Legislature(2007 - 2008)CAPITOL 17

03/03/2008 03:00 PM LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSHB 319(L&C) Out of Committee
Moved CSHB 357(L&C) Out of Committee
Bills Previously Heard/Scheduled
HB 357-CLAIMS AGAINST REAL ESTATE LICENSEES                                                                                   
3:07:04 PM                                                                                                                    
CHAIR OLSON announced that the first order of business would be                                                                 
HOUSE  BILL  NO. 357,  "An  Act  requiring errors  and  omissions                                                               
insurance  for real  estate licensees;  renaming the  real estate                                                               
surety  fund as  the real  estate recovery  fund and  relating to                                                               
that fund,  and redefining  the procedures  and criteria  used by                                                               
the Real  Estate Commission to make  an award from the  fund to a                                                               
person  suffering a  loss caused  by certain  misconduct of  real                                                               
estate licensees;  requiring a real  estate licensee  to maintain                                                               
an office in the state; and providing for an effective date."                                                                   
3:07:16 PM                                                                                                                    
DAVE FEEKAN,  Legislative Chair,  Alaska Association  of Realtors                                                               
(AAR),  stated  that  the   AAR  represents  approximately  1,600                                                               
licensed real estate agents or  realtors in Alaska.  He explained                                                               
that  HB 357  represents  a  joint effort  between  the AAR,  the                                                               
Division  of   Insurance,  and  the  Division   of  Corporations,                                                               
Business, and  Professional Licensing  (DCBPL).   The goal  of HB                                                               
357  is  to  modernize  the   surety  fund  and  ensure  consumer                                                               
protection  by requiring  mandatory  errors  and omissions  (E&O)                                                               
insurance for  all real  estate licensees.   The surety  fund was                                                               
started in  1974 as  a substitute for  corporate insurance.   The                                                               
fund   reimburses   consumers   for    losses   due   to   fraud,                                                               
misrepresentation,  deceit, and  conversion of  trust funds.   By                                                               
statute, the  fund has a  balance of $250,000 to  $500,000 funded                                                               
by  biennial licensee  fees, currently  set at  $30.   The surety                                                               
fund  has experienced  a  shortfall  due to  the  high number  of                                                               
frivolous claims  filed against the  fund, which has  resulted in                                                               
an  increase in  administrative fees,  along with  a drop  in the                                                               
number of  licensees whose  fees support the  fund.   He reviewed                                                               
claims filed  in the  past two  years, stating  that in  2006, 15                                                               
claims were  filed and all  were denied,  and in 2007,  13 claims                                                               
were filed  and 2 were paid.   This bill would  change the surety                                                               
fund  to  a  recovery  fund and  would  implement  mandatory  E&O                                                               
insurance for  all real estate  licensees.  This bill  would also                                                               
change  the process  from a  hearing  law process  to a  judicial                                                               
process to  file claims against the  recovery fund due to  an act                                                               
of fraud, deceit,  or misrepresentation.  A person  would need to                                                               
have  a  court  judgment,  arbitration,   award  judgment,  or  a                                                               
settlement  agreement  in order  to  file  a claim.    Currently,                                                               
almost all  of the surety  fund cases are unrepresented  by legal                                                               
counsel, or are  vexatious claimants, he stated.   He contacted a                                                               
legal firm  that performs  work in the  real estate  industry and                                                               
that firm  could not recall  one instance  of a case  against the                                                               
surety  fund in  which  the parties  obtained  legal counsel,  he                                                               
3:10:41 PM                                                                                                                    
REPRESENTATIVE  GARDNER inquired  as to  whether claimants  would                                                               
require  legal counsel  in  order  to make  a  claim against  the                                                               
proposed recovery fund.                                                                                                         
MR. FEEKAN  answered that  most of  the claimants  that currently                                                               
use  the surety  fund  could file  a claim  in  the small  claims                                                               
court.    He surmised  that  legal  representation would  not  be                                                               
REPRESENTATIVE GARDNER expressed concern  for consumers that have                                                               
been victims of fraud and  stated her desire that consumers would                                                               
not incur  additional expenses under  the recovery  fund proposed                                                               
in HB 357.                                                                                                                      
MR. FEEKAN surmised that it is  less expensive to file a claim in                                                               
small claims court than it is  to file a claim against the surety                                                               
fund, which currently costs $250.                                                                                               
REPRESENTATIVE  GARDNER  expressed  concern   that  if  a  person                                                               
