Legislature(1999 - 2000)
04/10/2000 03:27 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
April 10, 2000
3:27 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Andrew Halcro, Vice Chairman
Representative John Harris
Representative Tom Brice
Representative Sharon Cissna
MEMBERS ABSENT
Representative Lisa Murkowski
Representative Jerry Sanders
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 177(L&C)
"An Act relating to insurance trade practices; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: SB 177
SHORT TITLE: INSURANCE TRADE PRACTICES & ACTS
Jrn-Date Jrn-Page Action
5/16/99 1517 (S) READ THE FIRST TIME - REFERRAL(S)
5/16/99 1517 (S) L&C
1/18/00 (S) L&C AT 1:30 PM BELTZ 211
1/18/00 (S) Heard & Held
1/18/00 (S) MINUTE(L&C)
2/29/00 (S) L&C AT 1:30 PM BELTZ 211
2/29/00 (S) Moved CS(L&C) Out of Committee
2/29/00 (S) MINUTE(L&C)
3/01/00 (S) RLS AT 11:30 AM FAHRENKAMP 203
3/01/00 (S) MINUTE(RLS)
3/01/00 2476 (S) L&C RPT CS 1DP 3NR 1AM SAME
TITLE
3/01/00 2476 (S) NR: MACKIE, TIM KELLY, HOFFMAN;
3/01/00 2476 (S) DP: DONLEY; AM: LEMAN
3/01/00 2476 (S) ZERO FISCAL NOTE (DCED)
3/22/00 2692 (S) RLS TO CALENDAR AND 1 AM 03/22/00
3/22/00 2693 (S) READ THE SECOND TIME
3/22/00 2693 (S) L&C CS ADOPTED UNAN CONSENT
3/22/00 2693 (S) ADVANCED TO THIRD READING UNAN
CONSENT
3/22/00 2693 (S) READ THE THIRD TIME CSSB 177(L&C)
3/22/00 2693 (S) PASSED Y19 N1
3/22/00 2694 (S) EFFECTIVE DATE(S) SAME AS PASSAGE
3/22/00 2697 (S) TRANSMITTED TO (H)
3/23/00 2661 (H) READ THE FIRST TIME - REFERRALS
3/23/00 2662 (H) L&C, JUD, FIN
4/10/00 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
SENATOR DAVE DONLEY
Alaska State Legislature
Capitol Building, Room 508
Juneau, Alaska 99801
POSITION STATEMENT: Testified as the sponsor of CSSB 177(L&C).
MICHAEL LESSMEIER, Attorney for
State Farm Insurance Company
Lessmeier and Winters
431 North Franklin Street
Juneau, Alaska 99801
POSITION STATEMENT: Testified on CSSB 177(L&C).
BOB LOHR, Director
Division of Insurance
Department of Community and Economic Development
P.O. Box 110805
Juneau, Alaska 99811-0805
POSITION STATEMENT: Testified on CSSB 177(L&C).
JOHN GEORGE, Lobbyist,
National Association of Independent Insurers
2328 Fritz Cove Road,
Juneau, Alaska 99801
POSITION STATEMENT: Testified on CSSB 177(L&C).
ACTION NARRATIVE
TAPE 00-46, SIDE A
Number 0001
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce
Standing Committee meeting to order at 3:27 p.m. Members present
at the call to order were Representatives Rokeberg, Halcro, Harris
and Cissna. Representative Brice arrived as the meeting was in
progress.
SB 177-INSURANCE TRADE PRACTICES & ACTS
CHAIRMAN ROKEBERG announced the first order of business is CS FOR
SENATE BILL NO. 177(L&C), "An Act relating to insurance trade
practices; and providing for an effective date."
Number 0070
SENATOR DAVE DONLEY said CSSB 177(L&C) is an attempt to improve
consumer protection in Alaska in insurance matters. Alaska is in
the minority of states that do not allow the state's Division of
Insurance to take enforcement actions for individual abuses and
violations of the state's Unfair Claims Practices Act. Under
Alaska statutes, there has to be a pattern of behavior on the part
of an insurer before the Division of Insurance can take any
corrective action. In most of the states that were surveyed, the
divisions of insurance do have that authority to protect individual
consumers. CSSB 177(L&C) would give Alaska's Division of Insurance
the power to protect and to take corrective action for individual
violations of the Unfair Claims Practices Act, thus better
protecting Alaska insurance consumers. Due process safeguards
would apply. There are extensive due process safeguards in any
administrative enforcement action, and ultimately the option to
appeal to judicial review.
Number 0181
SENATOR DONLEY said another aspect of CSSB 177(L&C) is that it
expands the protections in the existing Unfair Claims Practices
Act. There is a series of protections listed in Section 5 of the
bill. That is the list that appears now in law, with some
modifications. There are only two sections of the Unfair Claims
Practices Act that do not apply to third party claimants. To
refresh the committee's memory, first party claimants are those who
have claims against their own insurance companies. A third party
claimant has a claim against somebody else who is insured. In
other words, if you are the injured party, you are not claiming
against your insurance company, you are claiming against the party
that injured you and that person's insurance company.
SENATOR DONLEY said all the protections of the existing act apply
to both first and third party claimants except items 7 and 11.
