Legislature(2007 - 2008)CAPITOL 17

02/11/2008 03:00 PM LABOR & COMMERCE


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03:03:45 PM Start
03:03:59 PM HB357
04:01:33 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 357 CLAIMS AGAINST REAL ESTATE LICENSEES TELECONFERENCED
Heard & Held
Bills Previously Heard/Scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                       February 11, 2008                                                                                        
                           3:03 p.m.                                                                                            
                                                                                                                              
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Kurt Olson, Chair                                                                                                
Representative Mark Neuman, Vice Chair                                                                                          
Representative Carl Gatto                                                                                                       
Representative Gabrielle LeDoux                                                                                                 
Representative Jay Ramras                                                                                                       
Representative Robert L. "Bob" Buch                                                                                             
Representative Berta Gardner                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                              
HOUSE BILL NO. 357                                                                                                              
"An Act requiring errors and  omissions insurance for real estate                                                               
licensees;  renaming the  real  estate surety  fund  as the  real                                                               
estate recovery  fund and relating  to that fund,  and redefining                                                               
the procedures  and criteria used  by the Real  Estate Commission                                                               
to  make an  award from  the fund  to a  person suffering  a loss                                                               
caused by certain misconduct of  real estate licensees; requiring                                                               
a real  estate licensee to maintain  an office in the  state; and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 357                                                                                                                  
SHORT TITLE: CLAIMS AGAINST REAL ESTATE LICENSEES                                                                               
SPONSOR(s): LABOR & COMMERCE BY REQUEST                                                                                         
                                                                                                                                
02/06/08       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/06/08       (H)       L&C, FIN                                                                                               
02/11/08       (H)       L&C AT 3:00 PM CAPITOL 17                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Eleanor Wolfe, Staff                                                                                                            
to Representative Kurt Olson                                                                                                    
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Presented HB  357 on  behalf of  the prime                                                             
sponsor, Representative Kurt Olson.                                                                                             
                                                                                                                                
DAVE FEEKAN, Legislative Chair                                                                                                  
Alaska Association of Realtors                                                                                                  
Kenai, Alaska                                                                                                                   
POSITION STATEMENT:  Testified and answered questions on HB 357.                                                              
                                                                                                                                
JENNIFER STRICKLER, Chief                                                                                                       
Professional Licensing                                                                                                          
Juneau Office                                                                                                                   
Division of Corporations, Business, and Professional Licensing                                                                  
Department  of   Commerce,  Community,  &   Economic  Development                                                               
(DCCED)                                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Testified and answered questions on HB 357.                                                              
                                                                                                                                
JEFFREY TROUTT, Deputy Director                                                                                                 
Juneau Office                                                                                                                   
Division of Insurance                                                                                                           
Department  of   Commerce,  Community,  &   Economic  Development                                                               
(DCCED)                                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Testified and answered questions on HB 357.                                                              
                                                                                                                                
SHARON WALSH, Administrator                                                                                                     
Real Estate Commission                                                                                                          
Anchorage Office                                                                                                                
Division of Corporations, Business, and Professional Licensing                                                                  
Department  of   Commerce,  Community,  &   Economic  Development                                                               
(DCCED)                                                                                                                         
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions on HB 357.                                                                            
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR KURT  OLSON called  the House  Labor and  Commerce Standing                                                             
Committee meeting to order at  3:03:45 PM.  Representatives Buch,                                                             
Gardner, Neuman,  and Olson  were present at  the call  to order.                                                               
Representatives Gatto, LeDoux, and  Ramras arrived as the meeting                                                               
was in progress.                                                                                                                
                                                                                                                                
HB 357-CLAIMS AGAINST REAL ESTATE LICENSEES                                                                                   
                                                                                                                                
3:03:59 PM                                                                                                                    
                                                                                                                                
CHAIR OLSON  announced that the  only order of business  would be                                                               
HOUSE  BILL  NO. 357,  "An  Act  requiring errors  and  omissions                                                               
insurance  for real  estate licensees;  renaming the  real estate                                                               
surety  fund as  the real  estate recovery  fund and  relating to                                                               
that fund,  and redefining  the procedures  and criteria  used by                                                               
the Real  Estate Commission to make  an award from the  fund to a                                                               
person  suffering a  loss caused  by certain  misconduct of  real                                                               
estate licensees;  requiring a real  estate licensee  to maintain                                                               
an office in the state; and providing for an effective date."                                                                   
                                                                                                                                
ELEANOR WOLFE,  Staff to Representative Kurt  Olson, Alaska State                                                               
Legislature, said  that HB 357  was introduced at the  request of                                                               
the Alaska Association  of Realtors.  She  introduced Dave Feekan                                                               
of the Alaska  Association of Realtors to present HB  357 in more                                                               
detail.                                                                                                                         
                                                                                                                                
