Legislature(2003 - 2004)
02/09/2004 01:04 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 340 - DAMAGES IN CONSTRUCTION CLAIMS [Contains reference to HB 151; contains testimony in opposition to HB 289.] Number 0042 CHAIR McGUIRE announced that the first order of business would be HOUSE BILL NO. 340, "An Act relating to damages in an action for a defect in the design, construction, and remodeling of certain dwellings; and providing for an effective date." [Before the committee was CSHB 340(L&C).] Number 0081 REPRESENTATIVE KEVIN MEYER, Alaska State Legislature, sponsor, said that HB 340 limits the damages that can be awarded in a construction defect lawsuit to the actual cost of fixing the construction defect and other closely related costs such as reasonable temporary housing expenses during the repair of the defect, any reduction in market value cause by the defect, and reasonable and necessary attorney fees. House Bill 340 does not apply to, limit, or otherwise affect lawsuits alleging personal injury or wrongful death resulting from construction defects. He referred to the bill as a necessary and significant step towards assisting homebuilders and contractors in obtaining affordable and necessary liability insurance, which affects the actual cost of a house because builders will pass those insurance costs on to the [homebuyer]. Such costs do not add any value to the home; they simply raise its cost. CHAIR McGUIRE asked Representative Meyer whether he could guarantee that passage of HB 340 will lower the cost of home prices. REPRESENTATIVE MEYER said he could not because there are a lot of factors that go into the cost of a new home. He suggested, however, that HB 340 will affect insurance costs, which is a factor in the cost of a home. He relayed that according to information from Nevada, for every $1,000 increase in the cost of [a home], 1,400 people no longer qualify for [a home loan]. Since 2001, the cost of general liability insurance has been going up while its availability has been declining; thus many builders are unable to purchase adequate insurance even though they are required to under current law. Currently, there are only two "national providers" willing to provide general liability insurance in Alaska: A conglomerate of companies that offer surplus lines [of insurance], and Alaska National Insurance Company (ANIC). REPRESENTATIVE MEYER surmised that a couple of reasons for the dearth of providers in Alaska is that the market is so small that insurance providers don't even want to "mess with it," and that Alaska has a very dangerous construction environment. He offered his hope that HB 340 will assist in making Alaska and Alaska's homebuilders more attractive to insurance companies, which in turn will benefit consumers because there is some concern that if builders cannot get insurance, they will simply build without it. He relayed that according to Alaska Economic Trends, since 1989, construction has provided more certainty and more steadiness to the state's economy than most other industries, especially with regard to overall employment and growth. Therefore, he surmised, if there are fewer insurance companies and [thus] fewer people building homes, then that will impact Alaska's economy. Number 0369 REPRESENTATIVE MEYER noted that there are other states that have either passed legislation similar to HB 340, or are considering such legislation. In conclusion, he offered that HB 340 - coupled with HB 151, which he described as the right to cure - is a necessary and final step towards getting insurance companies to come back to Alaska; HB 340 provides that if the homeowner cannot get the problem corrected and has to go to court, the damages that can be awarded will be limited. He relayed that he has been told by an insurance provider that although the right to cure is a good first step, a bill that limits the damages that can be awarded is necessary and of more interest to providers. REPRESENTATIVE GARA said that philosophically, he tends to have a hard time telling people that they can't recover their full actual damages. He asked what damages HB 340 is supposed to prevent people from recovering. REPRESENTATIVE MEYER suggested that HB 340 would prevent people from recovering damages for items unrelated to the home or its construction; for example, damage awards for emotional stress. REPRESENTATIVE GARA asked whether the insurance industry has indicated that passage of HB 340 would result in reductions in insurance rates and, if so, how much might those reductions be. "Have they made any commitments?" he asked. REPRESENTATIVE MEYER said that the insurance industry has not made any such commitments to him. Instead, he has only been told that if HB 340 were in place, Alaska would be more attractive to insurance providers. CHAIR McGUIRE opined that it would be nice if the insurance industry would weigh in on these issues in committee. It is very frustrating, she added, when taking on issues of