I
107TH CONGRESS
1ST SESSION
H. R. 785
To amend the Internal Revenue Code of 1986 to provide for the creation
of disaster protection funds by property and casualty insurance compa-
nies for the payment of policyholders’ claims arising from future cata-
strophic events.
IN THE HOUSE OF REPRESENTATIVES
FEBRUARY 28, 2001
Mr. FOLEY (for himself, Mr. MATSUI, Mr. GONZALEZ, Mr. ROYCE, Mr. TAN-
NER, Mr. MCINNIS, Mr. CRANE, Mr. HERGER, Mr. WATKINS, Mr.
ENGLISH, Mr. SAM JOHNSON of Texas, Mr. HAYWORTH, Mr. HOUGH-
TON, Mr. PORTMAN, Mr. WATTS of Oklahoma, Ms. PRYCE of Ohio, Mr.
EHRLICH, Mr. CHAMBLISS, Mr. MILLER of Florida, Mr. JONES of North
Carolina, Mr. BONILLA, Mr. BOEHNER, Mr. RADANOVICH, Mr. HINCHEY,
Mr. CANNON, Mr. PAUL, Mrs. MEEK of Florida, Mr. CHABOT, Ms. JACK-
SON-LEE of Texas, Mr. DOOLITTLE, and Mr. CALVERT) introduced the
following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
for the creation of disaster protection funds by property
and casualty insurance companies for the payment of
policyholders’ claims arising from future catastrophic
events.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Policyholder Disaster
Protection Act of 2001’’.
SEC. 2. FINDINGS.
The Congress makes the following findings:
(1) Rising costs resulting from natural disasters
are placing an increasing strain on the ability of
property and casualty insurance companies to assure
payment of homeowners’ claims and other insurance
claims arising from major natural disasters now and
in the future.
(2) Present tax laws do not provide adequate
incentives to assure that natural disaster insurance
is provided or, where such insurance is provided,
that funds are available for payment of insurance
claims in the event of future catastrophic losses from
major natural disasters, as present law requires an
insurer wishing to accumulate surplus assets for this
purpose to do so entirely from its after-tax retained
earnings.
(3) Revising the tax laws applicable to the prop-
erty and casualty insurance industry to permit care-
fully controlled accumulation of pretax dollars in
separate reserve funds devoted solely to the payment
of claims arising from future major natural disasters
will provide incentives for property and casualty in-
surers to make natural disaster insurance available,
will give greater protection to the Nation’s home-
owners, small businesses, and other insurance con-
sumers, and will help assure the future financial
health of the Nation’s insurance system as a whole.
(4) Implementing these changes will reduce the
possibility that a significant portion of the private
insurance system would fail in the wake of a major
natural disaster and that governmental entities
would be required to step in to provide relief at tax-
payer expense.
SEC. 3. CREATION OF POLICYHOLDER DISASTER PROTEC-
TION FUNDS; CONTRIBUTIONS TO AND DIS-
TRIBUTIONS FROM FUNDS; OTHER RULES.
(a) CONTRIBUTIONS TO POLICYHOLDER DISASTER
PROTECTION FUNDS.—Subsection (c) of section 832 of
the Internal Revenue Code of 1986 (relating to the taxable
income of insurance companies other than life insurance
companies) is amended by striking ‘‘and’’ at the end of
paragraph (12), by striking the period at the end of para-
graph (13) and inserting ‘‘; and’’, and by adding at the
end the following new paragraph:
‘‘(14) the qualified contributions to a policy-
holder disaster protection fund during the taxable
year.’’.
(b) DISTRIBUTIONS FROM POLICYHOLDER DISASTER
PROTECTION FUNDS.—Paragraph (1) of section 832(b) of
such Code is amended by striking ‘‘and’’ at the end of
subparagraph (D), by striking the period at the end of
subparagraph (E) and inserting ‘‘, and’’, and by adding
at the end the following new subparagraph:
‘‘(F) the amount of any distributions from
a policyholder disaster protection fund during
the taxable year, except that a distribution
made to return to the qualified insurance com-
pany any contribution which is not a qualified
contribution (as defined in subsection (h)) for a
taxable year shall not be included in gross in-
come if such distribution is made prior to the
filing of the tax return for such taxable year.’’.