DAVE FEEKAN,  Legislative Chair, Alaska Association  of Realtors,                                                               
explained that HB 357 would  enact mandatory errors and omissions                                                               
insurance (E&O) for all real  estate licensees and brokers.  This                                                               
bill  would also  change the  current surety  fund to  a recovery                                                               
fund.   The E&O insurance  that would  be required is  similar to                                                               
professional  liability insurance  in that  it covers  clients in                                                               
the  event of  honest mistakes  and  negligent errors  in a  real                                                               
estate  transaction.   Currently, voluntary  E&O coverage  covers                                                               
licensees  and brokers  that have  purchased insurance.   In  all                                                               
other   cases,  claims   are  made   against   the  surety   fund                                                               
administered by  the Alaska Real  Estate Commission (AREC).   The                                                               
surety fund  system has been  in place  for 25 years  with little                                                               
modification, except that in 2004  the limit for claims increased                                                               
from  $10,000 to  $15,000.    The real  estate  industry and  the                                                               
Legislative Budget  and Audit Division  (LB&A) have  analyzed how                                                               
the surety  fund system  works.   The $15,000  limit needs  to be                                                               
increased due to  the cost of repairs that have  risen along with                                                               
property  values, he  opined.   Additionally,  the  high cost  of                                                               
administrative hearings,  along with  legal expenses  for brokers                                                               
and  licensees,  has  resulted in  many  frivolous  claims  being                                                               
settled unnecessarily.  The purpose of  HB 357 is to help protect                                                               
the  public  by  requiring  every   real  estate  transaction  be                                                               
covered,  not  just  those  instances  in  which  the  agent  has                                                               
voluntarily purchased E&O insurance.                                                                                            
                                                                                                                                
3:06:42 PM                                                                                                                    
                                                                                                                                
MR. FEEKAN  explained that HB  357 would require the  Alaska Real                                                               
Estate Commission  (AREC) to make  certain that E&O  insurance is                                                               
available at a  reasonable rate to all licensees.   Licensees can                                                               
obtain their  own insurance  so long as  the E&O  insurance meets                                                               
the minimum threshold  amount set by the commission.   Errors and                                                               
omissions insurance does not  provide protection against criminal                                                               
acts such  as fraud or conversion  of trust.  Thus,  HB 357 would                                                               
convert the existing  surety fund to a recovery  fund and require                                                               
claims be  processed through the  recovery fund.  According  to a                                                               
2004  National  Association of  Realtors  study,  13 states  have                                                               
already  adopted  mandatory  E&O  insurance  with  a  68  percent                                                               
approval by licensees and a  89 percent approval of regulators in                                                               
those states.                                                                                                                   
                                                                                                                                
3:07:14 PM                                                                                                                    
                                                                                                                                
MR. FEEKAN,  in response to Representative  Neuman, answered that                                                               
approximately 25 percent of the  brokerage firms do not currently                                                               
have E&O insurance.   The average cost of  E&O insurance premiums                                                               
written on  a per broker  basis range  from $1,000 to  $2,000 per                                                               
licensee, he  said.  The reason  some firms do not  carry the E&O                                                               
insurance is  because it  is expensive.   Of  the 13  states that                                                               
require mandatory  E&O insurance,  most set limits  for insurance                                                               
coverage at  $100,000 with a  $1,000 deductible.   Premiums range                                                               
from $135 to $243 per year  for a $100,000 policy.  His brokerage                                                               
firm  pays $2,000  for $1,000,000  insurance policy  coverage for                                                               
its policy,  which is comparable  to paying $200 for  $100,000 in                                                               
coverage, he  noted.  One  company provides the E&O  insurance to                                                               
all 13  states surveyed.   Brokers can upgrade their  policies to                                                               
provide  coverage  for  other  items   such  as  protection  from                                                               
discrimination  suits.    The  primary   goal  of  mandatory  E&O                                                               
insurance is to ensure that  all licensees are insured to provide                                                               
consumer protection.                                                                                                            
                                                                                                                                
3:10:27 PM                                                                                                                    
                                                                                                                                
MR.  FEEKAN, in  response to  Chair Olson,  answered that  adding                                                               
items  to  the  E&O  insurance  policy  generally  increases  the                                                               
deductible amount.                                                                                                              
                                                                                                                                
3:11:23 PM                                                                                                                    
                                                                                                                                
MR.  FEEKAN, in  response  to  Representative Gardner,  explained                                                               
that insurance is  written to the broker.  This  bill would allow                                                               
licensees to  form a group  and purchase  a group policy  for E&O                                                               
insurance in order to reduce the  premium.  This bill still would                                                               
allow  an individual  licensee the  option of  purchasing his/her                                                               
own policy.   In further response to  Representative Gardner, Mr.                                                               
Feekan noted that  the terminology has been  changed from "agent"                                                               
to "licensee".   This bill was  patterned after Idaho's law.   In                                                               
Idaho, 25 percent  of the brokers have decided  to maintain their                                                               
current E&O insurance policies, he  noted.  Under HB 357, brokers                                                               
could continue with their insurance  and provide a certificate of                                                               
insurance  for any  licensee in  the firm  so that  all licensees                                                               
within the brokerage firm are covered.                                                                                          
                                                                                                                                