tort reform, to never be provided any information from the insurance industry. Number 0682 DAVE DILLARD, Owner, 3-2-1 Construction, Inc., relayed that at the end of the year, he was having to look for new insurance, both liability and workers' compensation. His former insurance provider of almost 18 years, State Farm, has completely pulled out of Alaska because of costs and "mold issues" in California. Last year, he said, he paid $6,500, and this year he was given a quote of $20,000 [for the same coverage]; this quote was then refigured to $50,000. He said that there is no way he could pass those costs on to his consumers. Additionally, the cost of his workers' compensation insurance went from 14 percent to 21 percent. MR. DILLARD suggested that HB 340, along with other legislation, will make Alaska more [attractive to] the insurance industry, and noted that his current insurance, although more reasonable, is still twice what he paid last year and doesn't "cover" his shop. He warned that if insurance prices continue to rise, it will limit the number of people who can afford to build houses, which will in turn drive the cost of homes up. If there is a problem with a home, it is the builder's responsibility to fix it, but the Alaska market must be made more competitive so that insurance providers will return to Alaska and offer decent rates. In response to questions, he said that he'd never had a liability claim filed against him, and again suggested that State Farm pulled out of Alaska due to mold issues in California and Alaska's lack of a liability cap for damages. CHAIR McGUIRE surmised, then, that State Farm's pulling out of Alaska wasn't due to the number of claims filed in Alaska, rather it was due to the possibility of being exposed to limitless damages. MR. DILLARD concurred. REPRESENTATIVE GARA pointed out that the insurance industry was using just such an excuse in 1988 before tort reform took place, and again in 1996, and so more tort reform took place. But even after twice enacting tort reform measures in the past, there has never been any demonstrable reduction in insurance rates. So why would doing it a third time have a different result, he asked, and how will limiting damages in non personal-injury cases lower rates? MR. DILLARD opined that the first step is getting insurance providers back in Alaska; once they are providing insurance to Alaskans again, then there can be discussion about lowering prices. REPRESENTATIVE GARA noted that in workers' compensation claims, one is not entitled to recover for pain and suffering, yet those rates are also going up. Thus, he suggested, rates are going up for reasons other than the award of pain and suffering damages, though that is not to discount the problems faced by Mr. Dillard and others in the home building industry. REPRESENTATIVE ANDERSON said he believes in the bill and agrees with Mr. Dillard's comments. He suggested that when people sue for damages caused by defects, they often attempt to recover more than the value of what was corrected. MR. DILLARD concurred, and reiterated that he has never been sued. Number 1177 STEVE ORR, after noting that he is an "entry local builder" in the Matanuska-Susitna ("Mat-Su") valley - the Wasilla/Palmer area - testified that he, too, has experienced higher insurance rates in the last year: general liability insurance that used to cost him $8,000 now costs him $80,000. This does nothing for the homes he builds except to make them more expensive - thus taking a few people out of the market. He opined that Alaska needs to slow down the progression of rising insurance rates, which he described as a national problem, adding that he doesn't want to see anybody left without the ability to go to court and that he sees no harm coming from passage of HB 340. He suggested that nuisance cases overshadow legitimate cases. REPRESENTATIVE GARA asked Mr. Orr how many times he has been sued for pain and suffering in a case that didn't involve personal injury. MR. ORR said that someone tried to do so once. Number 1303 JESS HALL, National Representative, Area 15 Vice President, Alaska State Home Builders Association (ASHBA), after relaying that he has been building homes for 25 years, said that HB 340 together with HB 151 make a complete package designed to address what he called a crises in liability insurance rates and availability. He described this problem is a national problem, adding that his rates, too, have gone up approximately 800 percent, and this increase is not something that builders wish to pass on to consumers. He pointed out that even though builders are paying between 500 percent and 800 percent more for general liability policies, the coverage of those policies is only about one-fourth of what it used to be even just two years ago. MR. HALL suggested that when a builder is taken to court to redress a construction defect, the attorneys have always viewed the insurance companies as being the pocket to go to if the builder