Legislature(2001 - 2002)
04/19/2002 02:00 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 271 - CAP ON AVIATION ACCIDENT PUNITIVE DAMAGES Number 1389 CHAIR ROKEBERG announced that the next order of business would be HOUSE BILL NO. 271, "An Act relating to recovery of punitive damages resulting from an aviation accident; and providing for an effective date." [Before the committee was CSHB 271(L&C).] CHAIR ROKEBERG called an at-ease from 2:24 p.m. to 2:25 p.m. Number 1442 REPRESENTATIVE MEYER moved to adopt the proposed committee substitute (CS) for HB 271, version 22-LS0741\L, Ford, 4/19/02, as a work draft. There being no objection, Version L was before the committee. Number 1445 REPRESENTATIVE ANDREW HALCRO, Alaska State Legislature, speaking as the chair of the subcommittee on aviation insurance, said that the concept of HB 271, which was sponsored by the House Labor and Commerce Standing Committee, originated last year. He elaborated: We've heard ... many stories about increasing insurance premiums and the effect that that has had on a state that really, seriously, depends on aviation. As you know, many of our rural communities you can only access by air.... The trend in the last five or six years has become very alarming, and one that has caused a number of aviation providers to go out of business and communities that rely on vital air links to suffer. This is a very difficult conversation to have; ... as we all know, ... whenever you talk about affecting somebody's right to sue for damages, I think you need to be very careful, but I think in this case it is well warranted and there still certainly are avenues out there. ... We're all very aware of the fact that aviation in this state is a very dangerous and risky business. I believe the fact that we found out during our subcommittee research was that there is one death every nine days in the aviation industry.... It is ... just a very risky proposition, but one that is ... really important to the success of this state and certainly access to and from these communities. ... We found out in our subcommittee [that] there [were] ... three areas where we could improve. One was education for aviation companies; and combining certain industry changes with educational programs such as the [Five Star] Medallion Program [and] the ... Capstone Program, we can start to make some inroads into safety in the aviation industry. The second thing we discovered was the ... problem where aviators are being forced to fly - feeling pressure to fly. And we introduced a subsequent piece of legislation - HB 269 - which actually at this point in time we've kind of let sit for a while because in our further discovery, there [are] enough protections under OSHA [Occupational Safety and Health Administration] Department of Labor standards to provide whistleblower protection for airline employees ... and more particularly pilots. The third ... area that we identified that could help this industry is tort reform for "aviation insurance accidents." There was one case, the Hageland case, where the insurance policy was for an "X" amount per seat, there was an unfortunate plane crash, and in subsequent settlements the judge ruled that the per-seat limitation was not the true exposure that the insurance company had. Number 1617 REPRESENTATIVE HALCRO continued: Now, I would simply say to you ... that regardless of what type of insurance business you're in, it's all predicated on risk. And if you go into an understanding - or the assigning of a policy - whereby you ... are under the legal impression that you are liable for "X" amount of dollars, and at the end of the day you find out you're liable for "Y" or "Z," ... I think it's understandable why they have pulled back. And we have seen not only an increase - a tremendous increase - in the amount of premiums being paid, but a real lack of coverage to begin with. CHAIR ROKEBERG said that he is interested in pursuing, with the insurance industry and the Division of Insurance, issues regarding "per-seat-mile limitations," noting that he would like to add "that" to the bill, if at all possible. He opined that doing so would avoid some of the problems that surround "tort reform, per se," by limiting the causes of action and how much can be paid out. He noted that he has heard testimony in the House Labor and Commerce Standing Committee regarding the [Five Star] Medallion Program. He added: In my conversations with you on this, and your staff, it indicates that you're of the believe and of the opinion that we cannot create any kind of an incentive to grant any of these limitations to a [Five Star Medallion Program] plan member even though it's a [Federal Aviation Administration (FAA)] approved type of a program for safety. Could you comment on that? REPRESENTATIVE HALCRO replied: The [Five Star] Medallion Program was started years ago, here in Alaska; as a matter of fact, Dick Harding from [Peninsula Airways, Inc. ("Pen Air")] is really one of the founders of this program and a real strong advocate for it. And the [Five Star] Medallion Program basically embraces ... specific areas in aviation - your operation, maintenance, ... flight safety techniques - and they come around and grade you. And it's similar to a number of the chamber