Legislature(2001 - 2002)

04/25/2001 03:23 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                 SB 138-INSURANCE CODE AMENDMENTS                                                                           
MR.  BOB  LOHR,  Director,  Division  of  Insurance,  Department  of                                                            
Community and  Economic Development (DCED), said a  slide packet had                                                            
been given  to the  committee that  summarizes SB  138.  The  Gramm-                                                            
Leach-Bliley Financial  Services Modernization Act (GLBA), which was                                                            
adopted by Congress in  1999, eliminated barriers between insurance,                                                            
securities,  and banking.  As a result  of that, there is  a need to                                                            
modernize and  streamline regulations for each of  those fields.  He                                                            
said the  focus of SB 138  was the insurance  regulatory  provision.                                                            
States have  the authority to regulate  insurance companies  without                                                            
intervention by  the federal government.  However,  if states do not                                                            
coordinate their regulatory  approaches with each other, the federal                                                            
government  would make an effort to  take over regulatory  authority                                                            
and preempt  state authority.   SB  138 was an  effort by states  to                                                            
modernize their  legislative approaches  to insurance in  a way that                                                            
retains state authority.                                                                                                        
MR.  LOHR  said there  were  three  basic  elements  of SB  138:  1)                                                            
Provisions dealing  with licensing of agents and brokers  - producer                                                            
licensing;   2)  Provisions  dealing   with  privacy  of   insurance                                                            
financial  information;   and  3)  Consumer  protection   provisions                                                            
dealing with banks who selling insurance.                                                                                       
MR.  LOHR  said Congress  provided,  in  GLBA  legislation,  that  a                                                            
national  approach  to licensing  would  be put  into  effect if  29                                                            
states  or  territories  did  not  adopt  a  reciprocal  or  uniform                                                            
approach to licensing  by a certain date.  It is preferred  that the                                                            
authority  be kept at the  state level but  in order to do  that the                                                            
process  has  to  be  simplified  to  make  licenses   available  to                                                            
nonresidents.   The licensing provisions would provide  reciprocity.                                                            
MR. LOHR said  the Senate Labor and  Commerce committee substitute,                                                             
as well  as SB 138, provide  an approach  toward privacy that  would                                                            
provide an opt-in approach  toward health information and an opt-out                                                            
approach toward financial  information.  Opt-out means that personal                                                            
information  may be  shared  with other  companies  unless a  person                                                            
opts-out.  Opt-in means  that personal information may not be shared                                                            
unless explicit  permission is given.  There are exceptions  to this                                                            
standard that  allow insurers to perform day-to-day  operations, and                                                            
there are also  marketing exemptions.   GLBA established  an opt-out                                                            
standard with  initial and annual notices to the consumer  regarding                                                            
financial institutions'  privacy practices, and policies.   Specific                                                            
provisions  in SB 138 give  the director  of insurance authority  to                                                            
adopt  privacy  standards  that are  consistent  with,  but no  less                                                            
restrictive  than,  the minimum  standards  in  GLBA.   GLBA  allows                                                            
states  to  set  standards  that  provide  greater   protection  for                                                            
consumer  privacy and  SB 138 would  preserve that  authority.   Mr.                                                            
Lohr said the  House appears to be  headed in a different  direction                                                            
on privacy  than what is  in SB 138, and  the Division of  Insurance                                                            
supports the Senate approach.                                                                                                   
MR. LOHR said consumer  protections in financial institutions' sales                                                            
of insurance,  banks, and related  institutions would occupy  the 13                                                            
safe harbors that are provided  under federal law and Section 305 of                                                            
GLBA.  The  protections would apply  to financial institutions  that                                                            
are not insurance  companies transacting business  in Alaska.  There                                                            
would be no need to have  those provisions cover insurance companies                                                            
because  insurance   companies  are  already  covered   by  existing                                                            
consumer protection  laws.  The provisions  would provide  important                                                            
protection  for Alaskans  who purchase insurance  through  financial                                                            
institutions, avoiding  possible preemption and enforcement of those                                                            
protections  in Alaska.   They make  a strong  statement that  state                                                            