wouldn't cure the defect. However, current policies, except for bodily injury, now exempt most things that a builder can be sued for, thus leaving the builder with the burden. He characterized current policies as providing mere license insurance, since, in order to get a contractor's license, one must have a liability policy; however, when a liability policy doesn't really cover liability, builders are left with "self insurance." He remarked that HB 340 is important in that if there is a lawsuit, only actual damages can be recovered, and predicted that lawsuits for punitive damages will result in builders filing for bankruptcy, which will in turn leave the consumers with no one to seek recourse from. MR. HALL predicted that adoption of HB 340 [and HB 151] will let all parties know, up front, that if there is a problem, the problem needs to be corrected. In conclusion he said that adoption of HB 340 is an important step that needs to be taken. CHAIR McGUIRE referred to page 2, lines 28-30, and mentioned that proposed AS 09.45.895(b) appears to disallow the damages that could be recovered via proposed AS 09.45.895(a)(1)-(4) if they exceed the greater of the claimant's purchase price for the residence or the current fair market value of the residence without the defect. In other words, subsection (b) appears to place an additional limit on the compensation allowed for in subsection (a); thus, even if a claimant is entitled to damages allowed for in subsection (a), if they exceed the amount specified in subsection (b), he/she will not be awarded that excess amount. She said that she supports the idea of excluding punitive damages and limiting awards to those things that are "compensatory and ... reasonable." Number 1684 REPRESENTATIVE HOLM relayed a personal experience in which he had to go to court to get redress for a construction defect in his home; the attorney fees for both sides combined far exceeded not only the cost of fixing the problem but also the value of the home. Noting that proposed AS 09.45.895(a)(4) allows compensation for "reasonable and necessary attorney fees", he asked who would be making the determination of "reasonable" with regard to attorney fees, particularly given the fact that many insurance companies have a seemingly endless pocket when it comes to paying attorneys to fight their case, whereas a homeowner might not have that kind of financial leeway. He indicated that he wants the limitations set forth in HB 340 to be fair, but he is not sure that limiting compensation to just the value of the home would be fair. CHAIR McGUIRE suggested as a solution simply removing proposed AS 09.45.895(b) altogether. MR. HALL, in response to questions, reiterated his view that HB 340 is an important step towards relieving what he termed a crises in Alaska - the lack of insurance providers willing to underwrite in this state - and his earlier comments pertaining to builders now having to shoulder the burden of liability even when they succeed in purchasing what providers are now calling liability insurance. He suggested that passage of HB 340 and HB 151 will entice insurance providers into coming back to Alaska. REPRESENTATIVE OGG said he is concerned that HB 340 does not currently address situations of willful or intentional [misconduct], malicious conduct, or fraud on the part of the builder. In those situations, he opined, the limitations set forth in HB 340 should not apply. MR. HALL suggested that such conduct is addressed elsewhere in statute, adding that he agrees that fraudulent behavior should be addressed differently than instances of defective construction due to mistakes, though he would want to see any proposed language change addressing that issue before having it included in HB 340. Number 2126 SIDNEY K. BILLINGSLEA, Attorney, Alaska Academy of Trial Lawyers (AATL), offered the following comments on HB 340: This law comes into effect when builders and remodelers and contractors do bad work. The question seems to be whether or not they can get affordable insurance to cover the possibility of them doing bad work that needs to be compensated for. There [has] historically been absolutely no correlation whatsoever between tort reform if you will, or lawsuit reform, and the reduction of insurance rates, primarily because the insurance industry is, historically, a cyclical industry that is tied to the market - tied to the stock market. Insurance companies, historically, invest their premiums into the market place and, for example, in the 1990s, no insurer could fail in the market; the insurance premiums can either hold fast or be reduced so that the insurers can get a larger share of the market, by cutting their prices, and still make a lot of money on their investments. When the stock market declines, as it did, insurers no longer [have] the huge cash reserves they once had, and they go to the insured - their customers - to get those funds restored by raising their premiums. When their coffers