What the bill does is expand those protections to third party
claimants in items 7 and 11. It does not create any new level of
protection. Those protections in Section 7 would be that insurance
companies should not (indisc.) for substantially less than the
amount that somebody ultimately recovered. Obviously, the merit of
that is to try to prevent litigation. People shouldn't have to sue
to collect what is rightfully owed to them under an insurance
policy. Item 11 says an insurance company shouldn't force people
to go to arbitration, to try to force them to settle for less under
the threat of arbitration and is going to cost the people so much
that they are going to lose money anyhow. "That's an existing
violation if it's a first party involved," Senator Donley said.
"This bill would expand that protection to a third party claimant,
too."
Number 0348
SENATOR DONLEY clarified that CSSB 177(L&C) is not attempting to
create a third party right of action in what is called a "good
faith" lawsuit. That has been controversial in other states. In
Section 6, drafters have specified that the provisions of this
section do not create a private cause of action for a violation of
this section. "This statement just re-announces the status quo to
make it clear to anybody that these changes are not intended to
create any kind of third party "good faith" cause of action, or any
kind of cause of action based on these other than private cause of
action," he said. CSSB 177(L&C) is talking about enforcement by
the Division of Insurance, how the Division of Insurance enforces
the Unfair Claims Practices Act.
SENATOR DONLEY noted that there is a suggested amendment from Mr.
[Michael] Lessmeier to change the proposed language for Section 6.
He does not oppose that amendment. "I think it is within the
spirit of what we are trying to get at in Section 6 already," he
said.
Number 0452
SENATOR DONLEY said all of the changes are significant, but what
may be the most important change is the last one. It was requested
by the Division of Insurance that a new definition of "proximate
cause" be included in the statutes.
Number 0548
SENATOR DONLEY referred to Section 7 of the bill, on page 3, the
definition of "prohibited denial of claim for causation."
Essentially what that is, he said, is a new definition of
"proximate cause." A problem has developed because the status quo
has been recently changed by a Supreme Court case saying that
insurance companies can now exclude risks even if they are not the
"dominant cause" of the loss.
Number 0548
SENATOR DONLEY gave an example:
Let's say that you have a homeowner's policy and it
doesn't include earthquake insurance. There is an
earthquake, and a power line half a mile away from your
house falls down and there's a spark that creates a fire
in the neighborhood, and there is a catastrophic chain of
events that leads from house to house to the house next
to your house, and your house catches fire and burns
down. Your house suffered no damage in the earthquake,
and your homeowner's policy does have fire insurance, but
you don't have earthquake insurance, and earthquake was
a substantial cause of the chain of events that led to
your house burning down. Arguably under this new case,
the insurance companies can now rewrite your homeowner's
policy to exclude that and say that if there is any
substantial cause in the chain of events that was not a
covered cause, even though the final one was clearly
covered by your homeowner's, your homeowner's doesn't
work; you're out of luck, you have no coverage for that
loss. The way it is now, they can exclude it if it is
the dominant cause. To go back to the earthquake
example, if you have homeowner's and it doesn't have
earthquake insurance and an earthquake occurs and it
knocks your house down, you're out of luck, you didn't
have earthquake insurance. That [earthquake] is clearly
the dominant cause of that damage.
SENATOR DONLEY said he thinks this is incredibly important for all
consumers in the state of Alaska, "because what's happening now is
some insurance companies as we speak are rewriting their
homeowner's policies to exclude things that are substantial causes,
not just dominant causes. Of course the rates were all based on
the old status of the law which was whether or not it was a
dominant cause."
Number 0679
SENATOR DONLEY explained that what this language recommended by the
Division of Insurance seeks to do is to preserve the status quo so
that something [that causes a loss] has to be a dominant cause, not
just a substantial cause, before it can exclude coverage.
Number 0724
SENATOR DONLEY said:
I would argue that the better public policy here is that
if you have fire insurance, and your house burns down,
and the dominant cause of it was something you did have
insurance for, i.e., the house next door caught on fire
and burned your house down, we should be protecting
people. People out there are not very sophisticated
insurance consumers. These [policies] are not ordinary
contracts where I'm negotiating with you as an individual
business person and come up with a meeting of the minds
and agreement for what we want to cover. These are
contracts of "adhesion." This is a legal term that
means, "it's a take it or leave it operation." These are
big corporations. They drop their policies. They're not
going to negotiate with any individual some change in
their policy to include that. They may offer earthquake
insurance or they may not. As an individual, you do not
have the same bargaining leverage that you have with
another individual, or as one company to another company.
That is one of the reasons why we regulate insurance the
way we do and have so many more laws that control
insurance, because the average consumer just isn't on an
equal playing field with large insurers, so it is
regulated to protect consumers in that way.
SENATOR DONLEY thinks the state should protect consumers by making
sure that they actually have that type of coverage they think they
are buying. "I'm not saying people should get more than they pay
for; I just think they ought to get what they pay for," he said
Number 0861
SENATOR DONLEY noted that there are two other proposed amendments,
both dealing with the same subject. He said he supports the Ford
amendment [Ford/LS0902/I.1]. This is a compromise position, he
explained. The language was recommended by the industry. It says
for third party claimants, the test would not be whether or not the
policy holder went to court and recovered more, but the test would
be whether or not there was an offering of an amount that had a
reasonable basis in law and fact. In other words, if the insurance
company had a reasonable reason for offering what it did. He said
he would be willing to settle for this compromise. "The industry
is requesting that we change it for both the status quo and for the
new third party action, to adopt this same standard for both," he
said. "My personal preference is to keep the status quo for what
we have now, for first parties, and for the new addition to the
law, the third parties, I could live with this standard here that
they are recommending for both."