regulation  of insurance can work  effectively to protect  consumers                                                            
while allowing the insurance industry to remain competitive.                                                                    
MR. LOHR  noted there are  two GLBA provisions  in SB 138 that  deal                                                            
with felony  convictions  involving dishonesty  or breach of  trust.                                                            
Under federal law the only  way someone with a felony conviction for                                                            
breach of trust  can be allowed into the insurance  business is with                                                            
the  consent  of  the  director  of  insurance.    The  Division  of                                                            
Insurance would  like state authority  to do the same thing  so that                                                            
the director can make waivers  when appropriate.  The Federal Bureau                                                            
of Investigation  does not  share criminal  background records  with                                                            
the Division  of Insurance unless  specific provisions in  state law                                                            
are adopted  to authorize  that.  This information  can be  accessed                                                            
through  fingerprint cards  but it  cannot be accessed  in a  timely                                                            
way. SB 138 would help expedite the enforcement of restrictions.                                                                
MR. LOHR suggested  two amendments  to SB 138.  He said there  was a                                                            
current requirement  on producer licensing under AS  21.27 requiring                                                            
trust accounts.  Payments  for premiums go into trust accounts until                                                            
they  are  transmitted  to the  insurance  company  and,  if  Alaska                                                            
maintains that requirement,  it may not qualify as one of the states                                                            
to ward  off a  national  takeover of  licensing.   That is  because                                                            
there is a prohibition  on having additional licensing  requirements                                                            
beyond those necessary  for reciprocal treatment of other applicants                                                            
for nonresident  purposes.  The proposed amendment  would delete the                                                            
trust account  requirement and substitute fiduciary  responsibility.                                                            
In addition this  would authorize the director to  adopt regulations                                                            
under consumer  protection provisions  of the Alaska statute,  which                                                            
requires trust  accounts.  If the  requirement is maintained  in the                                                            
licensing  statute,   Alaska  may  be  declared  nonreciprocal   and                                                            
therefore not be able to help get state regulation preserved.                                                                   
Number 1200                                                                                                                     
SENATOR COWDERY asked if there were penalties for violations.                                                                   
MR. LOHR replied that for  purposes of insurance privacy a violation                                                            
would be treated  like a consumer protection violation.   There is a                                                            
higher  penalty for  a willful  violation  than for  an inadvertent                                                             
violation.  An  inadvertent violation would probably  only receive a                                                            
warning.   Companies  want to comply  with the  provisions but  they                                                            
want a nationally  consistent approach.   Insurance companies  would                                                            
like  to do  business in  multiple  jurisdictions  without having  a                                                            
different  set of  rules for  each jurisdiction,  and  SB 138  would                                                            
accomplish that.                                                                                                                
MR. LOHR said  the amendment he submitted  to the committee  needs a                                                            
correction.  Instead  of reading, "Page 18 after line  6," it should                                                            
read "Page 18 after line  5."  Page two of the same amendment should                                                            
read, "Page 30, line 30," instead of "Page 30, line 29."                                                                        
MR. LOHR said  the second amendment  he would like the committee  to                                                            
consider  is  a  technical  amendment   that  would  add  a  delayed                                                            
effective date  of July 1, 2002 for a surplus lines  bond provision.                                                            
A drafting error,  which excluded the word "limitation,"  also needs                                                            
to be corrected in Section 50.                                                                                                  
MR. LOHR said  there was also a drafting recommendation  for another                                                            
amendment that would reword a regulatory authority.                                                                             
CHAIRMAN TAYLOR  asked Mr. Lohr to  explain the two-page  amendment.                                                            
Number 1353                                                                                                                     
MR. LOHR said  that amendment would  delete the references  to trust                                                            
account, and  the language, "held  by the licensee as a fiduciary,"                                                             
would be added.   That language would  confirm that a licensee  must                                                            
maintain  the fiduciary  responsibility  toward the  money, and  the                                                            
provision  would be amended  so that the  word "fiduciary"  would be                                                            
substituted  for trust  account.   This would  remove the  offending                                                            