programs, for instance, the "Green Star program," where you meet a criteria and you are awarded this distinction. Number 1747 The problem with interrelating what is a private program, albeit sanctioned by the FAA, [is that] it is a private program; and the thought that we are going to base liability limits on a private program causes a number of different headaches for the Department of Law. And they did cite to us, in a number of different cases, where this legally just would not work, and even some hypothetical situations where you could see that you could run into problems. For instance, if I'm an air carrier and I think that I have done more than enough to satisfy certain "medallion level" criteria, and I am told that my operation has not, ... certainly there's going to be some confusion, there's going to be some contradiction, and I think ... we just create work for the court system with [regard] to this. I'd much rather see us take an approach, as far as a public policy standpoint, [of] just straight ahead. Certainly, encourage those companies in this state to participate and get involved with the [Five Star] Medallion Program, but any cap of punitive damage or any reduction in liability needs to stand clearly on its face, instead of being tied to a program that really has no governmental oversight or governmental involvement. REPRESENTATIVE BERKOWITZ asked, "What assurances do you have from the insurance industry that if this bill is enacted, rates come down/coverage increases?" REPRESENTATIVE HALCRO said: We have had conversations; ... the bottom line answer is that ... we do not have anything in writing from insurance providers that said, "If you do this, rates will come down." What we have found out in our investigation of award settlements is that ... this is one of those ... "silent but deadly" type areas as far as insurance rates are concerned. What happens is sometimes those that sue use the threat of punitive damages to leverage a larger award, and usually those awards are sealed and not public information. So, in our discussions, in our having [Legislative Legal and Research Services] do some investigating on these types of accidents, ... we have found that ... [the] influence is, as I said, in kind of a silent but damaging way, where they are used as leverage [but] not actually claimed on those punitive damages. And by capping punitive damages, when these companies go into these settlement talks, at least the insurance carrier can eliminate one of these variables. Number 1873 CHRISTOPHER KNIGHT, Staff to Representative Andrew Halcro, Alaska State Legislature, said: To answer your question, ... I've talked with a number insurance companies and I've talked with a number of businesses that operate air carriers in Alaska, and each one has said every time they enter into one of these agreements - every time - a lawyer or a trial lawyer will threaten with punitive damages. And just the cost of defending the punitive damage case, whether you have committed any egregious acts or not, is huge.... The cost is so substantial that 99.9 percent of the time, these people would just rather enter into a settlement for the compensatory damages, and settle out at the insurance maximums. So, ... I think what Representative Berkowitz probably really wants is empirical evidence; we don't have it, the courts aren't going to give it to us .... MR. KNIGHT relayed that a representative from the Division of Insurance has indicated that she is unable to distinguish between premium costs and "torts," or whether there has been any sort of correlation. Referring to a handout in members' packets, he said that it "talks about the aviation industry and how much is going out each year in direct losses incurred ... and how much is earned in ... premiums." He also noted that according to the Division of Insurance, "They don't have the data ... to determine whether that was part of a settlement, [or] whether that was just increased costs of insurance; they just don't have the stuff broken down, so we really can't distinguish with empirical data." He alledged: Just to reiterate, every time these things go to a court case, every time, punitive damages are threatened. If I was a trial lawyer - and I think ... Representative Berkowitz has probably been in a courtroom - when you go to prosecute someone, and this is a similar situation, ... you always threaten the higher charges, hoping to get some sort of settlement on a lesser charge. It saves you time, saves the court time, and it saves everybody else ... some money. So, it's usually how these people proceed. Number 1982 REPRESENTATIVE BERKOWITZ countered: First of all, you don't threaten what you cannot prove. That's very bad practice, ... particularly in a small bar like we have here; people sniff that out pretty quickly.... So I would just reject that as a premise, that people would seek punitive damages without a grounding in the law that they have the right to do so. But what we heard today on the [House] floor ... is that the folks ... over at the insurance companies could calculate whatever numbers they plug in and [then] come up with a reason for increasing premiums. And it would seem to me that the state ought to have at it's disposal individuals who have