SENATOR DONLEY reminded the committee that these are all things
that are enforced by the Division of Insurance. The Unfair Claims
Practices Act cannot be enforced by private parties; it is enforced
by the Division, so the Division is going to use its expertise and
go through full due process in making a determination whether this
standard was violated or not. A consumer would file a complaint,
the Division would review the complaint, decide whether or not to
pursue it, and then, if there was a legitimate cause of action, the
Division would pursue it through the due process of enforcement,
and the question becomes what standard do they use.
Number 1018
CHAIRMAN ROKEBERG said he had in hand a proposed amendment from the
State Farm Insurance Company counsel and also the Ford language,
which he assumed would replace the language Senator Donley favors.
SENATOR DONLEY said he supports the Lessmeier language for Section
6.
CHAIRMAN ROKEBERG asked about Section 7.
SENATOR DONLEY said he supports the Ford language for Section 7.
He explained that the difference is that the Ford language
maintains the status quo for first party claimants, which he
believes is a better consumer protection standard, and adopts the
recommended standard [of reasonableness in fact and law] from the
industry for the new third party claimants.
Number 1077
CHAIRMAN ROKEBERG asked Senator Donley if he was saying that in
Section 7, it was like a "low ball" offer.
Number 1082
SENATOR DONLEY said that is right. What it [the existing law] does
is protect first parties, he said, that is:
It protects you from your insurance company offering you
less than your claim is worth. You go to court and prove
you're right, and you win, you get substantially more
than what they offered you. Then, arguably, there is a
possibility they violated the Unfair Claims Practices
Act, and you could file a complaint with the Division,
say, look, these guys made me go to court to collect
this. They only offered me $10 and I got $20 when I went
to court. And then the Division exercising its
administrative and executive discretion, could decide
whether or not they wanted to pursue enforcement action
based on unfair claims practice. And what the bill does
now is just extend that protection to third party
claimants. What the two options the committee has here
is whether to leave the existing law alone and just add
this standard for third party or whether to the proposal
from Mr. Lessmeier was to change the existing status quo
and use this standard for both first and third.
Number 1163
REPRESENTATIVE HALCRO said he always gets a little worried "when we
start talking about the unsophisticated consumer. These are the
same unsophisticated consumers who put us in office," he pointed
out. "When you go to buy insurance, you know what you are buying.
I understand your example with the earthquake and the fire, but you
are not dealing with a faceless company. You are dealing with your
local neighborhood agent." He asked how many states allow for the
enforcement, the penalization of one single unfair practice.
Number 1204
SENATOR DONLEY explained that the Division of Insurance had polled
all states and asked them that question. The majority of the
states that responded allow enforcement for single incidents. They
include California, Connecticut, Florida, Idaho, Indiana, Kentucky,
Maryland, Nebraska, Oregon, Pennsylvania, Rhode Island, Tennessee
and Wisconsin.
Number 1322
REPRESENTATIVE HALCRO asked about the case in which there is a
legitimate dispute over the value, such as that of a car that had
been wrecked. If the consumer goes to court and receives a
settlement greater than what the insurance company had offered,
does this mean the Director of Insurance is going to go after them?
SENATOR DONLEY said the director is not going to waste the
division's time. It would be possible to bring an action, but they
[cases] are all subject to administrative process, and that
administrative process is subject to appeal to the court. So it is
going to be at the discretion of the enforcement officers just as
it is with all of the other state agencies now.
Number 1831
CHAIRMAN ROKEBERG [indisc.].
SENATOR DONLEY replied no. That is the safeguard here. The
Division is the only entity that gets to enforce this, and anything
the Division does is going to be filtered through the
[administrative] process and also through due process.
Number 1398
REPRESENTATIVE HALCRO asked if the law says now that there has to
be a pattern of denying claims, why should the state be penalizing
for one incident when there could be a legitimate complaint.
Number 1447
SENATOR DONLEY countered, "Why should we not be enforcing the law
when one instance of abuse of the law could ruin, devastate an
Alaskan family? All it takes is one serious abuse by an insurance
company to ruin a family, deny a claim and wipe them out."
CHAIRMAN ROKEBERG asked, "[Indisc.] . . . I mean to have a cause of
action [Indisc.] insured to protect their own interest?"
Number 1465
SENATOR DONLEY said the family would not have a private cause of
action. It could take them years of going through the court
system, strung out on appeals for many years before they ever
collected. "There are horror stories," he said, "about what
happened to people when their medicals have been denied, when their
homes have burned down and they have been denied insurance."
CHAIRMAN ROKEBERG asked if there is not already due process for
them to bring a cause of action against the insurer.
SENATOR DONLEY said yes, they could bring a claim for the loss.
CHAIRMAN ROKEBERG noted, "But this adds the ability of the
commissioner to intercede on behalf of the insured, isn't that
right?"
SENATOR DONLEY said that is right, that it allows the commissioner
to enforce individual violations of the Unfair Claims Practices
Act. The intent is not really to win a claim for individuals; the
intent is to make insurance companies follow the Unfair Claims
Practices Act. "We start from that," he said:
We shouldn't allow single bad acts and just say, "Well,
they're not that important," because they can be very
important. Let's go back to the idea or first compel a
proof of a series? It is very difficult to prove a
series, and the argument becomes, when is it a practice?