phrase  that  triggers  the  nonreciprocity   determination  at  the                                                            
national level.  The change  would not sacrifice consumer protection                                                            
but would continue  to hold a licensee  to the same legal  standard.                                                            
Another  subsection says  the director of  insurance may  promulgate                                                            
regulations  to  implement,  define, and  enforce  regulations  that                                                            
would continue the requirement for the trust account.                                                                           
SENATOR ELLIS moved to  adopt CSSB 138(L&C), version 22-GS1025\F, as                                                            
the bill before the committee.                                                                                                  
SENATOR  ELLIS  moved to  adopt  amendment  1,  for the  purpose  of                                                            
discussion.  There being no objection, amendment 1 was adopted.                                                                 
SENATOR ELLIS asked about the technical amendment.                                                                              
CHAIRMAN  TAYLOR  asked  if  the  drafting  recommendation   for  an                                                            
amendment was a separate item, suggested by the drafter.                                                                        
MR. LOHR replied yes.                                                                                                           
SENATOR  THERRIAULT  said he  did not  understand  why the  drafting                                                            
recommendation was made  because it appears to make no difference in                                                            
the bill.                                                                                                                       
Number 1591                                                                                                                     
MR. LOHR said  the drafter was heavily  involved in the development                                                             
of the CS at the Labor  and Commerce level, and he does not know why                                                            
that particular amendment was suggested.                                                                                        
SENATOR THERRIAULT  moved the drafting  recommendation as  amendment                                                            
2.  There being no objection, amendment 2 was adopted.                                                                          
MS. CINDA SMITH, Geiko,  offered support for the language in Section                                                            
2  that  allows  customer  service  representatives  to  answer  and                                                            
implement changes to existing  policies for policyholders.  She said                                                            
she also appreciated  the opportunity  to testify by teleconference                                                             
because she  does not have  that opportunity  to do so in any  other                                                            
CHAIRMAN TAYLOR  asked where the opt-in and opt-out  provisions were                                                            
in SB 138.                                                                                                                      
MR. LOHR  said those provisions  were on page  24, line 30,  Section                                                            
45.  He said the  Gramm-Leach-Bliley Act sets out  minimum standards                                                            
for privacy  and federal  banking  agencies were  required to  adopt                                                            
privacy regulations under  those provisions, which would take effect                                                            
July  1, 2001.    Those  provisions  would be  enforced  by  federal                                                            
agencies in  the absence of state  agencies adopting standards  that                                                            
are at least  as strong as GLBA.   If states provide protection  for                                                            
privacy that goes  beyond the federal level of privacy,  it would be                                                            
upheld.   This  was  an unusual  provision  that allowed  states  to                                                            
exceed the federal  level and not be preempted.  However,  if Alaska                                                            
establishes  a unique level of protection  for privacy that  was not                                                            
found anywhere  else in the country, it would be more  difficult for                                                            
insurance companies  to do business in Alaska.  It  may also lead to                                                            
additional pressure in  trying to nationalize insurance regulations.                                                            
MR.  LOHR said  that  under  the current  GLBA  approach,  financial                                                            
information  is opt-out, allowing  customers to tell companies  they                                                            
do not want their  information shared.  The opt-in  approach is more                                                            
protective  of privacy because  it requires  the company to  have an                                                            
affirmative  statement that the customer  is willing to have  his or                                                            
her  information  shared.   The  default  is  the difference,  if  a                                                            
customer does  not act under the opt-out, the company  can share the                                                            
information.   However,  there are  exemptions that  do not  require                                                            
opt-in or opt-out,  such as administrative  operations by  a company                                                            
that is using the information  for the purpose it was intended for -                                                            
processing claims and underwriting,  for example, and there are also                                                            
marketing   exceptions.  Because   of  the   exceptions,  the   more                                                            
restrictive   opt-in  can  look  less   restrictive  than   opt-out.                                                            
Subsection  B,  page  26,  lines  5-10,  mandates  the  adoption  of                                                            
regulations  on privacy concerning  insurance information,  which is                                                            
