Legislature(1999 - 2000)
03/03/2000 01:20 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 284 - UNINSURED MOTOR VEHICLE INSURANCE CHAIRMAN KOTT announced that the next order of business would be HOUSE BILL NO. 284, "An Act relating to uninsured and underinsured motor vehicle insurance." Chairman Kott, sponsor of the bill, asked Pat Harman to present HB 284 to the committee. [Before the committee was CSHB 284(L&C). The written sponsor statement in packets referenced a letter from attorney Michael Cohn, dated September 21, 1999, also in packets, which explained the loophole addressed in the bill and an actual case that Mr. Cohn's law firm had handled.] Number 0535 PAT HARMAN, Staff to Representative Pete Kott, Alaska State Legislature, came forward on behalf of the sponsor. He explained that AS 28.20.445(f) currently has a glitch that permits insurance companies to deny coverage under their uninsured motorist provisions. Subsection (f) read: (f) If both the owner and operator of the uninsured vehicle are unknown, payment under the uninsured and underinsured motorists coverage shall be made only where direct physical contact between the insured and uninsured or underinsured motor vehicles has occurred. A vehicle that has left the scene of the accident with an insured vehicle is presumed to be uninsured if the person insured reports the accident to the appropriate authorities within 24 hours. MR. HARMAN illustrated by using three toy vehicles in a row: a semi truck stopped at an imaginary stoplight, followed by two race cars. He showed how Vehicle 3 could collide with Vehicle 2, propelling it into Vehicle 1, the truck. If Vehicle 3 had left the scene, Mr. Harman explained, the insured in Vehicle 1 may be denied coverage because Vehicle 3 had no direct contact with Vehicle 1. REPRESENTATIVE ROKEBERG pointed out that the fact pattern of the actual case [explained in Mr. Cohn's letter] was somewhat different, and the House Labor & Commerce Standing Committee hadn't seen this particular demonstration. Number 0634 MR. HARMAN referred to Mr. Cohn's letter and gave another demonstration using the toy vehicles. He then pointed out that the House Labor & Commerce Standing Committee version, CSHB 284(L&C), adds language that applies if the accident is witnessed by a disinterested person not occupying the insured's vehicle who can attest to the facts and to the involvement of a motor vehicle that left the scene. He again illustrated using the toy vehicles, then stated that there is a need for a disinterested person who is not riding in the vehicle of the insured; he indicated in that case, the insured could collect under his or her uninsured motorist insurance. CHAIRMAN KOTT suggested the illustration requires another car, then, from which some disinterested person passing the scene would see the accident. MR. HARMAN indicated the witness could be any bystander or other disinterested person. REPRESENTATIVE CROFT questioned whether a person in Vehicle 2 would truly be disinterested, for example. He agreed that a person on a street corner would more clearly be disinterested. Number 0736 MR. HARMAN advised members that a further issue remaining with the bill is a possible effective date. Currently the bill has no effective date. Michael Lessmeier has suggested an effective date of 1/1/01 to allow insurance companies to implement the changes at the next renewal of their clients' policies. However, Bob Lohr of the Division of Insurance, who was on teleconference, had sent an e-mail just before the committee convened [copy provided], which said there may be no need for an effective date. Mr. Harman suggested inviting those individual to testify about the issue. Number 0789 JOHN GEORGE, Lobbyist for the National Association of Independent Insurers (NAII), came forward and informed the committee that the NAII had also participated in working on this legislation. Although the NAII could certainly accept CSHB 284(L&C) in its present form, Mr. George urged the committee to consider amending it to add an effective date. He explained that traditionally, changes in benefits or coverage have occurred prospectively, without affecting existing policies. There may be a premium increase necessary, he noted, pointing out the need to run this through the actuaries and to possibly print some policy form amendments; he also noted that any rate or form changes have to be approved by the Division of Insurance. MR. GEORGE told members it makes sense to have some lead time so that insurance companies can react, and can provide and charge for the appropriate coverage. To his knowledge, there has always been an effective date such as the one proposed, giving six to nine months of development time so that can happen. Otherwise, there will be policies in force where the premium has already been charged but where the coverage will be broadened. Insurers, therefore, will pick up additional coverage that they haven't had an opportunity to