You may hear today from representatives of the insurance
industry, well, two can be a practice, but when they go
to court, they're not going to admit that, they're going
to fight that. They are going to say that a practice has
to be more than two incidents. Then you have to have
proof. Right now it is hard to develop data because
everybody out there knows if it's just a single consumer
complaint, you're wasting your time going to the Division
of Insurance. So the Division is not getting the data
coming in to even develop the case numbers to prove a
pattern of bad acts because consumers are not coming
forward in the volume they would if they knew they might
be able to get some corrective action by [reporting] a
single act.
Number 1569
REPRESENTATIVE KEMPLEN asked if consumers are not coming forward,
how do we know they're out there?
SENATOR DONLEY said it is anecdotal evidence, "but I can tell you
this. I have called people, attorneys who deal with insurance
matters and asked for examples of clients going to the Division of
Insurance and being told they couldn't be helped because it was a
single issue." The attorneys told him they tell their clients not
to bother, that they quit referring people to the Division of
Insurance years ago because the Division couldn't do anything for
them because they couldn't act on single acts.
Number 1610
CHAIRMAN ROKEBERG added that, in fact, the Division does receive a
number of complaints. He then mentioned that he was going to have
to leave the meeting early to attend another meeting, and planned
to turn over the gavel to Vice Chairman Halcro when he needed to
leave.
Number 1640
MICHAEL LESSMEIER, attorney, representing State Farm Insurance
Company, came forward to testify. He said there has been a lot of
work done on CSSB 177(L&C) in an effort to address Senator Donley's
concerns, the Division's concerns, and the industry's concerns. He
said he thinks, "We're not there yet. I think we're close.
Despite the work that has been done there remains a fundamental
lack of understanding about some of the important issues addressed
by this bill." He said one has to do with the issue of dominant
causation. It is a complicated issue, but the example Senator
Donley gave of the earthquake causing the fire, the damage caused
by the fire would be covered under State Farm's policy. He said he
also believes that under most policies, the damage caused by the
fire would be covered. Essentially, what this provision would do
would be to take Alaska to join a minority of states. As far as he
knows, only California and Washington have this dominant proximate
cause language. That language would be new to Alaska and "most
certainly would be litigate and litigated and litigated until we
have substantial agreement and interpretation amongst the courts as
to what that language really means." The way the law is now in
Alaska is that if an insurer is going to exclude a risk, it has to
be done in a crystal clear way that is meaningful to the lay
person.
CHAIRMAN ROKEBERG said, "That's where we have the litany of
earthquake, riot, acts of God, et cetera, et cetera, et cetera."
MR. LESSMEIER said he understood Senator Donley's concern, "which
is a legitimate concern and I think one we all share, which is to
meet the reasonable expectations of the insured." He continued:
I am not sure that his language really accomplishes that,
and I think it may well have a detrimental effect in
terms of causing litigation over many different
complicated issues where the law right now is at least
reasonably clear and reasonably predictable. Basically,
the law right now is that if an insurer clearly excludes
a risk, and if the insurer uses clear language to say
that if that excluded risk is a substantial factor in
causing the loss, then the loss is not covered. It has
to be very, very clear, and our Supreme Court has
reiterated that over and over and over again, and has in
some cases gone to rather surprising lengths to reiterate
that proposition. So I think there is a fundamental
disagreement there about as a matter of public policy
what would be best for the citizens of the state.
Number 1820
MR. LESSMEIER said the second issue over which there is some
disagreement has to do with the role of the Division of Insurance
and particularly in response to some of the questions raised by
Representative Halcro. Right now, the Division keeps statistics of
complaints.
Number 1851
MR. LESSMEIER then provided some statistics related to insurance
claims in Alaska:
In 1998 State Farm had approximately 38,000 automobile
claims. Of that number, State Farm paid a little over
30,000 [claims]. State Farm had approximately 7300
homeowner claims and paid approximately 5,000 of those
claims. According to the Division's statistics, in 1997
the Division received 52 complaints for State Farm, and
43 for 1998. So that is 43 complaints out of
approximately 45,000 claims handled. "That's not too
bad," he said. "I would suggest that's pretty good." We
don't know how many of those complaints are valid. And
what I would say to you is that when you're in a business
where you are making decisions about whether to pay or
deny claims, that does not indicate that there is a
significant problem.
MR. LESSMEIER said that in cases that he is involved in, first
party casees in which there is a dispute between an insurance
company and the insured, the practice is to involve the Division of
Insurance for purposes of leverage. They try to get the Division
to take action so it affects the merits of the dispute. Usually,
those claims involve disputes of fact or disputes of law that are
appropriate for the court to decide.
MR. LESSMEIER continued that in his experience, the Division has
not wanted to get involved in those kinds of claims until the issue
works its way through the court system, because there are
legitimate disputes of fact where one person says one thing and the
other person says another, and the Division is not in a position to
resolve those kinds of disputes. In the first party situation,
the consumers have a very powerful tool that is not affected by
this legislation, he said. They have the ability to file a "bad
faith" cause of action against an insurer, which gives them
tremendous leverage because there is tremendous exposure every time
an insurance company has to defend one of those cases. So in a
first party situation, insurers that deny first party cases have to
do so very, very carefully and should not do so unless there is a
very good reason and there is an objective basis that they can
point to in the evidence.