consistent  with and at least  as restrictive  as the provisions  of                                                            
the GLBA.   This would establish that  there would not be  a federal                                                            
takeover of state  authority with respect to privacy  in Alaska, and                                                            
it would  allow  the state  to go beyond  the  level established  by                                                            
GLBA.   It  would  also  give the  division  the  responsibility  of                                                            
sorting the process out and taking public comment.                                                                              
CHAIRMAN TAYLOR asked if personal data was opt-in.                                                                              
MR. LOHR replied  yes.  Proposed regulations have  been developed by                                                            
the National Association  of Insurance Commissioners to try to flush                                                            
out that authority  and under their  approach, opt-in is  for health                                                            
information,  which  is more  protective.    The limited  amount  of                                                            
financial  information that  an insurance  company gathers  about an                                                            
applicant  would  start   out  as  an opt-out   approach  -  a  less                                                            
restrictive level of protection.                                                                                                
CHAIRMAN TAYLOR asked about the House version of SB 138.                                                                        
MR. LOHR  noted  that the  House Labor  and Commerce  Committee  was                                                            
presently in  a meeting and the discussion  was to focus  on banking                                                            
and insurance  legislation with a focus on privacy,  trying to craft                                                            
a  consistent  approach  between  both  bills,  which  would  likely                                                            
provide opt-in  for financial and  health information.  There  would                                                            
be a significant exemption  from any notice required to the customer                                                            
for purposes of joint marketing  arrangements.  Opt-in looks tighter                                                            
but it depends how the  exemptions are used.  Companies would not be                                                            
able to sell information  to unrelated parties, there  would have to                                                            
be a marketing plan in place.                                                                                                   
CHAIRMAN  TAYLOR said  that trying  to figure  out who  would be  an                                                            
unrelated party would be very difficult.                                                                                        
CHAIRMAN  TAYLOR asked if  SB 138 only had  an opt-in provision  for                                                            
health information.                                                                                                             
MR. LOHR replied that GLBA  provides for opt-out as the approach for                                                            
financial  information.   GLBA does  not explicitly  address  health                                                            
information;   however,  the  National   Association  of   Insurance                                                            
Commissioners'  (NAIC)  regulations that  have been  developed  as a                                                            
model  do address  health privacy  and give  it a  higher degree  of                                                            
protection than financial information.                                                                                          
CHAIRMAN TAYLOR thought  that state governments, and not the federal                                                            
government,  had the authority to  regulate insurance, and  GLBA was                                                            
just saying it would be  better to be more uniform with other states                                                            
and the  only penalty  would be  that the federal  government  would                                                            
make it more difficult  for an insurance company to do business in a                                                            
particular state.                                                                                                               
MR. LOHR said that was accurate.                                                                                                
Number 2063                                                                                                                     
SENATOR THERRIAULT  asked about the  indirect court rule  in Section                                                            
55, page 10, line 9.                                                                                                            
MR. LOHR said  he believed the court rule amendment  was designed to                                                            
enforce the  confidentiality of the  notice of termination  and keep                                                            
it out of the court system.                                                                                                     
SENATOR THERRIAULT asked for an example.                                                                                        
MS. LINDA BURNETTE,  Division of Insurance,  said that when  it went                                                            
through drafting,  the attorney and  legal drafter decided  it would                                                            
be an applicable  change.  She said that section specifically  deals                                                            
with the reasons for termination.                                                                                               
SENATOR  THERRIAULT  said, "I  have a  health insurance  policy,  my                                                            
carrier  terminates me,  writes me  a letter that  explains why  I'm                                                            
terminated and that can't be brought into court."                                                                               
MS. BURNETTE  said insurance companies  appoint licensed  agents and                                                            
that appointment  allows them to underwrite or write  that insurance                                                            
company's  particular  product.    The company  may  terminate  that                                                            