price. Number 0867 CHAIRMAN KOTT, speaking as the sponsor, responded that certainly it isn't his own intent to increase premiums around the state. He asked, however, whether it is true that some companies do pay the claims like those used in the example. MR. GEORGE said he certainly has heard that that is the case. Although he cannot speak for all companies, he knows of at least one that claims it hasn't done so. [Claims adjusters] use judgment as to whether a claim is fraudulent or legitimate; if the claim is believed to be clearly legitimate, even though there was no contact, a company probably would honor that claim. Mr. George clarified that he doesn't know what the premium results would be [under this bill]; there may be no additional charge, or it may be slight. However, it would set a poor precedent to assume that there is no [premium increase] for this and to have that assumption continue for a future bill. Mr. George said he also believes it is appropriate to change policy endorsements or language to reflect the additional coverage, even though he agrees that probably if the law is changed, the additional coverage would apply regardless of whether the policy language is changed. Number 0940 CHAIRMAN KOTT asked Mr. George, "Absent the great number of major insurance companies that insure automobiles in this state, is that a reflection that most companies are, in fact, covering this under their policy, and this absolutely does not have any impact on them?" MR. GEORGE said he doesn't know and cannot comment on that. However, he is sure that there are companies which, using their judgment, are paying specific claims that technically might not be covered because they consider those legitimate. He restated that he doesn't have an answer. Number 1006 MICHAEL LESSMEIER, Attorney at Law, Lessmeier & Winters, and Lobbyist for State Farm Insurance Company, came forward on behalf of State Farm. He told members that the existing law is not a glitch. The history of uninsured/underinsured motorist coverage in Alaska goes back to before 1983, when he became involved with working on these issues with the legislature. He explained: The system of insurance with respect to automobile insurance ... has evolved and changed over that period of time. It started out in 1983. There was a mandatory automobile insurance bill before the legislature, and ultimately that bill was passed, but it was passed in a form that recognized that not everybody was [going to] buy insurance, even though they were legally mandated to buy it. And so what was passed with it was a mandated offer of uninsured and underinsured motorist coverage, the idea being that you could guarantee yourself protection by buying ... a limited form of protection through uninsured and underinsured motorist coverage. And this provision here is a provision that was intended to, again, strike a balance, as we often do, to protect against fraudulent claims. And so this was not a glitch. It was in the law for a reason, and I think the responsible companies - in response to your question - would use this provision to deny coverage only where they had a reasonable belief that there was a fraudulent claim being made. So what you're doing with this ... is you now are broadening coverage, and you may broaden it to cover a situation where there is a suspicion of a fraudulent claim, but you're now going to have to pay that claim. And that's fine. That's a different balance that we are seeking to adopt, and we understand the reasons that you want to do that. All we're saying here today is, "Let's not make a retroactive change." What happens is every policy that's purchased ... is generally on a six-month- renewal basis. So, in order for us to make changes in a policy or price them if there is going to be an increase, we need six months from the time that the legislature ... makes its final decision. And that's all we ask for, and historically that's never been a problem with anybody. Number 1153 REPRESENTATIVE MURKOWSKI asked whether this bill is broadening it enough so that insurers will decide it is necessary to raise rates. MR. LESSMEIER said he doesn't know the answer, and he isn't an underwriter. However, it definitely is broadening it. He returned to the issue of the effective date and stated that without at least six months' time, it would be "retroactive." He isn't sure [State Farm] could make changes mid-policy for people, and he doesn't believe that is something the legislature wants to do or has done before. Number 1220 REPRESENTATIVE CROFT noted that some policies last a long time. He asked whether this won't be retroactive, in some senses, even with [an effective date of] 1/1/01. MR. LESSMEIER said no. These policies are usually on a six- month-renewal basis. The legislature theoretically is going to act, and he can't imagine that the Governor wouldn't sign the bill. Therefore, he indicated, the company will have adequate notice if the effective date is 