thought an  action was intentional  by the real  estate licensee,                                                               
the  person might  be more  inclined  to hire  an attorney  since                                                               
he/she may not be familiar with the process of filing in court.                                                                 
3:13:26 PM                                                                                                                    
REPRESENTATIVE  GATTO  recalled   that  the  Alaska  constitution                                                               
limits  small claims  court  to  less than  $250  and above  that                                                               
amount the person could elect to have a jury trial.                                                                             
MR. FEEKAN  related his  experience that  real estate  agents are                                                               
not charged with  fraud.  He opined that very  few cases approach                                                               
the standard of fraud and the  rest of the cases would fall under                                                               
E&O insurance coverage.                                                                                                         
3:15:26 PM                                                                                                                    
CHAIR OLSON inquired as to whether  the limit for small claims is                                                               
currently set at $10,000.                                                                                                       
REPRESENTATIVE GATTO  surmised that  even though  the legislature                                                               
may  have raised  the  limit to  $10,000,  that the  constitution                                                               
still limits the  amount of small claims actions.   It is also up                                                               
to the defendant to decide and  he/she may prefer civil rules and                                                               
a jury trial.   If the claim  is for a small amount  such as from                                                               
$1,000-$5,000, most people  would be reluctant to take  a case to                                                               
court due to the costs involved.                                                                                                
3:16:42 PM                                                                                                                    
REPRESENTATIVE  GARDNER  inquired  as  to any  other  reasons  to                                                               
change to a recovery fund, other  than a need to reduce frivolous                                                               
MR. FEEKAN  answered that the  change to the recovery  fund would                                                               
also necessitate  requiring mandatory  E&O insurance,  which also                                                               
enhances consumer protection.                                                                                                   
REPRESENTATIVE GARDNER inquired as  to whether raising the filing                                                               
fee to file  a claim with the  surety fund from $250  to a higher                                                               
fee such as  $500-$1,000 would have the same  effect as replacing                                                               
the surety fund with the proposed recovery fund.                                                                                
MR.  FEEKAN said  he was  not certain  of the  reduced number  of                                                               
claims when the filing fee was  raised to $250 for filing a claim                                                               
against the surety fund.                                                                                                        
3:18:22 PM                                                                                                                    
REPRESENTATIVE   NEUMAN  moved   to   adopt  proposed   committee                                                               
substitute  (CS)   for  HB  357,  labeled   25-LS1363\L,  Bailey,                                                               
2/28/08, as the working document.                                                                                               
There being no objection, Version L was before the committee.                                                                   
3:19:37 PM                                                                                                                    
MARK DAVIS,  Director, Juneau  Office, Division  of Corporations,                                                               
Business,  and Professional  Licensing,  Department of  Commerce,                                                               
Community, & Economic Development  (DCCED), explained that HB 357                                                               
includes the  legislative auditor's recommendation to  revise the                                                               
surety fund, to  require mandatory E&O insurance  proposed by the                                                               
industry with  the conversion  of the surety  fund to  a recovery                                                               
fund.   Currently, 13  states have either  mandatory E&O  or some                                                               
form of recovery  fund combined with E&O insurance.   He surmised                                                               
that the  surety fund is  limited to relatively small  claims and                                                               
uses an  administrative law  process.   He explained  the process                                                               
which   consists  of   filing  a   claim,  appearing   before  an                                                               
administrative  law  judge,  with   the  judge  issuing  a  final                                                               
decision.  The parties can  further appeal the matter to superior                                                               
court which  acts as an appellate  court.  Insurance is  a normal                                                               
way to resolve disputes, he opined.                                                                                             
MR.  DAVIS   echoed  earlier  testimony   with  respect   to  the                                                               
administrative  law process  that  clients would  use for  surety                                                               
fund  claims  if  the  real  estate licensee  did  not  have  E&O                                                               
insurance.   According  to his  staff, about  75 percent  of real                                                               
estate  licensees  are currently  covered  by  some form  of  E&O                                                               
insurance and the remaining 25  percent deem the E&O insurance as                                                               