that kind of experience and can enter into their calculator whatever formula is used and come up with an answer to these questions. REPRESENTATIVE HALCRO said he would agree that the Division of Insurance works from the disadvantage of not having enough information, and that that information is grouped together. For example, in 1998, aviation insurance companies paid out a $1.65 for every $1 they took in, in premiums. So, that kind of information is available at the Division of Insurance, he said, but the more specific and particular information with regard to suits and the correlation between "rights and payouts" is not available to the division because most records pertaining to awards and settlements are sealed by the courts. He added that it would be very interesting to look at any correlation that might exist. REPRESENTATIVE BERKOWITZ said: "It seems to me that ... we're focusing here on the punitive-damage aspect of it as a way of driving insurance rates down, but you could also conceivably reduce them by increasing the performance standards for pilots and aviation companies. Is that correct too?" REPRESENTATIVE HALCRO replied: By performance standards I would assume ... you mean training and flight time requirements.... That is something that is the purview of the Federal Aviation Administration - certainly I don't believe one that the state legislature has any purview over... To be honest with you, ... the way we're trying to approach this ... problem is, ... we're basically in the position of being backseat drivers.... When you hear testimony, you will see real Alaskans - small business owners - that have had their going concern threatened by ... these horrific increases in insurance premiums. So ... I'm not quite sure how we get to the point where we get all of this information. REPRESENTATIVE BERKOWITZ said, "Just ... so the record's clear, I'm very supportive of the idea of keeping as many people flying as possible, but I just want to make sure that we're looking at the problem completely." REPRESENTATIVE JAMES posited that HB 271 will reduce the exposure to the insurance company, and although that may not lower insurance rates, it will still be advantageous for individual insureds. She acknowledged that there are a variety of reasons that insurance rates go up. She offered that the goal of HB 271 is not necessarily to reduce insurance rates; rather, it is to keep rates from going higher and to reduce exposure. Number 2202 KIP KNUDSON, President, Alaska Air Carriers Association (AACA), mentioned that his employer, Era Aviation, Inc. ("Era"), has a position similar to the AACA regarding HB 271. He said: From the industry's perspective, ... we're just as frustrated ... that we can't put something on a piece of paper from the insurance industry saying, "This change will result in this decrease in rates." We are currently, though, as an association, contacting the underwriters and vice presidents of the underwriters in New York and London, trying to get them to come and at least provide some verbal testimony ... saying in the affirmative, "Yes, this would have an impact on rates" - a positive impact, I guess, from our perspective. They're a little bit like herding cats, though, unfortunately, so it's quite a business. The empirical evidence you look at, the ... sum of the evidence that we can refer to on this issue of insurance and lawsuits, is that - and I've read this legislative research and I'm not exactly sure if the 2,354 civil cases are all aviation-related or not - but from the anecdotal evidence of our 90 members, no case in the last three [years] has ever gone to a jury. So there's obviously a great deal of pressure not to go to jury, and, of course, then, we don't know the outcome because it's all sealed, generally. But that is one piece of empirical evidence we know of, and the play of punitive damages - again, anecdotal from 90 members - is, punitive [damages] are threatened simultaneously with compensatory, in an effort to get the insurance company to settle at the liability limits, because most carriers in the state are not insuring punitive damages - couldn't, even if they tried. So the threat to a carrier, fully exposed to the punitive side, is causing the carrier, then, to go and negotiate with their insurance company: "Let's get this out from under us and move on." Number 2283 MR. KNUDSON continued: Just in general, on the issue of insurance and aviation services in the state, every air carrier has watched their rates go through the roof over the last decade, actually. And this is a big problem. I think [the terrorist attacks of September 11, 2001, ("9/11")] showed you a little more empirical evidence: the air system shut down for three days, and on the fourth day, pretty much every air carrier said, "We're about to go bankrupt." So, it takes three days of no income for them to be at the edge of the business model. So, what happens when an air carrier's insurance [rate] goes up 20 percent, 50 percent, 100 percent? All of these small carriers [that are] out in rural Alaska are on the ragged edge of being able to stay in business. Two reasons for the crises ...: one, and the one that's hardest for us to talk about, is loss experience, and it's Alaska-specific. There are a lot