1/1/01. Number 1281 BOB LOHR, Director, Division of Insurance, Department of Community & Economic Development (DCED), testified via teleconference from Anchorage, specifying that he would focus on the question of the effective date. First, he believes it is unlikely that a large number of accidents would fall into this category, although he doesn't have specific statistics on that. Just based on the way this arose and the length of time the statute has been in effect, however, this issue doesn't seem to have arisen very often. Second, if the legislature hypothetically had decided to change the law but the effective date had not yet arrived, and if there were one serious accident, Mr. Lohr said there would be a consumer protection issue for that individual or family. He stated: I don't believe anybody is proposing to try to make it retroactive. We simply heard that the concern was about the cost of notification of current policyholders, and we observed that the current policy language allows coverage to be broadened without the necessity of either reissuing the policy or, I believe, doing customer notification. So, from that point of view, it would not be necessary to incur additional expense to provide the broader coverage. MR. LOHR informed members that finally, he believes that the impact on rates is to be determined by actuaries; he noted that Sarah McNair-Grove of the Division of Insurance was available in the audience. Mr. Lohr returned to the question of the breadth of the impact; he noted that 56 insurers wrote private-passenger automobile physical damage coverage in Alaska in 1998, and 129 insurers wrote commercial auto physical damage coverage for the same year. Mr. Lohr said he believes accidents [related to the bill] are quite few, although he couldn't assert that this would have a "zero" rate of impact. He would want to see the numbers developed on that. He suggested there may be a middle ground where there is an advanced effective date, but only advanced so far as necessary to avoid retroactivity. Number 1440 MICHAEL COHN, Attorney at Law, Phillip Paul Weidner and Associates, testified via teleconference from Anchorage. He noted that in the case discussed in his own letter [which had inspired this legislation], his client's vehicle was struck by a second vehicle that crossed the center line; however, the [driver of] the other vehicle had claimed that a third vehicle, which had come from a side street, had caused the crossing of the center line and had then disappeared after causing the accident. Although something similar could happen to anybody in Alaska, he said, it apparently hasn't happened very frequently. MR. COHN referred to the new language in CSHB 248(L&C) requiring the witness to be a disinterested person not occupying the insured vehicle. He mentioned earlier remarks about the definition of "disinterested person" and whether that would also apply to the person in the second vehicle. Mr. Cohn noted that the new language excludes every person in the insured vehicle from testifying. He submitted that there shouldn't be an assumption necessarily that people are going to bring fraudulent claims. He suggested instead that people's testimony should be considered under the regular general rules that apply in arbitration, or in court, in determining the credibility of witnesses. MR. COHN referred to the language that requires direct physical contact. He said it appears that was written to ensure that there was actually an accident involving at least two motor vehicles. He pointed out, however, that physical evidence on the scene - such as skid marks from a vehicle that crossed the center line and then disappeared - can show that another vehicle was involved, even without direct physical contact or a "disinterested" witness to the actual accident. Mr. Cohn said his concern is with the narrowing in an effort to close this loophole. Number 1619 CHAIRMAN KOTT told Mr. Cohn the added language was somewhat of a compromise between himself and the industry. He asked whether this language would have helped his particular client. MR. COHN said yes. In that case, other witnesses on the scene who were not in their car had observed the other vehicle, although they didn't get the license plate [number]. He stated, however, that he is concerned about the next situation that may arise, if all the witnesses were in the insured's car, for example, or if a witness in another vehicle were determined not to be "disinterested." His concern is for the next accident, not the last one. Number 1720 REPRESENTATIVE MURKOWSKI stated: A few of us looked at this "disinterested person" issue and whether or not we needed to define "disinterested" and say that it can't be a family member, or ... you can't have had more than five beers with this person, ... and recognized that whether or not the person is truly disinterested is going to be ... an issue that the court is going to have to determine. They're going to have to weigh