Number 2018
MR. LESSMEIER then turned attention to the bill itself. One of the
reasons State Farm opposes this legislation is because the company
believes the Division already has the power to take action in
individual acts. There are a number of provisions in the statutes
that give the Division that power. The trade practice section of
the Unfair Claims Practices Act does require a pattern of practice,
but there are other statutory provisions that clearly give the
Division the power to take action in the event that there is an
individual act.
Number 2056
CHAIRMAN ROKEBERG asked Mr. Lessmeier to cite those statutory
provisions to the committee, although not necessarily at the
moment. Also, he requested the case citation of the
[indiscernible] case to which Mr. Lessmeier had referred. He then
asked Mr. Lessmeier if he was comfortable with the Ford amendment.
MR. LESSMEIER said he fears that it "gets us right back to the
situation that Representative Halcro was talking about." He said
he thought the Ford amendment was an attempt by Senator Donley to
meet the concerns of the industry halfway, because the amendment
does address the third party situation. But it doesn't address the
first party situation, and there could well be a situation in the
first party context where there is a reasonable basis in fact and
in law for the denial of a claim. "The court disagrees, and so
immediately when the court disagrees and the insurer loses, there
is under the present language of this act a violation of the act,"
he said. Now Senator Donley's response is that it's then up to the
discretion of the director then whether to take action or not, but
the point is, there is a violation of the act, and the director
certainly could take action. State Farm does not believe the
director should have discretion if there is a good faith basis in
fact and law.
Number 2160
CHAIRMAN ROKEBERG observed, "By having the liability clear, you're
actually backing up to the current statute, I think."
Number 2173
MR. LESSMEIER said:
There's no question that what we would be doing would be
changing the status quo, and the reason we would be
changing the status quo is because the status quo does
not allow for the defense based on (inaudible) . . .
interpretation of law and fact. And as long as we're
changing this statutory scheme, we ought to correct that
as well. If we agree that it is good public policy not
to second-guess judgment reasonably based on fact and
law, that applies equally in the first party situation
and in the third party situation.
CHAIRMAN ROKEBERG said it seemed that it would prevail throughout
the entire section.
MR. LESSMEIER said it should:
Otherwise, no matter how reasonable your position is, if
you lose, you've violated this act. And then it's up to
the director to take action, and the director can take
action, and I don't think you can second guess that
action in a court of law if the act has been violated.
You might be able to argue about the penalty, but you
can't argue that you didn't violate the act. There's no
excuse in here for reasonable interpretation of the law
or the facts, and there should be. I don't think that
anybody believes that we should be second guessing
reasonable judgments of law or fact... I think the
intent really is in a situation where there is no
reasonable basis in law or fact, where there's an abuse
of the power situation, and we don't have any problem
with that. But when you're second guessing judgment,
then that's where we do have a problem, and that applies
equally in the third party as well as the first party
situation.
Number 2263
CHAIRMAN ROKEBERG asked if he was suggesting that the senator had
taken the wrong approach to try to ameliorate the problem, "because
he is using trade practices which were traditionally based on a
pattern because they're practices rather than an isolated, discreet
incident which could and should be investigated by the Division of
Insurance and give rise to an individual cause of action also?"
Number 2283
MR. LESSMEIER said he thinks there are a number of different ways
of attacking the problem that the senator intends to attack. One
of the ways to attack the problem is to give the director the
authority to investigate an individual act. Another approach is to
give the Division authority to investigate patterns or practices.
"That was the approach that was originally adopted by Governor
Hammond when he introduced this legislation back in the 1970s," Mr.
Lessmeier said. "If you have time to look at the regulations that
were written by the director to apply these practices, there were
definitions that were promulgated as to what is an unfair practice
or what is a pattern or practice. One of the definitions that was
adopted was the repeated violation of a single practice without a
reasonable explanation. In other words, if you do it once, it's
not a violation, but if you do it a second time and you don't have
a reasonable explanation, it's a violation."
Number 2340
REPRESENTATIVE BRICE asked if in that instance, "can the person who
got hit the first time come back on you?"
MR. LESSMEIER said not under present law; there is no claim for bad
faith under the present law, nor would there be under this one.
The director would have the power under the existing law to take
administrative action. He thinks the director has that power
already under other provisions of the statute. Senator Donley's
approach is one that some other states have adopted, the approach
of allowing their director to take action in response to individual
acts.
MR. LESSMEIER testified that the National Association of Insurance
Commissioners (NAIC) has updated the model act that was the source
of Alaska's original act. The updated act allows action by
directors of insurance for individual acts if the acts were
committed flagrantly and in conscious disregard. Senator Donley
has proposed something else, and there is a basis for what he has
proposed. He also has been very careful to work with the industry
to prevent a situation in which this statutory scheme by going from
a trade practice to an individual act does not create a third party
bad faith cause of action, "because to do that I think we all
recognize would be disastrous for the state," he said. "In other
states that have one that, costs of insurance have just
skyrocketed. He's worked with us to try to ensure that that
doesn't happen here."
Number 2426
VICE CHAIRMAN HALCRO noted that Chairman Rokeberg, as previously
announced, had left to attend another meeting and passed the gavel
to Vice Chairman Halcro.
VICE CHAIRMAN HALCRO asked Mr. Lessmeier if he was recalling
correctly that there were 43 complaints filed in 1998.
MR. LESSMEIER said that was correct according to records kept by
the Division of Insurance.