of airplanes crashing in this state, and Alaska is generally considered as a special entity when insurers look at the state. And, unfortunately, they look at that unbelievably high accident rate, and that's just sort of a general malaise in an insurer's head when they come ... to underwriting carriers. The second issue ... is ... the jury/settlement experience in the state. Again, this is anecdotal, but insurers say that Alaska is right up there as the worst state in the union as far as settlements, and part of it has to do with the law that doesn't allow ... the cases to be removed from certain jurisdictions: If a plane crashes in Bethel, that's where the case occurs and, thus - I guess - the settlements or jury awards are quite a bit higher. Number 2355 MR. KNUDSON went on to say: What is the industry's response, then, to this crisis? Well, you've heard about [the Five Star Medallion Program] and this is something that's been hashed out for years among the carriers; it's not something that everybody's looking forward to, but everybody knows we have to do it. [The Federal Aviation Association] has very strict regulations about how to operate aircraft, and they get more strict every year. And now the industry is going to come in and add a higher level of requirements on top of that, and it's a voluntary program. It will make an impact on the loss experience for carriers that are willing to dedicate themselves to it. The conundrum for the industry is that there's a great deal of churning at the lower levels - the smaller airplanes. Some person will say, "This is a great industry; I want to get into it." They'll fly, they won't meet the standards, they won't live up to the higher expectations, they'll have problems, they'll go out of business, [and] somebody else will jump right back in. It's just over and over again - we see it - there's a lot of churning in the smaller parts of the industry. And they're the ones causing the accident rates, in a lot of the cases. But it's different carriers every year, because one's going bankrupt; another one starts up, crashes, goes bankrupt; and they just keep coming in. I don't know - something about the industry is quite sexy, apparently. TAPE 02-51, SIDE B Number 2388 MR. KNUDSON, in conclusion, said that the AACA feels that HB 271 would, in the long term, go a long way towards smoothing out the raises in insurance costs. He also mentioned that any effort to tie any kind of punitive damage limit to participation in the [Five Star Medallion Program] is very attractive to the AACA; by doing so, there would be a true economic incentive for the smaller carriers to follow the standards laid out in the [Five Star Medallion Program]. CHAIR ROKEBERG said he agreed, adding that a legal nexus has to be established. He asked: "Are you familiar with the Hageland case and what occurred there as far as the different causes of action exceeding the 'per-seat-mile limitation'?" MR. KNUDSON said he only knew that that was the first time that a "non-participant actually got their fingers into the money pot." He clarified that by non-participant, he was referring to someone who was not in the aircraft. CHAIR ROKEBERG said: It's a federal case that interpreted the actual real estate policy or contract, and it allowed the 'per- seat cap' to be breached ... on other causes of action; so, that's one thing I think the committee's going to look at if we can ... draft the statutory contract language to limit that.... And in [regard] to the amounts and the aircraft size and seating and weight, have you had a chance to look at the CS? MR. KNUDSON said he had, adding that although it may seem bizarre to most people, those "dividing points" are fairly consistent with FAA regulations, so from the standpoint of the AACA, that is a fine division. What it will do, he explained, is it will change the punitive cap based on the size of the aircraft, which generally corresponds to the size of the operator. Most small operators are not going to operate anything over the first level indicated in HB 271; "95 percent of the [AACA's] membership is going to fall under the first category," he remarked. CHAIR ROKEBERG asked how many seats are in a [Douglas] DC-3. MR. KNUDSON said 24 or 28. CHAIR ROKEBERG inquired about a "conveyer." MR. KNUDSON said 50, adding that Twin Otters are 19, and "Dash 8s" are 37. But most carriers in the state, he pointed out, are 19 seats or less. In response to further questions, he noted that air carriers are held to a higher standard as evidenced by the fact that although a DC-3 could carry 40 paratroopers with all their equipment, air carriers are only allowed to carry "28 with cameras." Number 2243 REPRESENTATIVE BERKOWITZ said that one of his concerns about "this proposal" is that the current limit on punitive damages is $500,000 or three times the amount of compensatory damages, whichever is greater, and this doesn't seem like a lot more money than is proposed in "the amendment in front of us." He said, "I'm still a little perplexed as to how this relatively small percentage change corresponds to a reduction of rates; it seems that we ought to be looking ... at all the drivers, at insurance costs, and we're not; we're just looking at one of the drivers." He suggested