are rebuilt by increased premiums, they can then reinvest in the stock market and go back into a competitive industry, where they can reduce premiums to get yet a larger share of the market of consumers, because some insurance companies won't have large enough reserves to survive the falling markets. And the larger insurance companies who do survive will then exploit that gap in the market and reduce their premiums in order to get a larger share of the consumers that are left. Unfortunately, what happens is that the insurers become somewhat tolerant of the higher prices of their premiums, and the premium costs don't, necessarily, drop to below the rate they were when the markets were fat. Number 2237 The other observation I have about this particular bill is that [subsection] (b) takes away all the awards of [subsection] (a), because, as [Chair McGuire] observed a little bit earlier, what if the cost of (a) exceeds the value of (b) that's awarded: You don't get recovery for the provisions in (a), if that happens, under the way this proposed law is written. The other thing it doesn't account for is the loss of personalty that would occur if a house is damaged due to bad construction, remodeling, or other defects that the bill covers or is intended to cover. So, if I were to make a claim on my ... personal homeowners' insurance policy for the personalty I lost - my stereo, my rugs, my furniture, et cetera, my car - my insurance policy would be canceled or my premiums would be increased through no fault of my own but through, in fact, the fault of a negligent builder. MS. BILLINGSLEA concluded: So, I don't think the law is helpful to consumers; in fact, it's only helpful to one industry, and that's the insurance industry who - I can tell you, and you know from two rounds of tort reform - have never responded with a decrease in premiums. They've never made a promise to decrease their premiums and they've never come through, nor do they actually testify that they will, and the reason that they don't is because ... the insurance company can't make that kind of promise in the way they operate in this cyclical market-driven economy. Thank you very much. Number 2356 JEFF DeSMET noted that he has been a builder and remodeler in Juneau since 1977, and that he is considering retiring. He said he supports HB 340 in the interest of doing whatever it takes to bring the cost of construction down so that those costs don't have to be passed on to the homeowners and so that there is at least an attempt at providing affordable housing during what he termed "this crisis." He noted that he, too, was dropped from State Farm after many years, and that he is now paying double for less [liability] insurance and paying 20 percent for workers' compensation insurance, the cost of which, he's been told, will increase next month. TAPE 04-11, SIDE B Number 2395 MR. DeSMET added that he is at this hearing to support the rest of the homebuilding industry in whatever needs to be done to attract affordable insurance [to Alaska]. He went on to say: It's difficult enough to get people that are qualified, good builders that don't have claims, don't fraudulently represent their work, they're interested in building affordable, quality, healthy houses. And I'm here to testify to that, not so much in detail as to the bill, but anything that would bring the competitive insurance market back to the state of Alaska I'm in support of .... MR. DeSMET also said: I see this as being more of a problem ... with licensing and enforcement, [which] we don't really have right now because we are in a crisis, ... [and] trying to have enforcement paid for. I think all the builders that are on line ... would be in favor of increased fees if, in fact, we would get some enforcement. Unfortunately, I think builders like myself, who've never had claims and try to ... build quality homes, fall victim to those that are the fraudulent ones that are operating either under handyman licenses or with no license whatsoever. And ultimately, those end up in court in litigation and, unfortunately, the whole industry has to pay for those. MR. DeSMET, in response to questions, suggested that professional homebuilders would support enhancing enforcement through the bill in order to prevent fraudulent and unqualified builders from getting into the field to begin with. REPRESENTATIVE ANDERSON suggested that the possibility of being sued for pain and suffering might be deterring new people from getting into the construction field. MR. DeSMET indicated agreement, adding he would counsel his son against going into the construction business because it is no longer profitable; "we can't pass ... those excessive costs on until we have some assurance ... that ... the insurance coffers are back up to full mark, where they can go back [and] start offering competitive rates." He suggested that HB 340 is a proactive stance that may encourage the insurance industry to at least justify its high premiums