Legislature(1995 - 1996)
04/12/1995 01:40 PM Senate JUD
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 95 INSURANCE AGAINST UNINSURED DRIVERS
SHERMAN ERNOUF, legislative aide to the Senate Labor and Commerce
Committee, testified on the Labor and Commerce committee
substitute. It reduces the maximum mandatory offer of
uninsured/underinsured motorist coverage to $500,000 per person and
$1,000,000 per incident. Uninsured/underinsured motorist coverage
protects the vehicle owner against being injured in an accident
with an at-fault motorist who has no bodily injury liability
insurance. UI motorist coverage applies only if the uninsured
motorist is legally liable for the resulting injury. Uninsured
motorist coverage puts the injured insured in the same position as
he/she would be in if the motorist responsible for the accident had
bodily injury liability insurance. The injured driver who cannot
be compensated for an injury by a negligent party who has no
insurance, can turn to his/her own insurance company for
compensation. In effect, the injured driver's company must take
the place of the at-fault motorist who has no liability insurance.
Three years ago the Alaska Legislature passed legislation which
required Alaskan insurers to make a mandatory offer of
uninsured/underinsured motorist coverage of $1 million per person,
and $2 million per accident. This mandatory offer has increased
the cost of liability insurance for all policy holders. CSSB 95
(L&C) seeks to assure the Alaskan consumer competitive automotive
insurance premiums by encouraging a competitive marketplace. The
bill would encourage a competitive market by requiring insurance
companies to offer a lower mandatory offer allowing smaller
companies to enter the market if the cost of reinsurance drops.
Number 392
SENATOR TAYLOR noted two major issues that have surfaced since the
bill was originally filed. He asked Mr. Ernouf to summarize the
two district court cases that resulted in two different judgements.
MR. ERNOUF deferred the question to Don Koch of the Division of
Insurance. He stated CSSB 95 (L&C) was a consensus approach to the
offer problem. The two court cases pertain to the triggering
mechanism problem.
SENATOR TAYLOR commented the offer issue is non-controversial; but
the underinsured insurance dilemma needs to be addressed. He
stated the uninsured motorist issue was addressed with SR 22 since
a driver must establish and prove that he/she is insured before
his/her license is returned. He asked Mr. Ernouf for the
definition of "underinsured." MR. ERNOUF responded that definition
is what caused the dilemma with the two court cases, since the
triggering mechanism by which the court will decide which part of
underinsurance has to be paid is unclear. He added that issue has
gone around full circle in the Labor and Commerce Committee.
SENATOR TAYLOR asserted it requires the Legislature to establish a
policy call.
Number 345
DENNIS BROWN, President of the Alaska Independent Insurance Agents
and Brokers, (AIIAB) gave the following testimony in opposition to
CSSB 95 (L&C). The AIIAB opposes mandatory offers of uninsured
motorists and underinsured motorists based on two issues:
availability of markets; and possible escalation of the auto
premium. Traditionally, uninsured and underinsured motorist
premiums have not played a large part of the overall insurance
dollars spent on the coverage, that coverage being a fraction of
the auto insurance cost. In the past few years the cost of the
uninsured motorist has risen at a faster rate than what AIIAB has
seen in other classifications, such as automobile liability
insurance. With passage of CSSB 95 (L&C), AIIAB would anticipate
a further acceleration of the auto insurance premiums in the state,
possibly bringing it to the highest level in the country. The
AIIAB has learned by experience in California and New Jersey that
this creates both political problems for the Legislatures, as well
as problems for the insurance-purchasing public. The companies
that left those states would not hesitate to leave Alaska. Second,
the bill is confusing, not only for the industry, but for the
consumer. When an insured buys auto liability coverage there are
two factors that are considered: cost and protection. If the buyer
has little or no assets, cost is the driving factor. If the
consumer has assets, while cost plays a part, protection is a
mandatory factor. In the purchase of uninsured/underinsured
motorist coverage, the primary factor will most likely be cost
which will only drive insurance rates higher. As premiums rise,
more will drop out of the insurance mechanism putting further
pressure on those who remain insured. AIIAB urges returning to the
system of buying uninsured/underinsured motorist coverage up to the
limit that is purchased for the third party liability coverage with
recovery limited to those limits, with offsets provided by the
responsible motorist.