that they should expand their scope and be a little more comprehensive. CHAIR ROKEBERG opined that the committee is doing just that via its discussions regarding the [the Five Star Medallion Program] and possibly restricting causes of action via "contract language" defining the "seat-limit cap." He mentioned that the "cap of $500,000" in the Hageland case was breached. MR. KNUDSON said that the industry would concur with Representative Berkowitz in saying that the punitive cap should be zero. He added, however, that he did not know that this is realistic. The theoretical concept behind punitive is that if a company is negligent, it should be made to pay to a point that it damages its business plan, in order to end negligent business practices. Unfortunately, he noted, it has turned into a different tool in the settlement process; very few of these cases end up showing gross negligence or negligence of any kind. CHAIR ROKEBERG said he assumes that given the right set of circumstances, three times compensatory damages could be substantially higher than $500,000. MR. KNUDSON said that in Era's case, it is, although for a lot of the smaller air carriers, it is not. CHAIR ROKEBERG asked Mr. Knudson what a typical policy is for Era: "What do you carry per seat?" MR. KNUDSON replied: "We carry well in excess of $1 million a seat." He added, "We're a bit of a strange bird in Alaska because we can actually go and get underwriting separate from the Alaska experience." He confirmed that this is possible because Era's parent company has greater financial strength and has operations all over the world. A typical Alaska operator, he noted, is completely at the whim [of insurance companies], adding that many operators have only the statutory limit of $150,000 per seat, which, he opined, is "an almost negligent operational standard." CHAIR ROKEBERG noted that the director of the Division of Insurance is available to answer questions. REPRESENTATIVE BERKOWITZ asked whether there is enough actuarial information to calculate, with a reasonable degree of certainty, what the impact on insurance rates would be if punitive damages were reduced as proposed [by HB 271]. Number 2025 BOB LOHR, Director, Division of Insurance, Department of Community & Economic Development (DCED), said he would prefer that the division's actuary respond to that question. He added that anecdotally, folks within the industry who are involved in litigation have indicated to him their belief that "punitives are probably undervalued in rates currently." As with the case of the terrorist attacks of September 11, 2001, for example, before that date, terrorism "was simply not a major rate-making factor"; now, of course, it does have a significant effect on "rate making" and availability of coverage. He pointed out that to the extent that punitives are underrepresented - underreflected - in rates currently, making the changes proposed by HB 271 might have less of an effect on the rates than it would on the availability of coverage. But in that regard, he added, HB 271 would have an extremely significant effect because "underwriters do not need to write the Alaska market"; thus, if, on balance, underwriters feel that the risk is unacceptably high, "we won't see them up here." To that extent, he opined, HB 271 is an important step toward providing an incentive that would bring insurance carriers back to the Alaska market. REPRESENTATIVE BERKOWITZ asked what the total value of the Alaska market is. Number 1989 SARAH McNAIR-GROVE, Actuary P/C, Central Office, Division of Insurance, Department of Community & Economic Development (DCED), replied that it probably would be possible to make some estimates, but the Division of Insurance does not have the individual claim data with which to do that; instead, "it would be an insurance company that would look at it." In addition, she noted, since the Division of Insurance does not regulate aviation rates, individual company rate filings that have aggregates are not seen by the division. She remarked: "So, could we do it? The answer is probably not. Could an insurer do it? I believe they probably could make some estimates." REPRESENTATIVE BERKOWITZ surmised, then, that the division wouldn't have any ability to calculate what the amount of coverage is in Alaska. MS. McNAIR-GROVE, referring to the handout in members' packets, said that in 2000, there were about $23 million worth of premiums in Alaska. CHAIR ROKEBERG, referring to what happened in the Hageland case, said he would like the Division of Insurance and the Department of Law to assist him in crafting statutory language that would ensure that the "per-seat cap" is not breached. "We can't really limit the number of causes of action," he noted, "but what we want to do is be able to limit the awards to various participants." MR. LOHR remarked that he is familiar with the issue and had reviewed the "case or cases involved," and opined that "that" would be a very worthwhile endeavor. He said: I do believe that the legislature, of course, can provide guidance to the court, and I do believe the supreme court was involved in certifying the question in connection with one of those cases. In any case, I think that the legislature could do a considerable amount of damage