the evidence in front of them and make that determination as to whether it's disinterested. So I agree with you, Mr. Cohn. I had some concerns initially, just looking at that term, what exactly constitutes a "disinterested person." ... I'm probably more satisfied with where we are, just leaving it as it is, "disinterested person," and recognizing that that will be one of the factors that the judge is weighing when they're considering the testimony of the witness. MR. COHN pointed out that it won't be for a judge to decide, however, if the language remains as it is now, because it automatically excludes the testimony of any person who was in the vehicle with the insured. Number 1809 REPRESENTATIVE CROFT said he still isn't sure that the person in the middle car is disinterested. The problem is that the judge isn't weighing this. Furthermore, the judge could find such a person credible but not disinterested under the statutes; the person in the middle car would have an interest in pointing to liability of the "phantom" car, because the middle car, after all, ended up rear-ending the truck. REPRESENTATIVE ROKEBERG indicated, on the other hand, that the judge could find that a passenger in the second car - if there were one - may be a witness, because that person wouldn't have been the proximate cause of the accident, especially if that person isn't married to the driver, for example. REPRESENTATIVE CROFT pointed out that a person standing on the street corner could be related somehow or could for some reason not be a "disinterested person" under this, and yet that person could have relevant testimony that a jury or judge might find credible. He explained that normally, in a trial, that is all put into the "mix." Witnesses aren't disqualified for being people's relatives, for example; instead, they are put on the stand, they give testimony, and counsel brings out that relationship for the judge or jury to weigh along with everything else. REPRESENTATIVE CROFT suggested that if the word "disinterested" were removed, so that the language just said "witnessed by a person not occupying the insured vehicle," the judge would still be able to hear about the interest, which is bias that is always admissible. As it is now, however, the person couldn't testify as a witness, no matter how credible otherwise. Representative Croft acknowledged that Mr. Lessmeier's point is good that this is a balance in an area which is difficult to prove; therefore, it may need some sideboards, which exist [in this section]. Number 2157 REPRESENTATIVE ROKEBERG said he believes the issue here is what the public policy should be. In the past, the legislature has said the public policy should be to deny that [coverage] because the potential for fraud is greater than the public interest with higher premiums. Because of an unusual fact pattern here, he suggested there is a need to make sure that this type of an injustice doesn't happen again. He suggested the legislature needs to weigh the public policy in terms of increased costs to all of the ratepayers in the state, and yet open it up somewhat to make sure that the injured party can have some compensation without opening a floodgate. He said that is the idea of making a balance. REPRESENTATIVE CROFT responded that he thinks it is appropriate that it not be allowed solely on the evidence of the insured. However, he isn't sure that putting all the sideboards on the other witness makes sense. He questioned the need for "disinterested" or "not occupying the vehicle," but said maybe "disinterested" is the main one. He pointed out that proof in civil court requires a verifying witness, and the question here is how much to limit who that witness is. REPRESENTATIVE ROKEBERG surmised that the substantial majority of these cases would be for less than $10,000 if there is just property damage. He mentioned the need to take another look, however, if they are talking about personal injury or medical costs, which could skyrocket; he suggested that bifurcating this in terms of statutory structure to make that distinction would be difficult. He said the statute should be clear enough, on its face, so that administrative judgments and agreements can be made without litigation. He pointed out that the bill opens up an area that was prohibited before, which he believes is the balance. CHAIRMAN KOTT agreed it loosens it up quite a bit, but said it also requires a couple of restrictions: the witness cannot be occupying the vehicle for which the claim is made, and must be a disinterested party. Number 2411 REPRESENTATIVE MURKOWSKI indicated she has talked herself into accepting the "disinterested person" language. She pointed out that the statute doesn't say what a "disinterested person" is, and suggested a court could determine whether a person meets that standard. She cited an example. TAPE 00-27, SIDE A Number 0001 CHAIRMAN KOTT told the committee that trying to define "disinterested" was, clearly, one