Number 320
SENATOR TAYLOR questioned the statement, "with recovery limited to
that which was chosen by the responsible motorist." MR. BROWN
replied, "The AIIAB would urge that if the purchaser of the
uninsured motorist coverage had third party liability coverage,
that is coverage that is attributed to somebody that he or she runs
into, that the corresponding uninsured motorist coverage that they
have purchased would equal that. If they were involved in an
accident and the responsible party, especially the underinsured
motorist, had a policy of $50,000, that there would be a total of
$300,000 applicable to that loss, with the first $50,000 paid by
the responsible party, and the balance paid by the underinsured
motorist coverage provided to the policyholder."
SENATOR TAYLOR asked for further clarification of Mr. Brown's two
statements. MR. BROWN replied, "We would urge we go back to a
system of buying uninsured motorist and underinsured motorist
coverage up to the limit that is purchased for the third party
coverage and recovery limited to those limits with offsets provided
by the responsible motorist." He explained the uninsured motorist
limits purchased by the policyholder would equal the third party
liability coverage amount.
SENATOR TAYLOR asserted it should be the purchaser's choice to
choose the amount of liability coverage on oneself and on the
amount he/she wished to purchase in case he/she was struck by an
uninsured motorist. He asked Mr. Brown if he believes the amounts
of each policy should be the same. MR. BROWN replied the AIIAB's
position is that the purchaser would have an option to buy an
amount of uninsured/underinsured motorist coverage equal to the
amount in the liability policy.
SENATOR TAYLOR asked if the purchaser would have to choose the same
amount of coverage for both policies. MR. BROWN answered, "No, we
are not saying that, but the problem that we have is when you
purchase uninsured motorist or underinsured motorist limits,
greater than what you are willing to buy for liability insurance
for yourself, that is the problem we are having."
Number 260
SENATOR TAYLOR asked why that would be a problem as it would only
trigger in the event an individual hit someone with a lesser amount
of coverage, or no coverage at all. MR. BROWN stated, "In an ideal
world, it would be great, but in the world of practicality, as we
see it, as an association, is that it is going to drive the auto
rates completely out of sight. There has to be an outward
pressure, or an outward movement of premiums that one has to buy to
buy a family auto policy."
SENATOR TAYLOR discussed the following scenario. "Mr. Brown,
unless I'm misunderstanding you, what you are saying is that
whenever two people have been responsible drivers and have
purchased insurance, and each purchased insurance for amounts they
decided was a fair risk that they should take, and that they should
spend that amount of money to buy the insurance, then
unfortunately, these two responsible drivers have run into one
another. What you are basically saying is the insurance industry
should only have to pay off on one policy, and that is the cheapest
policy. Otherwise it will drive rates right through the ceiling,
right?"
MR. BROWN reiterated the AIIAB's position is that the whole problem
is over the underinsured motorist coverage. AIIAB's goal is to
have the insured be allowed to purchase that protection for
uninsured motorists equal to his/her liability limit. He stated,
"If a person bought $500,000 worth of underinsured motorist
coverage and had third party liability coverage for $500,000, and
that person was involved in an accident with an individual who
carried a $100,000 policy limit, and the claim was worth $500,000,
there would be recovery from the individual for $100,000, and the
person would have the opportunity to collect from his/her
underinsured motorist coverage for the other $400,000. That is
what the AIIAB would like to achieve, instead of stacking the
underinsured motorist limits over the policy of the driver
responsible for the accident."
Number 231
SENATOR TAYLOR said, "Let's say I have the $300,000 underinsured
policy, and you have the $100,000 policy, and you run into me and
cause $400,000 worth of damage. I have the right to sue you
because you had a liability policy good for $100,000. So I get to
sue you and your company confesses policy limits. They kick in
$100,000. I've been paid by you all I can get out of your policy.
