4. Factual Background

Commercial hot air ballooning was a relatively small industry in California until the 1980s, when it began expanding to serve customer demand. Today, approximately 50 companies offer balloon rides throughout California, carrying some 60,000 passengers per year and generating millions of dollars in tourist revenue. Balloon operations are concentrated in popular tourist regions, including the Napa Valley, Sonoma Valley, Palm Springs, Temecula, and San Diego areas.

There is no dispute that in early 2002, liability insurance that met the requirements of GO 120-C became unavailable to California balloon operators. In part because of the events of September 11, 2001, insurers had either withdrawn from this relatively small market in California or limited their proffer of insurance in a manner that the Commission's staff, under law, was unable to accept.

For example, Tudor Insurance Company (Tudor) was prepared to offer balloon insurance in California, but it limited the maximum liability of its coverage to $1 million, which does not provide the $100,000 liability per seat for larger balloons that is required by GO 120-C. Similarly, another willing insurer, New Zealand-based Contractors Bonding Limited (Contractors Bonding), which currently provides balloon insurance to 30% of balloons operated in the United States, is not an admitted insurer licensed to write insurance in California and has not been added to the list of approved nonadmitted insurers maintained by the California Department of Insurance.³ (See California Insurance Code §§ 1760, 1763.) Only admitted insurers and approved nonadmitted insurers are authorized to provide insurance in California.

Thus, as existing insurance policies lapsed and renewal was denied, balloon operators found themselves unable to comply with the Commission's insurance requirements. Commission staff, in turn, was required to issue "cease and desist" letters to operators demanding that they obtain the insurance required by law or cease operations.

In D.03-07-047, the Commission sought to provide interim relief to the balloonists. First, it allowed operators to limit their operation to fewer balloons and provide insurance only for those balloons, in contrast to the requirement of Section 8, GO 120-C, that all of the operator's balloons be covered. Second, it permitted operators to file affidavits limiting the number of passengers they would carry in order to comply with the $100,000-per-seat requirement. Finally, the Interim Decision established procedures permitting operators to set aside funds and self-insure part of their operations.

Two months later, in September 2003, the insurance problem facing California balloonists changed dramatically. Staff advised the Commission that an insurer, Houston Casualty Company (Houston Casualty), had begun offering balloon insurance that met all requirements of GO 120-C. Houston Casualty is a Texas-based nonadmitted insurer approved by the Department of Insurance, and its coverage is offered by a surplus line broker licensed by the Department of Insurance. Coverage includes per-occurrence limits of either $1 million or $2 million per policy, and Houston Casualty was prepared to sign the Commission's Form PE-794 as proof of insurance. At hearing in November 2003, staff reported that it had processed and accepted Form PE-794s from Houston Casualty on behalf of three California balloon operators.

Additionally, we take official notice that the Department of Insurance has recently recognized the difficulty that balloon operators face in obtaining liability insurance and has acted to widen the pool of available insurance. In December 2003, the Department of Insurance added "Hot Air Balloon Liability" to its 2004 Export List. The Export List includes risks for which there is little or no insurance market in California. In turn, this makes hot air balloon liability insurance eligible for placement with nonadmitted insurers and exempt from all requirements of Insurance Code § 1763 except for the filing of a confidential written report. (Department of Insurance Bulletin No. 2003-7, December 9, 2003.)