if not actually lower them. Number 2182 KELLY STEPHENS, Owner, Superior Builders, Inc., relayed that he agrees with and supports HB 340 100 percent. Even though no one can guarantee that insurance premiums will go down, he remarked, hopefully things can be done to attract insurance companies back to Alaska so that more competitive rates become available. With only two insurance providers serving Alaska, there is no way that insurance rates will drop, he added. He noted that the cost of his builder's insurance is no longer just a percentage of the cost of a home he builds; it is now "a line figure" that gets added to the list of what the purchaser is paying for when buying a home. In response to a question, he predicted that not passing HB 340 will encourage more builders to lie in order to get insurance or to do without insurance because insurance costs are so high. The problem with lying to get insurance, of course, is that it voids the policy should something happen. He, too, suggested that attention should be given to the issue of enforcement. MR. STEPHENS, in response to a question regarding HB 289, said he does not support that bill because people will think that contractors have deep pockets; additionally, there is the likelihood that it will leave young people with no chance to get into the industry. Returning to the issue of HB 340, he said that the increases in insurance costs make it very difficult to stay in business. Number 1947 ROBIN WARD, Legislative Chair, Alaska State Home Builders Association (ASHBA), offered: First of all, this is absolutely an insurance bill; this is our main thrust here. We are one of 28 states who have either just recently or over the last two years ... adopted ... a "right to repair" bill. This is the next section of this. There are 14 of us ... across the United States that are doing this piece of it. We can't do it alone; we are a very, very small market. We are painted with the brush from national markets. So we are actually working in concert with other associations to do this very piece. Second of all, this bill is meant to keep, and help keep, our good builders in business, but not to protect our bad ones. If we need to, under exemptions - with, of course, the approval and support of our sponsor - ... go back and clarify that fraud and gross negligence need to be exceptions, we don't have a problem with that; we don't want to protect our bad builders, so if we need to ... clarify that, I don't have a problem with doing that. This is all about making sure that our good builders stay in business. I'm a 23-year insured of State Farm - never, not one claim in 23 years; every contractor in the United States has been canceled by State Farm .... It was no longer a profitable line for them. ... And that's not the only one. Lots of insurance companies have realized that. Because there is no cap on the upper risks, they have canceled and gone out of markets. So ... right now, even affordability isn't our biggest question - accessibility is. We have to create a market they will come back to, and this is the first step, is to make it a little more friendly environment for them to work in - then we can start negotiating some rates. Number 1857 MS. WARD continued: So this is what we're trying to do, in concert with the rest of the United States, to create a better market for our whole entire industry. We [also] do not ... have a problem - again, with the support and approval of our sponsor - [with] taking out the cap on the top limit of the house. If you were to go down today and ... replace your vehicle through the [National Automotive Parts Association] NAPA parts department, it would cost you three or four times the cost of the original vehicle. That's just the way it is. So if it exceeds that, as long as it's actual damages and reasonable costs, we don't have a problem with that. So, hopefully, that will take [care of] a couple of concerns. And then finally I just want to address the bonding [HB 289]. We are not in favor of that for exactly the same reasons you are. ... We had a concern four or five years ago about people being able to get into the business with almost no capital and no experience. And we've worked hard [on] our continuing education. A general contractor today can go build a school without any education, but a residential endorsement requires, to build a house, that we have to have continuing [education] and certain levels of education, so we've worked very hard at that. But the threshold now for a young person to get into business, with the insurance situation, is so high that we're not attracting people in any more. And once all of us retire, ... there's going to be no one to take over for us, and then the cost will ... CHAIR McGUIRE interjected to ask why the residential requirements are different with respect to continuing education. MS. WARD replied that general contractors have no education requirements. [Residential contractors], on the other hand, must