Report 2010-125 Recommendation 6 Responses

Report 2010-125: State Lands Commission: Because It Has Not Managed Public Lands Effectively, the State Has Lost Millions in Revenue for the General Fund (Release Date: August 2011)

Recommendation #6 To: Lands Commission, State

To ensure that all of its oil and gas leases have current surety bonds and liability insurance, as required by law and certain lease agreements, the commission should require lessees to provide documentation of their surety bonds and liability insurance. If the commission believes that assessing a monetary penalty will be effective in encouraging lessees to obtain surety bonds or liability insurance, it should seek legislation to provide this authority. Finally, if it obtains this authority, the commission should enforce it.

Annual Follow-Up Agency Response From October 2013

This recommendation is fully implemented. Commission staff requires lessees to provide documentation of their surety bonds and liability insurance. Furthermore, Commission staff has revised its lease language (Section 3, paragraphs 8 and 9) strengthening the indemnity provisions and modifying the insurance requirements (see Section 3 attached). These changes provide equivalent protection for the State while simultaneously eliminating issues identified by lessees as barriers to compliance.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

To provide clarification to the Commission's response, the Commission staff revised its lease language for most types of leases.

Annual Follow-Up Agency Response From October 2012

The specific recommendation was “to ensure that all of its oil and gas leases have current surety bonds and liability insurance, as required by law and certain lease agreements, the commission should require lessees to provide documentation of their surety bonds and liability insurance. If the commission believes that assessing a monetary penalty will be effective in encouraging lessees to obtain surety bonds or liability insurance, it should seek legislation to provide this authority. Finally, if it obtains this authority, the commission should enforce it.”

In accordance with the specific language of the recommendation, this is already done on the Commission's offshore oil and gas leases and the bondsmen are required to give at least 90-day notice (some are longer) before they can terminate a bond. Further, staff requires that the offshore lessees show evidence of current bonding and insurance or a replacement bond for any expiring or terminating bond at the annual meetings with all lessees. For the Commission's surface leases, as described in our one-year response, staff has contacted Federal, State, and local agencies with leasing responsibilities, both in California and in other states. Many agencies indicated that they do not require insurance of any kind when leasing to private individuals. Those that do require insurance communicated significant difficulty in obtaining insurance compliance. Staff's communications with the insurance industry indicate there is no stand-alone product available that covers recreational piers.

Insurance companies appear to be reluctant to name the state as an additional insured and to provide notice of cancellation to the state. In some instances lessees can obtain insurance, but this appears to be an exception that the companies make to retain clients with large insurance portfolios.

Staff is currently exploring options including: 1) strengthening the indemnity provisions in the lease language; 2) contacting the insurance industry and educating them on the market for an insurance product that covers recreational piers; and 3) contacting various insurance companies and attempting to create a pilot program providing insurance coverage.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

All Recommendations in 2010-125

Agency responses received after June 2013 are posted verbatim.