of the problems when looking at this [initially], and no concrete agreement or conclusion had been reached about that. He mentioned situations where a judge would have to decide whether a person is truly "disinterested." REPRESENTATIVE MURKOWSKI indicated that is the balancing that the judge or jury does with any witness, weighing credibility and giving weight to the evidence accordingly. REPRESENTATIVE ROKEBERG surmised that in Mr. Cohn's actual case, the people in the car that hit the [insured's] car would be disinterested and credible in the eyes of the court because there were corroborating witnesses. CHAIRMAN KOTT replied that hopefully the companies involved in insuring these individuals would make their own determinations as to whether a witness is interested or disinterested. The last resort is to go to court. REPRESENTATIVE ROKEBERG said that is a good point. If a company wants to pay off the claim because of this law, that might cut in half the court activity or disputes over claims like this. Rather than one case every 10 years, for example, there will be one every 20 years. "So, there's some value in your bill," he concluded. CHAIRMAN KOTT called an at-ease at 2:55 p.m., then called the meeting back to order immediately. Number 0290 DANE HAVARD, President, Northern Adjusters, Inc., testified briefly via teleconference from Anchorage, informing members that his company handles claims from a lot of insurance companies. Mentioning the discussion about letting the courts decide, Mr. Havard pointed out that the claims adjuster handling the claim must make a decision on this, and it needs to be as objective as possible. He explained: If we have to deal with the issue of "disinterested" and we determine ... that a person is somehow or other interested and they take that to court, then that subjects the insurance company, as well as the adjuster, to potential bad faith; and that's a rather big issue that would cause many adjusters ... to decide that it must be covered, even when it might not otherwise should be. ... That's a real problem that adjusters face in these kind of situations. So I would like to suggest perhaps the word "disinterested" be eliminated or very objectively defined. And I realize the problem with defining it, but ... I think you'll have, actually, ... considerable trouble if you do not define it. So I would like to suggest that we take that out. Number 0401 CHAIRMAN KOTT posed a situation where he is riding in a vehicle that is rear-ended by a car driven by his own daughter, whose car had been plowed into by a third vehicle, resulting in her car hitting his own. He asked Mr. Havard whether, in his experience, the daughter would be considered a disinterested or interested party. MR. HAVARD answered that it seems she might be an interested party if she is Chairman Kott's daughter. CHAIRMAN KOTT said that is his point. Number 0470 REPRESENTATIVE CROFT observed that the part about not occupying the insured's vehicle is easy to determine, but the "disinterested" gets into problems both ways, including problems with interpretation. For example, does the gas station owner at the corner who witnessed the accident have any interest in not having his corner known as a dangerous place? He pointed out that there are many arguments regarding this issue. CHAIRMAN KOTT continued with that line of thought, asking whether the gas station owner would be interested if he had just loaned his car to his employee, and that car had been the one plowed into. Number 0532 REPRESENTATIVE MURKOWSKI commented that she had talked herself into "disinterested" but could be talked out of it too. She said that sounds like the way the committee is going, and she doesn't have a problem with that. Noting that Mr. Lessmeier had indicated this really broadens things, she asked him whether it broadens it that much more by removing "disinterested." She said she doesn't believe it does but asked him to comment. CHAIRMAN KOTT invited Mr. Lessmeier back up, adding his own opinion that he isn't so sure it expands it that much. MR. LESSMEIER returned to the witness table and stated: Our concern is that you do broaden it up. And the reason that we came up with the language of "disinterested" is because we believe that the decision about whether to pay or not to pay should not always be an automatic decision just based on whether there's contact or not contact. We believe that what the adjuster ought to be doing ... is looking at the case and making a determination of whether there is fraud involved or not fraud involved, and only in instances where they believe there was no contact and fraud involved should this provision ever be used. And the thing that I think you ought to remember ... is that there is some benefit to having a term like "disinterested" that is broad enough to cover many different situations, because there will be incentive, then, for both sides to look at this language and make a determination, and