not only attend a "homebuilding and artic engineering homebuilding workshop" in order to obtain their license, they must also attend 16 hours of continuing education every two years in order to renew their license. She suggested that the requirements differ because people live in homes, whereas they don't live in commercial buildings. Number 1772 CHAIR McGUIRE remarked, however, that schools are also very important, ranking right up there with homes. MS. WARD continued relaying the ASHBA's concerns with HB 289: We had two concerns with the bonding. One is the threshold to get into business. And the other is, it's a very litigious society, and we were afraid, with the $100,000 bond, they'd go right directly [at that]; I might as well paint a big target on my shirt. So, we were concerned for those two reasons. REPRESENTATIVE OGG, noting that HB 340 has been described as the second "piece" of a "full package," asked whether the legislature could expect to see more "pieces." MS. WARD indicated that HB 340 is the final piece. In response to a question, she said that according to the Department of Labor & Workforce Development (DLWD), [operating] without a license is a misdemeanor. If one advertises his/her services without proper licensing and bonding, then there might be other penalties involved, she suggested. She added that rising insurance premiums "are driving many of our people underground - to use handyman licenses." CHAIR McGUIRE, in response to a concern expressed by Representative Holm, explained that the language in subsection (c) of proposed AS 09.45.895 is not being changed - it currently exists as AS 09.45.895. MS. WARD noted that any compensation paid to the homeowner from what she referred to as the "national warranty program" that she provides will not affect the homeowner's policy. If compensation is paid by the homeowner's policy, however, then there is the potential that his/her policy premiums might go up. REPRESENTATIVE GARA said it is absolutely inconceivable to him that insurance rates which went from $8,000 to $80,000 will be at all impacted by "a bill that only addresses non personal- injury cases and that only addresses a minor portion of damages that we've never even heard, ... from any testimony, ever get awarded in those non personal-injury cases." He asked what assurances can be given that HB 340 will have any impact on insurance rates. Number 1599 MS. WARD, in reply, offered: This does come from a national perspective. As we do this as a group, we have met with the national insurers, and this is what they're telling us. So we're responding to what they're telling us. And they may not go down, but maybe they won't rise as fast, and maybe we'll create more competition. And right now that's what we're looking for, frankly, is the competition. REPRESENTATIVE GARA asked for examples of abuses under the current law - examples of people who have non personal-injury cases who recovered full damages. MS. WARD replied that people have been awarded huge claims for personal damages such as emotional distress: trauma, for example. She noted that someone tried to sue her for trauma, most of the claim being for stress, but did not recover anything because she fought that case. Her insurance company, however, wanted to just write the person a check; she wouldn't let them. CHAIR McGUIRE suggested that part of the problem is perhaps the perceived exposure to such claims. REPRESENTATIVE GARA opined that HB 340 falls in that class of bills that in order to protect one group of Alaskans, the rights of another group of Alaskans are being taken away. "The rights that we're taking away are the rights of people who have legitimate claims for personal injury, for emotional injury, and we're telling them ... that we're going to take away those rights to protect people on the other side," he remarked. He offered an example of a homeowner being willing to live in a garage for three months while work is being done on the house, but having to live in the garage for nine months instead just because the builder decided, at the end of three months, to go work on "a more profitable job." He asked why that homeowner should not be compensated for the inconvenience of having to live in the garage for an extra six months. MS. WARD pointed out, however, that [the bill] addresses situations in which the homeowner is in the house, everything is fine, and then a defect in the construction forces the homeowner to live in "good" temporary housing while repairs are made; proposed AS 09.45.895(a)(2) provides that the homeowner shall be compensated for the reasonable cost of that temporary housing. Number 1423 REPRESENTATIVE GARA noted, however that even in that situation, if the builder leaves the repair job early to go work on a more profitable job and the homeowner has to live in the temporary housing for a much longer period of time, he/she will only get compensated for the cost of that housing after he/she sues. Why should the