too expensive,  he noted.   The Division  of Insurance  staff has                                                               
reviewed other states' E&O insurance  rates, which range from $80                                                               
$258 per  year, he stated.   He  noted that Rhode  Island charges                                                               
licensees  $80  per  licensee   annually,  and  Colorado  charges                                                               
licensees  $258.    Alaska's  fees  would  likely  be  closer  to                                                               
Colorado,  he opined.   He  pointed out  that currently  most E&O                                                               
insurance fees  run about  $1,000 annually  for licensees.   This                                                               
bill  would change  E&O insurance  from  individual policies  for                                                               
licensees  to  a  master  group  policy  which  the  Division  of                                                               
Insurance recommends.   This bill  includes a provision  to allow                                                               
the division to use a competitive  bid process to procure the E&O                                                               
insurance policy.   This bill  also includes a savings  clause so                                                               
that the process  would revert back to the current  method in the                                                               
event than no company bid to offer E&O insurance.                                                                               
MR. DAVIS, in  response to Chair Olson, answered  that his staff,                                                               
Linda Hall,  Director, and Mr. Troutt,  Deputy Director, Division                                                               
of  Insurance,  Department  of Commerce,  Community,  &  Economic                                                               
Development (DCCED) support the proposed committee substitute.                                                                  
3:23:45 PM                                                                                                                    
MR. DAVIS,  in response to Representative  Gardner, answered that                                                               
E&O policies are written by  insurance companies, with exclusions                                                               
such that  some things  are covered  and some are  not.   The E&O                                                               
insurance policy  would cover  licensees for  up to  $100,000 for                                                               
occurrences  for which  real  estate  licensees are  responsible.                                                               
The  insurance  company  would   defend  licensees  against  such                                                               
claims.   However, intentional actions  or fraud are  not covered                                                               
by E&O insurance.   If the E&O insurance  company determines that                                                               
the  claim might  not  be  covered, the  company  writes what  is                                                               
called  "reservation of  rights" letter.   He  disclosed that  he                                                               
once performed  work related  to this.   He  related that  in the                                                               
reservations   of  right   letter  the   E&O  insurance   company                                                               
essentially acknowledges  that the person has  coverage, has been                                                               
sued,  and  that  the  E&O  insurance  company  will  defend  the                                                               
licensee,  but the  company also  advises the  licensee that  the                                                               
claim is not  likely going to be covered under  the policy.  Once                                                               
the licensee  receives the letter,  he/she has the right  to seek                                                               
private counsel or  to continue with the  E&O insurance company's                                                               
counsel until  the company issues  a final  determination whether                                                               
the  action  is  covered  under  the E&O  policy.    If  the  E&O                                                               
insurance company  wrongfully releases the policyholder,  the E&O                                                               
insurance company can  be held liable under  bad faith provisions                                                               
of law.   Insurance companies tend to  settle meritorious claims,                                                               
he opined.   He pointed out that if a  policyholder pleads guilty                                                               
to fraud that the insurance won't  cover the licensee, but if the                                                               
policyholder  pleads  that  the  action an  honest  mistake,  the                                                               
insurance company will likely cover the claim.                                                                                  
3:26:21 PM                                                                                                                    
REPRESENTATIVE GARDNER related her  understanding that if a claim                                                               
is filed and is not covered  under E&O, it would be filed against                                                               
one  of  the  funds,  either  the surety  fund  or  the  proposed                                                               
recovery  fund.   She inquired  as to  difference in  the process                                                               
consumers would  use to access  the surety fund and  the recovery                                                               
MR.  DAVIS answered  that once  the  action is  determined to  be                                                               
fraud, the surety fund or  the proposed recovery fund would cover                                                               
the  claim.   If the  claim were  "true fraud"  the person  would                                                               
probably want  to additionally  sue to  seek personal  assets, he                                                               
3:27:07 PM                                                                                                                    
MR. DAVIS,  in response to  Representative LeDoux,  answered that                                                               
the provision  in HB  357 to require  that real  estate licensees                                                               
must maintain a place of business  in the state is at the request                                                               
of the industry and the  Real Estate Commission, who believe that                                                               