hopefully the determination will be made to use this provision only when there is a legitimate and real issue of fraud. ... And that's the reason that we propose this language. If you take out this term, "disinterested," you will have created a situation where there really is very little way ... of making this determination. And then you will have opened a loophole. And we don't know how wide that loophole is, but in terms of this coverage, when you broaden this coverage, you increase the cost of this coverage. And I don't know if the members of this committee have seen the history that we have done of this coverage in this state. If you haven't, ... it's very dramatic. And if you look back, and you go back to 1984, the rate changes for State Farm for UM/UIM [uninsured motorist/underinsured motorist] since 1984, that coverage has increased 154.6 percent. And all coverages have declined by 1 percent during that period of time for ... automobile insurance coverage. ... What we have done with UM/UIM coverage is we have made changes after change after change, and that's why that coverage has ... gotten expensive. And you make this change and you're [going to] to broadening that coverage more. And so, what we did, when you came up with idea, is try to come up with a compromise that, in our judgment, was a fair compromise that didn't open a loophole that would be wide and still preserve what this is designed to preserve. And this is what we came up with. And I think it does satisfy -- certainly, it satisfied Mr. Cohn as of the last hearing that we had on this, and I thought it satisfied you, Mr. Chairman. So my recommendation would be that we go with this language. If we still have a problem after this, we can always come back and loosen it up some more. But give this at least an opportunity to work. Number 0789 CHAIRMAN KOTT noted that Mr. Havard had suggested that if the "disinterested" were left in, the adjuster would likely go along with the motorist who was harmed, thus avoiding further litigation, which would, in his own mind, adjust costs upwards for the consumer. MR. LESSMEIER said the concern is that there will be cases where there is a legitimate suspicion of fraud, but where there is an inability to deny the claim. He restated the need for balance and opening this coverage wider, but going no further than CSHB 284(L&C), as he believes going further would be bad for [State Farm's] policyholders and adjusters. Number 0860 CHAIRMAN KOTT asked what the current penalty is for fraudulent claims. MR. LESSMEIER said he doesn't know. He added that he doesn't know that he has seen anybody prosecuted for claims that are fraudulent. He said no matter how "disinterested" is defined, it won't cover every single situation. He reiterated that the intent is to broaden this but not go too far, and to create a balance. Number 0927 MR. COHN responded to Mr. Lessmeier by clarifying that at the last hearing, he hadn't necessarily agreed with the language of "disinterested person not occupying the insured vehicle." As he recalls, his suggestion in his letter was that there be corroborating evidence beyond just the testimony of the insured person who was driving the vehicle. MR. COHN restated concern that absolutely excluding people who had occupied the insured vehicle would be too restrictive. He believes there is little likelihood that this will open a floodgate of cases. Furthermore, fraud can occur even if there has been direct physical contact, because fraud is a potential problem in all cases. He suggested that this doesn't exclude fraud but just excludes people who have legitimate claims. Number 0991 REPRESENTATIVE ROKEBERG referred to earlier testimony and expressed his belief that removing the "disinterested" language would create a "private fiscal note" and a higher probability of fraudulent claims, without affecting the number of cases that this is intended to fix. REPRESENTATIVE CROFT pointed out that under the rule of this provision, the committee wouldn't have allowed Mr. Lessmeier to testify, as he is an interested person in this regard. He said it is appropriate to hear from him, however, because the committee can hear his testimony, know that he is an interested party, and put it all in the mix; the legislature does this with interested persons all the time. REPRESENTATIVE CROFT continued. He agreed that there ought to be some corroboration, not just the word of the insured, as happens in other areas where there is a worry about fraud or falsification. He said it seems to be a good piece of legislation as written, but possibly it would be better without the word "disinterested," while still barring [testimony from] a person - no matter how credible - who was occupying the insured's vehicle. Number 1182 CHAIRMAN KOTT asked if there was further discussion, then announced that HB 284 would be held over for further analysis and to address the effective date.
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