homeowner not get compensated for the inconvenience as well, especially when the builder "has blown them off." MS. WARD replied that for every one person that might reasonably deserve that compensation, there will be five people that sue for it and really don't deserve it. REPRESENTATIVE GARA countered: "Then why don't we pass something that would just punish people who file frivolous lawsuits, instead of passing something that takes away the rights of people who have legitimate claims?" CHAIR McGUIRE indicated that she would like to work with Representative Gara on that issue at a later time - perhaps a bill that would put some teeth into the Alaska Rules of Court addressing frivolous lawsuits. REPRESENTATIVE GARA added that it torques him to take away the rights of people with legitimate claims in order to solve somebody else's problem: If the problem really is frivolous claims, I would have no problem coming up with significant penalties ... [for] people who file frivolous claims; we should do that. But I really hate the idea of taking away the rights of people with legitimate claims because somebody on the other end gets what I believe is a false promise from an insurance company that they'll lower rates if they just take away these people's rights. CHAIR McGUIRE suggested that part of the problem is that the barrier to filing such lawsuits is too low, and builders wind up having to defend themselves at great cost. Number 1317 REPRESENTATIVE GRUENBERG offered some suggestions as to which Alaska Rules of Court ought to be altered to more adequately address frivolous lawsuits. He then turned attention to proposed AS 09.45.895(c), and said: The collateral source rule doesn't cover a situation where the insurance coverage that may have paid the claimant in the first place contains a subrogation clause. And I'm wondering if there should be some change in [CSHB 340(L&C)] to reflect the circumstance where the insurance company would have first claim on the money because of a subrogation clause. If we don't put that in, the result will be that the claimant is unfairly penalized ... because their claim is reduced, and ... then ... the benefit would [actually] go to the tort-feasor - or the person who caused the damage here - because they wouldn't have to pay the amount they should additionally have to pay to compensate the insurance company for the money it has paid out to the claimant. Care to comment? MS. WARD replied: "I think I understand, Representative Gruenberg, where you're going; I guess I would have to find the technical path." REPRESENTATIVE GRUENBERG said that this issue need not be addressed right now, but it should be looked at, at some point because, normally, if there is a subrogation clause in an insurance policy, that doesn't let the tort-feasor - or the person who's responsible - off the hook; the insurance company gets first claim on the money in order to reimburse itself for any money its paid out. Then any additional money that the claimant claims for deductible or non-covered costs would go directly to the claimant. But it could be a significant and unfair windfall for the person responsible for the damages if the bill doesn't include a provision "like that." So although the language in proposed AS 09.45.895(c) is not being changed via HB 340, perhaps it contains a defect that should be addressed at some point. MS. WARD said she would research that issue. REPRESENTATIVE ANDERSON, offering an example of an in-home wedding being disrupted because of a construction defect, predicted that the potential of a claim for pain and suffering in such a situation could very well drive some people out of the homebuilding business. He opined that in such an example, as a matter of public policy, curing the defect and reimbursing reasonable costs should be sufficient. Number 1099 MS. WARD agreed, adding that reasonable and actual damages will still have to be determined by the court system, which may, in fact, decide to award "a little something" for any pain and suffering incurred as a result of the construction defect. She opined that the language in HB 340 is broad enough to give some discretion regarding actual damages and is not eliminating the possibility of recovering some sort of punitive damages. REPRESENTATIVE ANDERSON remarked that courtroom debate on the issue of damages for pain and suffering can go on and on. MS. WARD, in conclusion, said: "The majority of these claims are going to be because of gross negligence, fraud, and so on. We don't want to protect those people. We want to protect the good builders; that's our aim here." REPRESENTATIVE GARA predicted that many more tort reform bills were going to come before the committee. He asked whether the committee is considering exempting negligence from the protections provided by HB 340. CHAIR McGUIRE clarified that a suggestion discussed earlier involved exempting fraud and gross negligence from the bill's protections. REPRESENTATIVE GARA said that