real  estate licensees  should maintain  a place  of business  in                                                               
state.   He said that  he is not sure  that he concurs  with that                                                               
view.   He  referred to  that provision  as a  "brick and  mortar                                                               
clause."    In further  response  to  Representative LeDoux,  Mr.                                                               
Davis offered that  the legal drafters believe  it is appropriate                                                               
and  defensible to  have such  a requirement  perhaps because  it                                                               
pertains  to real  property in  the state.   He  further surmised                                                               
that whether to  require a "brick and mortar clause"  is a policy                                                               
REPRESENTATIVE  LEDOUX  inquired as  to  whether  the "brick  and                                                               
mortar"  provision protects  in-state realtors  from out-of-state                                                               
realtors.   She  related that  the  provision is  similar to  one                                                               
formerly used  by lawyers.   However,  most states  have loosened                                                               
that  requirement.     Instead,  the  state   uses  a  qualifying                                                               
examination  to determine  who  can practice  in  the state,  she                                                               
MR.  DAVIS related  his understanding  that the  provision is  to                                                               
ensure  that the  real estate  licensee  understands Alaska  law,                                                               
particularly  since  it relates  to  tangible  real estate.    He                                                               
opined that  the U.S. Supreme  Court struck down  some provisions                                                               
of the  legal community  practices since the  practice of  law is                                                               
fungible, and is not subject to interstate commerce.                                                                            
3:30:16 PM                                                                                                                    
REPRESENTATIVE  LEDOUX   inquired  as  to  whether   real  estate                                                               
licensees submit to examinations.                                                                                               
MR. DAVIS opined  that the real estate  qualifying examination is                                                               
not as  difficult as  the one  that attorneys take.   He  said he                                                               
believes in competition, while at  the same time he also believes                                                               
in  consumer protection.    He related  the  importance for  real                                                               
estate licensees  to see the  non-fungible property.  He  posed a                                                               
scenario  in  which  agents  have sold  land  that  was  actually                                                               
underwater.     However,  he   pointed  out   that  traditionally                                                               
requiring  a physical  presence  in the  state  could also  limit                                                               
interstate commerce.                                                                                                            
3:31:40 PM                                                                                                                    
REPRESENTATIVE NEUMAN inquired  as to whether it  would be easier                                                               
to monitor  real estate  transactions with  respect to  fraud and                                                               
ensure that real  estate licensees understand the  details of the                                                               
property when  the real estate  agent has a physical  location in                                                               
the state.                                                                                                                      
MR.  DAVIS  agreed  that  it  is  always  easier  to  conduct  an                                                               
examination of real estate transactions  when the licensee has an                                                               
office in  state.   He related  his own  experiences as  a former                                                               
banking commissioner  in which he  spent an inordinate  amount of                                                               
time  to investigate  out of  state companies  doing business  in                                                               
3:32:53 PM                                                                                                                    
CINDY  RICE GRISSOM,  CEO, Rice  Insurance Services  Company, LLC                                                               
(RISC),  explained   that  RISC  provides  the   mandatory  group                                                               
programs in  11 of  13 states that  currently have  mandatory E&O                                                               
requirements.  She  related that her family has  been issuing E&O                                                               
group insurance since  1989.  She offered that a  person does not                                                               
have  to file  a lawsuit  to recover  under the  insurance.   The                                                               
claimant typically is  defined as a demand for  money or service.                                                               
In  response  to Chair  Olson,  Ms.  Grissom  agreed that  it  is                                                               
similar to automobile insurance in  which one person is obviously                                                               
responsible and the matter gets settled outside litigation.                                                                     
REPRESENTATIVE GARDNER  related her understanding that  costs for                                                               
E&O  are based  on the  prior  year's sales  for an  agent.   She                                                               
inquired as to whether the quoted  cost for a group E&O insurance                                                               
policy would be based on an average.                                                                                            
MS. GRISSOM answered that her  company initially base the premium                                                               
on the group premium for  other states.  Typically, the actuaries                                                               
would review  the amount of  claims, and  the amount paid  out in                                                               
claims to determine the amount  the company would need to collect                                                               