(c) DEFINITIONS AND OTHER RULES RELATING TO
POLICYHOLDER DISASTER PROTECTION FUNDS.—Section
832 of such Code (relating to insurance company taxable
income) is amended by adding at the end the following
new subsection:
‘‘(h) DEFINITIONS AND OTHER RULES RELATING TO
POLICYHOLDER DISASTER PROTECTION FUNDS.—For
purposes of subsections (b)(1)(F) and (c)(14)—
‘‘(1) POLICYHOLDER
DISASTER
PROTECTION
FUND.—The term ‘policyholder disaster protection
fund’ (hereafter in this subsection referred to as the
‘fund’) means any custodial account, trust, or any
other arrangement or account—
‘‘(A) which is established to hold assets
that are set aside solely for the payment of
qualified losses, and
‘‘(B) under the terms of which—
‘‘(i) the assets in the fund are re-
quired to be invested in a manner con-
sistent with the investment requirements
applicable to the qualified insurance com-
pany under the laws of its jurisdiction of
domicile,
‘‘(ii) the net income for the taxable
year derived from the assets in the fund is
required to be distributed no less fre-
quently than annually,
‘‘(iii) an excess balance drawdown
amount is required to be distributed to the
qualified insurance company no later than
the close of the taxable year following the
taxable year for which such amount is de-
termined,
‘‘(iv) a catastrophe drawdown amount
may be distributed to the qualified insur-
ance company if distributed prior to the
close of the taxable year following the year
for which such amount is determined,
‘‘(v) a State required drawdown
amount may be distributed, and
‘‘(vi) no distributions from the fund
are required or permitted other than the
distributions described in clauses (ii)
through (v) and the return to the qualified
insurance company of contributions that
are not qualified contributions.
‘‘(2) QUALIFIED
INSURANCE
COMPANY.—The
term ‘qualified insurance company’ means any insur-
ance company subject to tax under section 831(a).
‘‘(3) QUALIFIED
CONTRIBUTION.—The term
‘qualified contribution’ means a contribution to a
fund for a taxable year to the extent that the
amount of such contribution, when added to the pre-
vious contributions to the fund for such taxable
year, does not exceed the excess of—
‘‘(A) the fund cap for the taxable year,
over
‘‘(B) the fund balance determined as of the
close of the preceding taxable year.
‘‘(4) 
EXCESS
BALANCE
DRAWDOWN
AMOUNTS.—The term ‘excess balance drawdown
amount’ means the excess (if any) of—
‘‘(A) the fund balance as of the close of
the taxable year, over
‘‘(B) the fund cap for the following taxable
year.
‘‘(5) CATASTROPHE DRAWDOWN AMOUNT.—
‘‘(A) IN GENERAL.—The term ‘catastrophe
drawdown amount’ means an amount that does
not exceed the lesser of the amount determined
under subparagraph (B) or (C).
‘‘(B) NET
LOSSES
FROM
QUALIFYING
EVENTS.—The amount determined under this
subparagraph shall be equal to the qualified
losses for the taxable year determined without
regard to clause (ii) of paragraph (8)(A).
‘‘(C) GROSS
LOSSES
IN
EXCESS
OF
THRESHOLD.—The amount determined under
this subparagraph shall be equal to the excess
(if any) of—
‘‘(i) the qualified losses for the taxable
year, over
‘‘(ii) the lesser of—
‘‘(I) the fund cap for the taxable
year (determined without regard to
paragraph (9)(E)), or
‘‘(II) 30 percent of the qualified
insurance company’s surplus as re-
gards policyholders as shown on the
company’s annual statement for the
calendar year preceding the taxable
year.
‘‘(D) SPECIAL DRAWDOWN AMOUNT FOL-
LOWING
A
RECENT
CATASTROPHE
LOSS
YEAR.—If for any taxable year included in the
reference period the qualified losses exceed the
amount determined under subparagraph (C)(ii),
the ‘catastrophe drawdown amount’ shall be an
amount that does not exceed the lesser of the
amount determined under subparagraph (B) or
the amount determined under this subpara-
graph. The amount determined under this sub-
paragraph shall be an amount equal to the ex-
cess (if any) of—
‘‘(i) the qualified losses for the taxable
year, over
‘‘(ii) the lesser of—
‘‘(I) 1⁄3 of the fund cap for the
taxable year (determined without re-
gard to paragraph (9)(E)), or
‘‘(II) 10 percent of the qualified
insurance company’s surplus as re-
gards policyholders as shown on the
company’s annual statement for the
calendar year preceding the taxable
year.