control, so to speak, with respect to the NIED claims, for example - negligent infliction of emotional distress - and the unanticipated consequences of that kind of court decision on the costs and availability of coverage. I do think that when insurers - insurance companies - end up paying judgments that are substantially out of line with what they thought they were going to be covering when they wrote the policy, that is a serious public policy problem, and it comes home to roost with respect to withdrawal from the market and higher rates. MR. LOHR, in conclusion, said he would be happy to help the chairman draft appropriate language. CHAIR ROKEBERG extended his request for assistance to Mr. Knudson and to the insurance industry. He then specifically asked Mr. George whether any of his clients could "shed some light on this 'per-seat-mile type limitation.'" Number 1794 JOHN L. GEORGE noted that he was not speaking on behalf of the clients for whom he is a lobbyist. He mentioned that as a former "risk manager" for the state and as former director of the Division of Insurance, he has a fair understanding of the aviation market, although he did not have direct contact with "those companies." MR. GEORGE said that in the case of aviation insurance, "you really have to find an underwriter that's willing," who then might just say, "Well, how much is worth to you," and then charge according to whim. He mentioned that underwriters are influenced by Civil Rule 82 [of the Alaska Rules of Civil Procedure] and various court cases, and, thus, might not necessarily be willing to underwrite in Alaska, particularly since other markets are more attractive. "These things, really, are incremental in changing someone's attitude on their willingness to participate," he remarked; "if you change five things, you might ... change their perception 5 percent or 10 percent or 50 percent." With regard to just how much that perception might change, however, he added that he did not think it is possible, even by an underwriter, to "put a number on it". REPRESENTATIVE BERKOWITZ indicated that he is confused by this seeming inability: "Every year, the underwriters ... write bills to their clients, so if you say, 'If the facts were a little bit different, what would the bill be?'" "I don't know why it's so difficult to plug that [variable] in," he added. MR. GEORGE replied: As I say, there is no book they go to and say, "Ah, your airplane's this, and your pilot's that, and therefore your premium is this." It really is very subjective how some of these rates are calculated. And ... September 11 [2001] didn't affect Alaska at all from a crash standpoint, but somebody said, "Oh, geez, we lost a lot a lot of money; let's charge more money." Number 1682 REPRESENTATIVE BERKOWITZ said: But if I were to give you two side-by-side hypotheticals, one that was the current conditions, and one with the current conditions with one of these tweaks - or more of these tweaks - ... I would think that someone could give me two different quotes, right? REPRESENTATIVE JAMES asked Representative Berkowitz whether he had his checkbook out. REPRESENTATIVE BERKOWITZ, using that analogy, said, "The air carriers in Alaska have their checkbooks out." He suggested that it's a fair question to ask: "Here's one set of facts; what's the rate here? Here's another set of facts; what's the rate?" "I think we ought to be able to get an answer for it," he added. CHAIR ROKEBERG posited that that is only one aspect of the issue that must be addressed, the other aspect is that "insurance underwriters are leaving the state," and thus the availability of insurance is decreasing. MR. KNIGHT noted that he posed Representative Berkowitz's question to representatives of the insurance company, American International Group, Inc. (AIG), and was told that they would like to give him that actuarial data. Mr. Knight said: "They have unequivocally told me that the rates will, if they don't go down, they will stay at where they're at for at least some time." He mentioned that according to an insurance company representative from Ketchikan, rates may not necessarily go down, but should maintain their current value. Rates shouldn't go up any more if there is some sort of limitation on punitive damages, surmised Mr. Knight. He added that as much he and others would like the data pertaining to the calculation of insurance rates, he is not convinced that they will ever get it. REPRESENTATIVE BERKOWITZ remarked that economists use a term that means, "all other things being equal, what happens if you change a variable." "All I'm asking for," he said, "is 'What happens if I change this variable?'" He added that Mr. Knight has given him the first glimmer of evidence that rates would stay flat if one of the variables were changed, and surmised that to mean that if nothing is changed, rates will go up. In closing, he said: "So, How do we get there?... Somebody's got a slide rule or a calculator or whatever it is they're using - adding machine, I don't know, abacus, something - and things are going up, and ... I'd like to know how that calculation takes place." Number 1544 CHAIR ROKEBERG announced that HB 271 [Version L] would be held over.
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