Now, I, being a responsible motorist, had gone and purchased
underinsured motorist coverage of $300,000. I've got $400,000
worth of damages. There are two scenarios that can now occur. One
scenario is that my policy that I purchased face value, that said
$300,000, is only good for $200,000 because you want to add the
$100,000 I got from the other guy. In other words, you want me, on
my policy, to be subrogated to the third party who was liable. So
I can recover a maximum total of $300,000, and you say that somehow
this is something I paid for. No, I paid for $300,000 of
underinsured from your company. Your policy of $100,000 you paid
for yourself, that is outside of the contract I have with you. The
second scenario is, as you call, stacking, and stacking says I go
after the bad guy that ran into me. I get $100,000 from him and
since I still have $300,000 of stipulated damages, over and above
that, I then turn to my own carrier, and of course I'll have to
file suit because they will never voluntarily come in and give that
money to me. I'll have to bring a suit in court against my own
insurance company for that $300,000 of underinsured coverage that
I had purchased in good faith in the first place. Under one
district court judge, he says you can't stack, and under the other
district court judge, he says you can. Isn't that the problem we
got?"
MR. BROWN stated he would agree. SENATOR TAYLOR commented,
according to Mr. Brown, those two people who had paid a fair,
actuarially-justified, Commissioner of Insurance-reviewed premium
will cause devastating impacts to the industry if we make those two
companies meet their contractual requirements. MR. BROWN clarified
the AIIAB's position is that it would drive the auto premium rates
upward. Whether the carriers are willing or unwilling to do this
is a matter for the insurance industry to decide. The AIIAB's
membership consists of people at the point of contact, they sell
the product to the consumer and know whether markets exist and what
drives the costs. The uninsured motorist rates have doubled over
the past few years. The AIIAB is questioning at what point does
the consumer pay enough before the marginal ones drop out.
SENATOR TAYLOR replied he understands the consumer aspect of the
problem, and he does not want to do anything that will encourage
the insurance industry to bill the consumer at higher rates. He
asked if his actuaries have been selling insurance based upon the
fact that only half of the claims would have to be paid off. "Your
policy wouldn't get touched as long as you could tap the other
guy's policy, so you'd get that premium for free, and also get an
offset every time that you had an opportunity to push the coverage
off onto Brand X company instead of having to pay under your
underinsured motorist provision that you sold your own customer.
MR. BROWN disagreed, and noted that all rates are loss-driven. The
amount paid out in the form of losses, is directly reflected in the
rates charged. If they are going to pay more out in losses under
the underinsured motorist section, obviously that rate will
increase.
Number 140
SENATOR TAYLOR stated if there was a captive population of 100
people on an island, with mandatory insurance, purchased from two
companies by equal numbers, one company would never have to pay off
on a policy in a given year, depending on who ran into who. When
premiums are determined by losses, insurance companies are counting
on not having to pay off a percentage of the time based upon the
manner in which you interpreted the policy prior to the case.
Number 120
MR. BROWN answered he is not testifying on behalf of the insurance
industry. The AIIAB's clients are paid by the consumer, and he is
testifying on the impact to the consumer. SENATOR TAYLOR asked if
the income of AIIAB's members is derived as a percentage of
premiums sold to the customer. MR. BROWN answered affirmatively.
SENATOR TAYLOR asked if insurance companies have a contractual
agreement with AIIAB and refer to AIIAB as their agent. MR. BROWN
disclosed in some instances they do. SENATOR TAYLOR said that is
why he considered Mr. Brown to be an agent speaking on behalf of
those companies when selling a policy. He pointed out the
Legislature needs to make a policy call on whether it is good or
bad policy to have consumers remain ignorant of what the word
"underinsured" means. The lay person believes he should collect
the amount of his underinsured policy necessary to pay damages less
the amount paid by the underinsured's policy. If that causes
premiums to increase, so be it.
Number 060
DON KOCH, Division of Insurance, explained CSSB 95 (L&C) began as
a repeal of the excess offer legislation that was enacted several
years ago. The Division testified to the Labor and Commerce
Committee that some room for compromise was necessary, because it
believed the mandatory limit in Alaska is the highest in the
nation. In view of the Tumbleson decision, the Division felt the
issues brought forth in that case needed to be addressed. The
Division understood, when the excess offer legislation passed, that
underinsured motorist coverage was intended to be excess, so that
in the $400,000 example, the $100,000 would be available from the
other party, and the full $300,000 would be available as excess
insurance.