VICE CHAIRMAN HALCRO asked if that included the full range of
complaints, irrespective of their nature.
MR. LESSMEIER did not know. He said the Division's web page shows
the number of complaints by company per year, and for the total
industry per year. "They don't tell us how many of those
complaints they believe are valid," he added.
Number 2461
VICE CHAIRMAN HALCRO posed a hypothetical question: "Let's say
there is a class action suit, and you're found guilty. How would
this act affect a class action suit settlement? Would the director
then be able to come and you'd be in violation of this act and be
able to impose fines?
MR. LESSMEIER said it was hard to answer that question in the
abstract.
TAPE 00-46, SIDE B
MR. LESSMEIER continued, saying he thinks it is possible that if
there were a class action lawsuit against an insurer, "that as a
result of the finding in that class action, the director could
probably investigate and take additional action. I think that is
a possibility".
Number 0055
BOB LOHR, Director, Division of Insurance, Department of Community
and Economic Development, came forward to testify. He said the
Division strongly supports CSSB 177(L&C), believing it would
enhance insurance consumer protection in Alaska. The current
mission statement of the Division is to protect and serve the state
by developing, interpreting and enforcing the insurance statutes
and regulations; to protect and educate the consumer, and to
enhance the insurance business environment. He said the Division
believes that each of the three prongs of the mission would be
enhanced by adoption of this legislation.
MR. LOHR said it is fairly clear that consumer protection is at the
heart of the single act authority, and he believes that CSSB
177(L&C) would enhance the Division's ability to deal with the very
limited number of cases in which there is "a truly bad act by an
insurance company." He said he was not talking about the innocent
mistake of a company, or even necessarily a series of mistakes.
"If a company comes to us and can show that mistakes were made and
that they were innocent in nature, we are not even going to go
after that under the existing authority of the Division" he said,
"because frankly, we don't have the time. There are bigger issues
out there in the insurance world with which the Division needs to
deal."
Number 0136
MR. LOHR pointed out that in rare cases, a customer or a family is
"truly put through the wringer" by a company. "It may be a
combination of gross negligence or it may be actual intentional bad
acts, but the bottom line is that it can leave a family
devastated," he said. He gave an example: Valid claims were filed
by a policy holder, a family, for $186,000 worth of medical claims
in May and June, 1997. The treatment had been pre-certified. Six
months later, the family was reimbursed for those expenses; the
hospital was paid, but in the meantime, the family's credit rating
had been affected and other costs were incurred because of the
company's failure to timely pay the hospital bill. The company
finally acknowledged that its case reviewer never notified the
claims office that the claim had been certified as valid, so it was
an internal mistake of the company. " Innocent? Well, maybe," Mr.
Lohr said. "But the bottom line is that the customer was severely
impacted. I can't say that would be a candidate for enforcement,
but it would certainty be a candidate for investigation to
determine more details about why the customer was put into that
situation and what was done to remedy it afterwards."
Number 0221
MR. LOHR said in a case like that, the Division would be less
interested in fining the company than in requiring a prevention
plan to avoid similar occurrences in the future, without having to
wait for a pattern of practice. He continued:
As Mr. Lessmeier indicated, under regulations the
Division adopted under the current statute, one of the
other standards is that one percent or more of the claims
in a given year have to be found to be not valid,
improperly handled by the company. If you took all of
the complaints handled by the Division in a given year,
and assumed they were all valid (which they are not), and
that they were all against one company, it would not rise
to anywhere near one percent of total claims. I would
submit to you on that basis that that standard is
effectively ineffective, it doesn't work. The multiple
violations of the same standard without a reasonable
explanation is closer to reality. It is closer to a real
world standard. But it does not deal with the single
serious violation of a consumer's rights, and that is
what this section is talking about, I believe.
Number 0273
MR. LOHR said he thinks that this would also address the third
branch of the mission of the agency, and that is the insurance
business environment, because "I don't think anyone would come to
the table and testify in support of bad apples." He continued:
The reason that we have a very strong effective,
investigative unit within the Division of Insurance is
because we take insurance fraud seriously. We do this
both for claimant fraud, where somebody is just putting
together a false claim for reimbursement, and we refer to
the district attorney a number of those for prosecution
every year. We also enforce fraud within companies, and
that's more what we're talking about here. We have
authority to investigate in any case in which we believe
that is indicated, but we don't have authority to enforce
for unfair claims for the single bad act, and that is
what we are talking about here. I have said more about
that than I will about the other provisions of the bill.
I am not going to go for my half-hour that has become
customary.
Number 0318
MR. LOHR then addressed the proximate cause question. He said he
wanted to acknowledge an innocent mistake by the Division of
Insurance, which was that they used the example of earthquake
causing a fire and whether or not that is covered. Upon further
review, they determined that under the Insurance Services Office
(ISO) standard policy language, the fire would not be an excluded
cause coming from the earthquake. "That is our mistake; we take
full responsibility for it, and we are doing what we can to correct
the record on that," he said. That does not, however, lessen the
need for language to address the issue, because once again, there
are rare instances in which this chain of causation problem is
going to lead to somebody being denied appropriate coverage. In
that very limited number of circumstances, the Division believes
that the change in the definition of concurrent causation is
appropriate and necessary. While it is not of the magnitude to
rise to affecting rates, in the Division's opinion, it is something
that can really devastate a family. "So if there is a theme
through this bill" he said, "it is looking out for those single
horror stories, those worst case abuses, where a family is just
left devastated because they either thought in good faith they had
coverage or they were just really treated in a rotten fashion by a
company. In either of those cases, I think that the Division's
authority to enforce is important."