‘‘(E) REFERENCE PERIOD.—For purposes
of subparagraph (D), the reference period shall
be determined under the following table:
‘‘For a taxable year
The reference period
beginning in—
shall be—
2005 and later .......................
The 3 preceding taxable years.
2004 .......................................
The 2 preceding taxable years.
2003 .......................................
The preceding taxable year.
2002 or before .......................
No reference period applies.
‘‘(6) STATE REQUIRED DRAWDOWN AMOUNT.—
The term ‘State required drawdown amount’ means
any amount that the department of insurance for
the qualified insurance company’s jurisdiction of
domicile requires to be distributed from the fund, to
the extent such amount is not otherwise described in
paragraph (4) or (5).
‘‘(7) FUND BALANCE.—The term ‘fund balance’
means—
‘‘(A) the sum of all qualified contributions
to the fund,
‘‘(B) less any net investment loss of the
fund for any taxable year or years, and
‘‘(C) less the sum of all distributions under
clauses (iii) through (v) of paragraph (1)(B).
‘‘(8) QUALIFIED LOSSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
losses’ means, with respect to a taxable year—
‘‘(i) the amount of losses and loss ad-
justment expenses incurred in the qualified
lines of business specified in paragraph
(9), net of reinsurance, as reported in the
qualified 
insurance 
company’s 
annual
statement for the taxable year, that are at-
tributable to one or more qualifying events
(regardless of when such qualifying events
occurred),
‘‘(ii) the amount by which such losses
and loss adjustment expenses attributable
to such qualifying events have been re-
duced for reinsurance received and recover-
able, plus
‘‘(iii) any nonrecoverable assessments,
surcharges, or other liabilities that are
borne by the qualified insurance company
and are attributable to such qualifying
events.
‘‘(B) QUALIFYING EVENT.—For purposes
of subparagraph (A), the term ‘qualifying event’
means any event that satisfies clauses (i) and
(ii).
‘‘(i) EVENT.—An event satisfies this
clause if the event is 1 or more of the fol-
lowing:
‘‘(I) Windstorm (hurricane, cy-
clone, or tornado).
‘‘(II) Earthquake (including any
fire following).
‘‘(III) Winter catastrophe (snow,
ice, or freezing).
‘‘(IV) Fire.
‘‘(V) Tsunami.
‘‘(VI) Flood.
‘‘(VII) Volcanic eruption.
‘‘(VIII) Hail.
‘‘(ii) CATASTROPHE
DESIGNATION.—
An event satisfies this clause if the event—
‘‘(I) is designated a catastrophe
by Property Claim Services or its suc-
cessor organization,
‘‘(II) is declared by the President
to be an emergency or disaster, or
‘‘(III) is declared to be an emer-
gency or disaster in a similar declara-
tion by the chief executive official of a
State, possession, or territory of the
United States, or the District of Co-
lumbia.
‘‘(9) FUND CAP.—
‘‘(A) IN GENERAL.—The term ‘fund cap’
for a taxable year is the sum of the separate
lines of business caps for each of the qualified
lines of business specified in the table contained
in subparagraph (C) (as modified under sub-
paragraphs (D) and (E)).
‘‘(B) SEPARATE
LINES
OF
BUSINESS
CAP.—For purposes of subparagraph (A), the
separate lines of business cap, with respect to
a qualified line of business specified in the table
contained in subparagraph (C), is the product
of—
‘‘(i) net written premiums reported in
the annual statement for the calendar year
preceding the taxable year in such line of
business, multiplied by
‘‘(ii) the fund cap multiplier applica-
ble to such qualified line of business.
‘‘(C) QUALIFIED LINES OF BUSINESS AND
THEIR RESPECTIVE FUND CAP MULTIPLIERS.—
For purposes of this paragraph, the qualified
lines of business and fund cap multipliers speci-
fied in this subparagraph are those specified in
the following table:
‘‘Line of Business on Annual
Fund Cap
Statement Blank:
Multiplier:
Fire ...............................................................................
0.25
Allied ............................................................................
1.25
Farmowners Multiple Peril ..........................................
0.25
Homeowners Multiple Peril ..........................................
0.75
Commercial Multi Peril (non-liability portion) .............
0.50
Earthquake ...................................................................
13.00
Inland Marine ...............................................................
0.25.