from licensees in order to cover  expected costs.  In the case of                                                               
a  new program  in  Alaska,  she would  not  anticipate that  the                                                               
premium would  be set  higher than  Colorado's premium,  which is                                                               
currently set at  $243.  However, she did note  that Colorado has                                                               
more licensees.   She opined  that Wyoming's property  values due                                                               
to resorts  are probably high,  yet their fees are  currently set                                                               
at $150.   The actuaries will not provide a  set figure until the                                                               
bid is let,  she noted.  She  pointed out that it is  a good idea                                                               
to include  the provision that  if a reasonable policy  cannot be                                                               
had that  the mandatory E&O  insurance not  be required.   In the                                                               
history of  mandatory E&O that  has never happened thus  far, she                                                               
3:38:23 PM                                                                                                                    
MS. GRISSOM, in response to  Chair Olson, explained that the rate                                                               
would probably  be a  combination between the  Alaska rate  and a                                                               
national  rate.    She stated  that  insurance  companies  cannot                                                               
expect to profit  in each state each year.   However, the company                                                               
would anticipate that  smaller states would have  some years that                                                               
are more  extreme.  Thus,  their company would review  the number                                                               
of claims and average cost to develop a premium.                                                                                
CHAIR OLSON  inquired as  to whether the  company would  put this                                                               
out on admitted paper or surplus lines.                                                                                         
MS. GRISSOM  answered that RISC  always uses admitted paper.   In                                                               
further  response to  Chair  Olson, she  advised  that RISC  uses                                                               
Continental Casualty  and that company would  not likely reinsure                                                               
it since  the limit is set  at $100,000.  She  surmised that they                                                               
may reinsure  on excess policies  that RISC writes, but  she said                                                               
she felt  certain the company  would retain the  policies limited                                                               
to $100,000 claim limits.                                                                                                       
3:40:20 PM                                                                                                                    
CHAIR  OLSON,  after first  determining  no  one else  wished  to                                                               
testify, closed public testimony on HB 357.                                                                                     
3:40:39 PM                                                                                                                    
REPRESENTATIVE  GARDNER expressed  a  concern  with the  recovery                                                               
fund and  maintained that  by increasing the  filing fee  for the                                                               
surety  fund that  it  would  not be  necessary  to  switch to  a                                                               
recovery fund.   She noted that the fee  is non-refundable unless                                                               
the party  prevails so  it would  eliminate nuisance  claims, yet                                                               
the people who have a genuine case would not be dissuaded.                                                                      
CHAIR  OLSON offered  that  the industry,  the  division and  the                                                               
board  recommend the  changes to  a recovery  fund. He  suggested                                                               
that the  committee support their  efforts since  the legislature                                                               
could  come back  to make  changes.   He noted  that the  program                                                               
seems to have intertwined provisions  and that to make changes to                                                               
HB 357 may result in unintended consequences.                                                                                   
3:42:06 PM                                                                                                                    
REPRESENTATIVE GARDNER  related that she spoke  to many licensees                                                               
who generally  supported the mandatory  E&O insurance.   However,                                                               
some had expressed concern with the recovery fund.                                                                              
REPRESENTATIVE NEUMAN  agreed with Chair Olson  that the industry                                                               
has reviewed this  to protect the public buying real  estate.  He                                                               
stated  that  he  was  also  inclined to  take  the  Division  of                                                               
Insurance Director's recommendation on HB 357.                                                                                  
REPRESENTATIVE LEDOUX  acknowledged that it is  important to take                                                               
industry  comments  seriously.     However,  she  said  she  also                                                               
supports the committee's obligation  to consider all comments and                                                               
independently analyze the bill.                                                                                                 
REPRESENTATIVE NEUMAN  agreed that  independent bill  analysis is                                                               
appropriate.  He offered he has done so with respect to HB 357.                                                                 
CHAIR  OLSON pointed  out  that HB  357  represents a  collective                                                               
effort and  a consensus on  the issues.   He noted that  the real                                                               
estate  licensees have  addressed a  number of  issues since  the                                                               