Number 0395
REPRESENTATIVE BRICE asked if he could give the committee an
accurate hypothetical example of the chain of causation scenario.
Number 0408
MR. LOHR said there is a court case, Murray v. State Farm
Insurance, a 1988 case in which the West Virginia Supreme Court
considered the type of concurrent causation with contract language
that CSSB 177(L&C) is designed to deal with. In that case, there
was a high wall above the Murrays' house. The wall had been
negligently designed originally, and then was maintained by the
subsequent owner. As a result of the negligence, sandstone holding
some large boulders in place gradually eroded away. The boulders
fell through the air and through the roof of the Murrays' house,
causing extensive damage. Fire officials turned off power to the
home and condemned it. The policies involved covered damage
resulting from negligence of third parties and falling objects, but
not erosion or earth movement. The chain of causation was thus
negligence, erosion and falling object. Because erosion, an
excluded coverage, was in the chain, the insurer denied the claim.
The court found that whether the proximate cause of the loss was
negligence, erosion, or falling object was a question of fact for
the jury. But the court found that concurrent causation language
in the contract to be invalid as a matter of public policy because
it was not consistent with the reasonable expectations of the
insured. The court acknowledged Alaska's bonding case and
criticized it, pointing out that our court suggested that the
policy holder's reasonable expectations were more in line with
being "a fervent hope usually engendered by a loss."
Number 0499
MR. LOHR quoted from the Murray case record:
Indeed, if we were to give full effect to the State Farm
policy language excluding coverage, whenever an excluded
peril is a contributing or aggravating factor in the
lass, we would be giving insurance companies carte
blanche to deny coverage in nearly all cases.
Number 0519
VICE CHAIRMAN HALCRO asked Mr. Lohr if it was correct that the
Division already has the ability to investigate, but does nothave
the ability to enforce.
MR. LOHR said that was correct with respect to unfair claims
practices, for a single act.
VICE CHAIRMAN HALCRO noted that in the example, the $186,000
[payment being delayed for six months] was resolved. The insurance
company said it was more or less a clerical error. Has that
company committed other such offenses?
Number 0542
MR. LOHR said he did not believe so, which is why the Division
thought it was an appropriate example.
VICE CHAIRMAN HALCRO asked Mr. Lohr if at any time in the future,
he might be levying fines or, as he had said the Division was
simply going to use that as leverage to hopefully produce some form
of corrective policy within the insurance organization.
Number 0563
MR. LOHR believes the bill would grant authority to impose fines.
However, as Senator Donley had indicated, doing that involves "the
full-blown administrative due process within the Division with a
hearing officer involved, with my review of that decision, and
then, if necessary, if somebody feels aggrieved by that decision,
appeal to Superior Court." But the way he would anticipate it
working in most cases is that the Division would be trying to use
this tool to prevent other consumers ending up in the same boat.
The Division would do that is by requiring a company to submit a
plan to show how there would be no recurrence. It might involve
better training of the people that were involved, {or] looking at
the notification procedure to see if there is something obvious
about it that could be fixed. But if you take a company that does
not even acknowledge wrongdoing and does not give the Division "the
time of day with respect to a plan to fix it, I think in those
cases we'd look at a fine," he said. "Or if we found a plan that
made good sense on paper and simply wasn't implemented over a
reasonable period of time, which we would try to specify as part of
the plan, there again we would look at a fine to make the point
that that's not OK to treat customers that way."
Number 0620
VICE CHAIRMAN HALCRO asked if under current law, the people whose
payment of $186,000 was strung out for six months would have the
right to sue the insurance company.
MR. LOHR said he would prefer to leave that question to the
attorneys. He said there was an attorney from the Division who
could try to address it.
Number 0659
MR. LESSMEIER said the answer to the question is yes. In fact, he
said:
There have been some huge verdicts against [Aetna, Inc.],
one of them here in Juneau, that although I think it was
reduced by the federal district court judge who was
hearing it, there was a punitive damage award of some $17
million against Aetna. There also was another case
against Aetna in Anchorage that was tried just a couple
of years ago where there was a punitive damage award for
a delay in payment that ran in the millions of dollars.
VICE CHAIRMAN HALCRO summarized that currently, the consumer would
have the ability to bring a cause of action.
MR. LESSMEIER concurred, and said he thought it was important that
everybody understand that the cause of action would not be based on
a violation of the act, but on the duty that the insurer owes its
insured, independent of the act.
Number 0716
JOHN GEORGE, representing the National Association of Independent
Insurers (NAII), came forward to testify. He said Senator Donley
had considered the proposed changes the NAII had put forward. "We
have had a dialogue and there have been some significant
improvements, and my clients want to acknowledge that," he said.
MR. GEORGE continued:
There is no law that you could write but what someone
couldn't come up with an anecdotal story about how it
doesn't work for a particular case. It is unfortunate
that sometimes we write laws to fix a specific situation
which can't fix everything. You try and get laws that
kind of go down the middle and take the vast majority and
there are going to be a few that fall outside the deal.