‘‘(D) SUBSEQUENT
MODIFICATIONS
OF
THE ANNUAL STATEMENT BLANK.—If, with re-
spect to any taxable year beginning after the ef-
fective date of this subsection, the annual state-
ment blank required to be filed is amended to
replace, combine, or otherwise modify any of
the qualified lines of business specified in sub-
paragraph (C), then for such taxable year sub-
paragraph (C) shall be applied in a manner
such that the fund cap shall be the same
amount as if such reporting modification had
not been made.
‘‘(E) 
20-YEAR
PHASE-IN.—Notwith-
standing subparagraph (C), the fund cap for a
taxable year shall be the amount determined
under subparagraph (C), as adjusted pursuant
to subparagraph (D) (if applicable), multiplied
by the phase-in percentage indicated in the fol-
lowing table:
Phase-in percentage to be
‘‘Taxable year
applied to fund cap computed
beginning in:
under subparagraphs (A) and (B):
2002 ...................................................................
5 percent
2003 ...................................................................
10 percent
2004 ...................................................................
15 percent
2005 ...................................................................
20 percent
2006 ...................................................................
25 percent
2007 ...................................................................
30 percent
2008 ...................................................................
35 percent
2009 ...................................................................
40 percent
2010 ...................................................................
45 percent
2011 ...................................................................
50 percent
2012 ...................................................................
55 percent
2013 ...................................................................
60 percent
2014 ...................................................................
65 percent
2015 ...................................................................
70 percent
2016 ...................................................................
75 percent
2017 ...................................................................
80 percent
2018 ...................................................................
85 percent
2019 ...................................................................
90 percent
2020 ...................................................................
95 percent
2021 and later ................................................... 100 percent.
‘‘(10) TREATMENT
OF
INVESTMENT
INCOME
AND GAIN OR LOSS.—
‘‘(A) CONTRIBUTIONS IN KIND.—A trans-
fer of property other than money to a fund
shall be treated as a sale or exchange of such
property for an amount equal to its fair market
value as of the date of transfer, and appro-
priate adjustment shall be made to the basis of
such property. Section 267 shall apply to any
loss realized upon such a transfer.
‘‘(B) DISTRIBUTIONS IN KIND.—A transfer
of property other than money by a fund to the
qualified insurance company shall not be treat-
ed as a sale or exchange or other disposition of
such property. The basis of such property im-
mediately after such transfer shall be the great-
er of the basis of such property immediately be-
fore such transfer or the fair market value of
such property on the date of such transfer.
‘‘(C) INCOME WITH RESPECT TO FUND AS-
SETS.—Items of income of the type described in
paragraphs (1)(B), (1)(C), and (2) of sub-
section (b) that are derived from the assets held
in a fund, as well as losses from the sale or
other disposition of such assets, shall be consid-
ered items of income, gain, or loss of the quali-
fied insurance company. Notwithstanding para-
graph (1)(F) of subsection (b), distributions of
net income to the qualified insurance company
pursuant to paragraph (1)(B)(ii) of this sub-
section shall not cause such income to be taken
into account a second time.
‘‘(11) NET INCOME; NET INVESTMENT LOSS.—
For purposes of paragraph (1)(B)(ii), the net in-
come derived from the assets in the fund for the tax-
able year shall be the items of income and gain for
the taxable year, less the items of loss for the tax-
able year, derived from such assets, as described in
paragraph (10)(C). For purposes of paragraph (7),
there is a net investment loss for the taxable year
to the extent that the items of loss described in the
preceding sentence exceed the items of income and
gain described in the preceding sentence.
‘‘(12) ANNUAL STATEMENT.—For purposes of
this subsection, the term ‘annual statement’ shall
have the meaning set forth in section 846(f)(3).
‘‘(13) EXCLUSION OF PREMIUMS AND LOSSES
ON
CERTAIN
PUERTO
RICAN
RISKS.—Notwith-
standing any other provision of this subsection, pre-
miums and losses with respect to risks covered by a
catastrophe reserve established under the laws or
regulations of the Commonwealth of Puerto Rico
shall not be taken into account under this subsection
in determining the amount of the fund cap or the
amount of qualified losses.
‘‘(14) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations—
‘‘(A) which govern the application of this
subsection to a qualified insurance company
having a taxable year other than the calendar
year or a taxable year less than 12 months,
‘‘(B) which govern a fund maintained by a
qualified insurance company that ceases to be
subject to this part, and
‘‘(C) which govern the application of para-
graph (9)(D).’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2001.
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