Legislature(2007 - 2008)CAPITOL 17
03/03/2008 03:00 PM LABOR & COMMERCE
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* first hearing in first committee of referral
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= bill was 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 offered. 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 necessary. 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 claims. 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 fund. 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 opined. 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 call. 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 noted. 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 Alaska. 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 opined. 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 read: (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.