changing the bill in that fashion would satisfy his concerns quite a bit. He added that the concept that a jury will award a claimant with "some crazy claim" a lot of money disregards the fact that, historically, juries in Alaska have not done that, and opined that such a fear is not justified given the way Alaskan juries have conducted themselves. CHAIR McGUIRE suggested that part of the problem is that insurance companies do not take that fact into account; instead, they look to circumstances in the Lower 48 when determining risk. Number 0859 REPRESENTATIVE SAMUELS said he agrees that Alaskan juries, particularly in Anchorage, are conservative. He suggested, however, that part of the problem is that when threatened with a lawsuit, it is often cheaper to settle [out of court] even if no wrongdoing occurred; very few cases ever actually go to court. REPRESENTATIVE GARA remarked that the idea that someone with a bogus claim will be awarded a lot of money because the defendant is afraid of a jury verdict ignores one reality: the attorney for the defense is there and he/she is not going to advise the client to pay a lot of money on a bogus claim. So what happens in these cases, he explained, is that the defense attorney says to the claimant, "You have a bogus claim; I dare you to spend a ton of money over these next five years and take me to court, because you're going to spend money on your attorney and you're going to lose." So to assume that someone will give a claimant money just for filing a bogus claim ignores the reality that the response will be, "We know you have a bogus claim; we're not going to pay you money, because we know you're not going to get anywhere with it." Logic doesn't leave the judicial system just because one side has a claim, he remarked. CHAIR McGUIRE, after ascertaining that no one else wished to testify, closed public testimony on HB 340. Number 0686 CHAIR McGUIRE made a motion to adopt Amendment 1, to delete subsection (b) from page 2, lines 28-30. There being no objection, Amendment 1 was adopted. Number 0651 REPRESENTATIVE OGG made a motion to adopt Conceptual Amendment 2, to "conceptually create an exemption, to these limitations, for [gross] negligence and fraud." Number 0610 REPRESENTATIVE GARA objected for the purpose of discussion. He said the levels of bad conduct are: negligence, gross negligence, intentional misconduct, and "recklessness." He recommended that the committee include, as exemptions from the protections provided by HB 340, conduct that is grossly negligent, conduct that is fraudulent, and conduct involving intentional misconduct. He indicated that conduct involving intentional misconduct would address situations wherein the contractor decides, in the middle of the project, that he/she is just going to go "somewhere else for a while." That's not fraud, it's not gross negligence, but it's intentional misconduct, "and I don't think that we should reward people who engage in intentional misconduct," he added, but unless Conceptual Amendment 2 is amended to include intentional misconduct, that's exactly what will happen. REPRESENTATIVE OGG said he did not have a problem with that concept. REPRESENTATIVE HOLM suggested that intentional misconduct might apply to the contractor who delayed a project because he/she could not get materials within a certain timeframe or because the proper subcontractors weren't available. REPRESENTATIVE OGG remarked, "I think the concept is there, and I think that the sponsor can craft it." He suggested that Representative Holm's examples would fall more within the category of negligence or actually even the realm of a bona fide excuse, and so it wouldn't qualify as intentional misconduct. He indicated that he would rather leave Conceptual Amendment 2 as is, and work with the sponsor to ensure that intentional misconduct is not protected. CHAIR McGUIRE indicated agreement that Representative Holm's examples would not qualify as intentional misconduct, and expressed a willingness to allow Representative Ogg to work with the sponsor regarding what Conceptual Amendment 2 would include. She told Representative Meyer that the committee did not wish to gut the bill, and suggested to Representative Gara that he review the bill in its amended form, before it goes to House floor, in order to ensure that his concerns are addressed. REPRESENTATIVE MEYER agreed to work with Representatives Ogg and Gara on the concepts discussed. REPRESENTATIVE GARA withdrew his objection to Conceptual Amendment 2. Number 0355 CHAIR McGUIRE, noting that there were no further objections to Conceptual Amendment 2, announced that Conceptual Amendment 2 was adopted. Number 0325 REPRESENTATIVE ANDERSON moved to report CSHB 340(L&C), as amended, out of committee with individual recommendations and the accompanying zero fiscal note. There being no objection, CSHB 340(JUD) was reported from the House Judiciary Standing Committee.
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