contract, sometimes  with reasons  for cause, and it is the  reasons                                                            
for cause that are confidential,  depending on what the reasons are.                                                            
SENATOR THERRIAULT clarified  that it was not the individual Alaskan                                                            
getting coverage but the agent who was to be covered.                                                                           
MS. BURNETTE said yes.                                                                                                          
SENATOR THERRIAULT  asked if an agent's contract was  terminated for                                                            
unfair  reasons,  why  shouldn't  the  letter  be used  in  a  court                                                            
proceeding for an appeal.                                                                                                       
MS.  BURNETTE  said  the provision,  in  addition  to  allowing  the                                                            
information  to be retained as confidential,  also allows  the agent                                                            
to  rebut  and  respond   to  the  termination  for   cause.    That                                                            
information   would  also  be  submitted   and,  depending   on  the                                                            
circumstances,  the  division  would evaluate  that  information  to                                                            
determine if appropriate civil action would be taken.                                                                           
SENATOR  THERRIAULT asked  if the  civil action  taken by the  state                                                            
would be against the company.                                                                                                   
MS. BURNETTE said it would be against the agent.                                                                                
CHAIRMAN TAYLOR asked why  there was a need to amend the law at this                                                            
time on evidence  that may be presented  in an Alaskan court  today,                                                            
to exclude from  presentation in evidence the communication  between                                                            
a  company and  an agent,  changing  existing  law on  the  subject.                                                            
There would  be reason to  change court rules  if this section  were                                                            
not enacted.                                                                                                                    
MR. LOHR said  the division wants to make sure an  insurance company                                                            
gives  it a straight  answer  on the  company's  reason for  letting                                                            
someone  go.    If  the  division  does   not  agree  to  treat  the                                                            
information as  confidential, and the company fears  litigation, the                                                            
chances are the full truth would not be presented.                                                                              
SENATOR THERRIAULT  asked if the confidentiality  requirement  would                                                            
only be for  the state agency handling  the information and  not for                                                            
the broker  who lost his agreement,  because the division  would not                                                            
want them to have a copy.                                                                                                       
MR. LOHR said that was accurate.                                                                                                
CHAIRMAN  TAYLOR  said an  agent may  be  able to  get a  copy in  a                                                            
deposition or discovery but they cannot use it in court.                                                                        
MR. LOHR said that was precisely the point.                                                                                     
TAPE 01-23, SIDE B                                                                                                            
CHAIRMAN TAYLOR said there  is a law that already protects companies                                                            
as long as they  honestly reveal to the division what  happened with                                                            
an employee, and the company cannot be sued.                                                                                    
SENATOR  THERRIAULT  asked if  the division  was trying  to get  the                                                            
honest information  so it could make  a determination of  whether to                                                            
let an agent continue operating in Alaska.                                                                                      
MR. LOHR said  that is correct.  He said these would  be independent                                                            
contractors  and not  employees under  a typical  relationship.   If                                                            
terminations   of  employment  were   occurring  for  impermissible                                                             
reasons, the division would have ample enforcement authority.                                                                   
CHAIRMAN   TAYLOR  commented   that  companies   would  only   write                                                            
termination  letters with permissible  reasons for the termination.                                                             
Number 2265                                                                                                                     
CHAIRMAN TAYLOR said he  could not imagine the provision being added                                                            
if there had  not been situations  where a termination occurred  and                                                            
the terminated  person discovered  the reasons  were not  acceptable                                                            
and then brought suit and used that letter in his suit.                                                                         
MR.  LOHR said  the  division has  ample  authority  to initiate  an                                                            
investigation  if there is a suspect element for the  reasons given.                                                            
SENATOR ELLIS  requested that SB 138 be held so the  committee could                                                            
see what the House was doing with the legislation.                                                                              
CHAIRMAN TAYLOR said SB 138 would be held until a later time.                                                                   

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