In the past, the Division of Insurance when they found a
single act and said boy this is bad we can't let that
happen, would issue a cease and desist order that says,
"Don't ever do that agin." The director just testified
that they would hope to use this leverage to say, "OK,
and you must come back with a plan of how you are going
to fix it so it doesn't happen again, whether it be
training or you're going to change your policy, or your
going to pay cash instead of checks, whatever the fix is,
I don't think that anyone would object to being brought
to bear to yea we screwed up, we can't do it again, and
we're going to have to fix it and this is what we are
going to do. My clients are very concerned that one act
could be considered a trade practice and we might find
that the next director of insurance is not quite so
benevolent and understanding, and might say boy I've got
'em now and I'm going for the mat." As long as
reasonable people are interpreting the law whether it be
the old law or the one proposed by Senator Donley, there
probably isn't a lot to argue about. Bt we never know
what the next guy is going to be like, and I think the
Division has always when complaints came in used the
standard of is there some basis, is the insurance company
just kind of off the wall or did they have some basis for
denying a claim or for offering $10,000 instead of $2
million that was asked, and I think they have to use that
kind of standard. You can do virtually only do that
after the fact; you can't do it before the fact because
. . .
Number 0848
MR. GEORGE continued:
The Division does have a lot of almost coercive power.
Insurance companies live in fear that the Director of
Insurance is going to do something to them whether it be
additional examinations or deny their rate and form
filings, or whatever. And they are most anxious to
comply with whatever it is, and if complying mens to come
up with a plan to reorganize how they do things and fix
it, I think that's a reasonable standard that we
certainly could live with. So as long as it is
benevolently applied, it doesn't matter if we have the
new law or the old law. Our concern is that we just
don't know how it's going to be applied in the future,
and we'd like law therefore that allows us under the
worst case scenario to be able to continue without
draconian penalties. I can see after Director Lohr
testified on his plan of action that I could see how
maybe we could craft some language to go in here that we
wouldn't necessarily call it a "trade practice," but on
a single event, a company could be ordered to come up
with this kind of a resolution. I think we could
probably support that.
Number 0970
MR. GEORGE said:
The examples the director came up with in virtually all
cases were health insurance claims, and you notice the
health insurance people are not here, it's the property
casualty people who are here today. And I guess we all
agree that health insurance is a real different animal,
that the claims are adjusted at a different level, by
telephone and send the receipts in as opposed to when an
adjuster goes out and actually looks at the property and
analyzes the legal liability and that kind of thing. I
don't know how the health insurance problems; that's a
whole different can of worms. When the only three
examples the Division could really come up with in Alaska
were health insurance, I think it may indicate that
that's a whole different kind of problem, but I still
think the plan to come up with a resolution is a good
idea. The director seemed to think that was an avenue he
would like tot take on single cases, and I think that's
something the industry could support as opposed to a
$50,000 fine and those kind of penalties.
Number 0986
SENATOR DONLEY said the only thing from the testimony he would like
to clarify is that there is an opinion from the Attorney General's
office saying that the director does not have the authority Mr.
Lessmeier has suggested. "Based on his interpretation of some
other section of the statutes, he believe the director has
authority to act on individual acts," Senator Donley said, "but the
administration and the Department of Law disagree with that
analysis and believe the director does not have the authority to
act, and since they are the ones that he has to take the advice
from, he is subject to what the Department of Law says his powers
are." He distributed copies of the attorney general's opinion.
Number 1019
VICE CHAIRMAN HALCRO noted that the director stated in his
testimony that he does have the ability to investigate, and if his
desire is simply to persuade or to mandate that insurance companies
come up with a corrective policy, couldn't that be done on a kind
of a working relationship rather than giving him the ability to
levy fines?
Number 1043
SENATOR DONLEY said the director does have the ability to
investigate. The Division can't do anything about it once they
have investigated. The director doesn't have the authority to take
corrective action regarding individual acts. If he did, "under
this he could issue divisional bulletin saying here's something
that's going on, we want you to not do this any more. As it is
now, he would have to wait until there is a pattern develops and
they can proved that there's a pattern before they can take that
kind of action."
Number 1072
MR. LOHR said he thought Senator Donley had accurately stated:
. . . the record under AS 150 specifically which is one
that State Farm earlier suggested did have single act
authority. The attorney general's office found that it
does not. The pattern of practice is something the
Division really does need to be able to move right now
and a simple investigation taken alone won't solve the
problem. We need to have the teeth their somewhere to
really get the attention. While I think that what Mr.
George said that we do have the respect and the attention
of industry is generally true, that may be far less so
for the problem insurance company. Look what we have as
two paradigms here. One is the rogue regulator, and I
agree that could be a risk; and the other is the rogue
insurance company. So far the movies have tended to
focus on the rogue insurance company, not on the rogue
regulator, and I think there is good reason for that. It
is a much more plausible scenario, and I think given the
opinion of the public about insurance. We want to keep
the reputation of the industry as good as possible. One
way to do that is by weeding out the problem cases early,
dealing with the effectively. That involves teeth beyond
simply the prevention plan that is our first approach,
but it shouldn't stop there.
Number 1137
SENATOR DONLEY noted that the company Mr. Lessmeier represents,
State Farm, has one of the better records of claims as far as
complaints in the state. "If you go to say Progressive Insurance
{Progressive Mutual Insurance Company], the number of complaints
is dramatically different," he said. "There is very different
experience from company to company. He is correct; State Farm has
an excellent record. Some of the other companies do not." [CSSB
177(L&C) was heard and held.]
Number 1162
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at 5:45
p.m.
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