SENATOR TAYLOR asked if the Division interpreted the word "excess"
to refer to stacked coverage when the bill passed. MR. KOCH
replied affirmatively. SENATOR TAYLOR asked if anyone in the
industry would have thought otherwise. MR. KOCH described the
disagreement as to what triggered the stacking in the Tumbleson
case. His interpretation of the Tumbleson decision is that the
coverage is treated as excess, but is only triggered if the other
motorist is uninsured. Effectively the case says that uninsured
motorist coverage before underinsured motorist coverage is
triggered.
TAPE 95-22, Side A
SENATOR TAYLOR asked if the lay person would think to ask when
underinsured coverage is triggered, when purchasing insurance. MR.
KOCH felt they would not, and that most producers would not have
the time to explain the whole process. Agents have expressed
concern about E and O exposure for not adequately explaining the
procedure, therefore other alternatives are made more difficult.
He pointed out that to the degree the public fails to insure under
the mandatory automobile law, there will be more exposure in the
uninsured and underinsured area, as more losses arise from it. The
automobile insurance premium contains a part that is mandatory: the
$50,000; $100,000; and $25,000 liability purchase. The uninsured/
underinsured coverages are mandatory offers but are not required.
An insured may elect to waive that insurance. Higher offers of
underinsured motorist coverage are increasing in cost, and
insurance companies have been able to justify those increases with
division actuaries, and it is likely the costs will continue to
rise. But that coverage is still an option for the consumer,
therefore it should not affect all auto insurance consumers, only
those that choose to bear that cost.
SENATOR TAYLOR reiterated the Legislature needs to set a policy
since the two court decisions are conflicting as to what standard
to use. He believed the federal court would adopt the policy once
enacted by the Legislature. MR. KOCH implied the proposed Senate
Judiciary committee substitute would address both the Tumbleson
issue and the mandatory offer limit.
SENATOR TAYLOR pointed out that if all drivers had good liability
coverage, excess coverage would be unnecessary. MR. KOCH replied
that would depend on the amount of liability coverage purchased by
consumers, since minimum limits are often inadequate.
SENATOR TAYLOR thought it is bizarre that a person who has excess
coverage would be paid the full amount if he/she had an accident
with an uninsured motorist, but would only collect the offset
amount after suing his/her own insurance company if the accident
was with an underinsured motorist. MR. KOCH stated some believe a
person should only be able to buy for his/her own protection, the
amount purchased for third party protection. He disagrees as such
a policy would discourage consumers from taking responsibility in
protecting themselves as well as others.
Number 141
SENATOR TAYLOR felt Mr. Brown alluded to the fact that people
should only be allowed to purchase equal amounts of liability
insurance and excess coverage. MR. KOCH agreed, and clarified the
idea is that an individual should only be able to purchase for
their own protection, the amount he/she purchases for the third
party's protection. That opinion prevails in many states,
although several states are moving toward higher mandatory offers
of uninsured/underinsured coverage.
SENATOR TAYLOR asked Mr. Koch about the no-fault insurance movement
in Alaska, which turned out to be uninsured/underinsured motorist
coverage. MR. KOCH replied an individual could purchase
uninsured/underinsured motorist coverage prior to that time, but
only up the limit of one's third party limits. At that time it was
only triggered by uninsured motorists. A few companies voluntarily
offered underinsured motorist coverage but there appeared to be no
marketing effort for it.
SENATOR DONLEY clarified that underinsured motorist coverage was
offered with the adoption of mandatory auto insurance in 1984. MR.
KOCH explained it was never made distinct coverage. In 1990,
legislation clarified that those coverages were to be offered as
excess coverage. During that time period, many states were
enacting no-fault laws with the initial focus for responsibility to
oneself, and contained thresholds from the tort system. Alaska
chose a new departure. In fairness to insurance agents, MR. KOCH
stated this concept is difficult to sell because it is a departure.
SENATOR TAYLOR commented to prevent insurance agents' E and O
exposure from expanding under the two court decisions the
Legislature must make a policy decision one way or the other. MR.
KOCH agreed, and reiterated the proposed Judiciary committee
substitute appears to have a clear expression of intent.
SENATOR TAYLOR announced CSSB 95(L&C) would be held over until next
Wednesday.
| Document Name | Date/Time | Subjects |
|---|