bill was introduced.  Ultimately,  the industry will learn if the                                                               
program is not working and consumers will be vocal, too.                                                                        
3:46:44 PM                                                                                                                    
REPRESENTATIVE   LEDOUX   maintained   her   concern   with   the                                                               
requirement for a real estate  licensee to have a physical office                                                               
in  the state.   She  related some  scenarios in  which the  real                                                               
estate licensee lives  in an urban area, but sells  property in a                                                               
rural area such as Nome.                                                                                                        
CHAIR  OLSON surmised  that it  is likely  to be  much easier  to                                                               
address issues  with licensees  who are in  state rather  than in                                                               
Puerto Rico, Texas,  or Florida.  He opined that  the real estate                                                               
profession is not the only  one that requires a physical presence                                                               
in state.                                                                                                                       
REPRESENTATIVE  BUCH  recalled  that last  year  the  legislature                                                               
considered a bill that required  mortgage lenders to have a brick                                                               
and mortar  presence.   He further recalled  that the  reason for                                                               
the physical presence was that  out of state mortgage lenders who                                                               
were not  knowledgeable or reputable were  conducting business in                                                               
Alaska without a  physical presence.  He offered  his support for                                                               
HB  357, including  the brick  and mortar  clause to  ensure that                                                               
businesses doing business in Alaska are legitimate.                                                                             
3:49:39 PM                                                                                                                    
REPRESENTATIVE  GARDNER inquired  whether the  provision that  if                                                               
E&O coverage is not cost effective  that it would not be required                                                               
is currently  in the bill.   She  further inquired as  to whether                                                               
there is a statue of limitations in the bill.                                                                                   
MR. FEEKAN referred  to page 6, line 15, to  subsection (e) of HB                                                               
357 which read:                                                                                                                 
     (e)   If the  commission is unable  to obtain  a master                                                                    
     errors  and   omissions  insurance  policy   to  insure                                                                    
     licensees   that  meets   the   terms  and   conditions                                                                    
     established under (b) of  this section, the requirement                                                                    
     that a  real estate licensee carry  and maintain errors                                                                    
     and  omissions insurance  under  AS  08.88.172 is  void                                                                    
     during  the period  that the  commission  is unable  to                                                                    
     obtain the insurance.                                                                                                      
MR.  FEEKAN, in  response  to  Representative Gardner,  explained                                                               
that the  division would  establish the  terms and  conditions of                                                               
the E&O insurance policies in  regulation rather than to set them                                                               
in statute.   He referred to page  5, line 25-31 of  HB 357 which                                                               
     (b)  The department shall establish by regulation the                                                                      
     terms and conditions of the errors and omissions                                                                           
     insurance required by this section, including                                                                              
          (1)  coverage requirements;                                                                                           
          (2)  limits of coverage;                                                                                              
          (3)  the maximum amount of premium to be charged                                                                      
     licensees under a master errors and omissions policy                                                                       
     under (d) of this section; and                                                                                             
       (4)  the method for adjusting these amounts based                                                                        
     on the Consumer Price Index.                                                                                               
3:52:22 PM                                                                                                                    
REPRESENTATIVE NEUMAN  moved to  report the  committee substitute                                                               
(CS) for  HB 357,  labeled 25-LS1363\L,  Bailey, 2/28/08,  out of                                                               
committee  with individual  recommendations and  the accompanying                                                               
fiscal notes.                                                                                                                   
REPRESENTATIVE GARDNER  objected for  the purpose  of determining                                                               
if the bill has a further referral.                                                                                             
CHAIR OLSON  announced that  the bill has  a further  referral to                                                               
the House Finance Committee.                                                                                                    
There  being no  further  objection, CSHB  357(L&C) was  reported                                                               
from the House Labor and Commerce Standing Committee.                                                                           

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