3:12:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER inquired as to  whether HB 357 would shift                                                               
the burden to purchase and  maintain insurance from the brokerage                                                               
firm to the individual licensee.                                                                                                
                                                                                                                                
MR.  FEEKAN   said  that  currently,  brokers   acquire  the  E&O                                                               
insurance,  but pass  the cost  on to  the licensees  as part  of                                                               
their  monthly  realtor fees.    He  reported  that most  of  the                                                               
brokers he  polled advised they  would not use the  proposed AREC                                                               
E&O insurance  unless the policy  offers $1 million  in insurance                                                               
coverage.   He  explained that  the difference  between a  surety                                                               
fund and  a recovery fund  is that a  surety fund does  not cover                                                               
acts of crime  such as fraud, deceit, or  misrepresentation.  The                                                               
most  common conversion  of trust  claim is  due to  broker theft                                                               
from the trust  account, he noted.  The surety  fund requires the                                                               
parties  submit to  an administrative  hearing  process.   Alaska                                                               
currently has  a high number  of frivolous claims in  the process                                                               
of  administrative  hearings.    Other  states  have  gone  to  a                                                               
recovery fund for  similar reasons, he opined.  Under  HB 357, an                                                               
individual must have a court ordered  judgment in order to make a                                                               
claim  for  reimbursement  from the  recovery  fund  which  would                                                               
eliminate  administrative hearings  for those  matters, he  said.                                                               
The bill also  requires that the judgment  must be uncollectible,                                                               
which  means the  court  found the  action  constituted a  crime.                                                               
Finally, in  order to qualify to  use the recovery fund  under HB                                                               
357, the  person must be licensed  by the board as  a real estate                                                               
licensee, which means there was a license violation involved.                                                                   
                                                                                                                                
3:15:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX noted her  agreement that the $15,000 claim                                                               
limit is set  too low in proposed AS 08.88.465(a).   She inquired                                                               
as to  whether the amount in  the surety or recovery  fund should                                                               
also be increased.                                                                                                              
                                                                                                                                
MR. FEEKAN answered that the  majority of claims are for property                                                               
conditions and not  fraud, deceit, or conversion of  trust so the                                                               
$100,000  limit is  adequate to  cover most  claims.   He related                                                               
that most claims average from  $7,000-$10,000 for items such as a                                                               
leaky roof that had not been   disclosed.  The surety fund covers                                                               
issues  of conversion  of trust  such as  not refunding  security                                                               
deposits, or theft  from the trust account,  which typically fall                                                               
well within the $15,000 limit.   He offered that no acts of fraud                                                               
were discovered  in his  research, although  there could  be some                                                               
cases.                                                                                                                          
                                                                                                                                
3:17:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX posed  a scenario in which  a broker states                                                               
that a  roof was  inspected, but the  buyer later  discovers that                                                               
the  roof  leaks.    She   inquired  as  to  whether  that  would                                                               
constitute fraud.                                                                                                               
                                                                                                                                
MR. FEEKAN  answered that Representative LeDoux's  scenario might                                                               
constitute  a case  of fraud  against the  licensee, but  in real                                                               
estate transactions those types  of claims constitute negligence,                                                               
which is covered under E&O insurance.                                                                                           
                                                                                                                                
3:18:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   LEDOUX   maintained   her   concern   that   the                                                               
surety/recovery fund limits are set too low in HB 357.                                                                          
                                                                                                                                
MR.  FEEKAN  answered  that  the   surety  fund  is  funded  from                                                               
licensees' fees.   Thus,  increasing the  fund limits  would also                                                               
increase  the   real  estate  licensees'  fees   to  a  threshold                                                               
potentially  not affordable  by  a high  percentage  of them,  he                                                               
opined.                                                                                                                         
                                                                                                                                
CHAIR OLSON offered that typically  a new program uses an average                                                               
cost as  a starting point.   He offered that  in the case  of the                                                               
recovery fund proposed in HB  357, the claims have generally been                                                               
considerably  less than  $15,000 for  the surety  fund.   If that                                                               
amount   isn't  adequate   to  fund   the  recovery   fund,  [the                                                               
legislature] could increase the limit, he offered.                                                                              
                                                                                                                                
3:19:38 PM                                                                                                                    
                                                                                                                                
MR. FEEKAN,  in response to Representative  LeDoux, answered that                                                               
the  average  surety  fund claim  has  been  substantially  below                                                               
$10,000,  but  occasionally a  claim  might  reach $15,000.    He                                                               
further explained that  a surety fund does not provide  a form of                                                               
insurance for the licensee.                                                                                                     
                                                                                                                                
REPRESENTATIVE LEDOUX inquired as to  whether a surety fund could                                                               
get insured if claims were to exceed $15,000.                                                                                   
                                                                                                                                
CHAIR  OLSON  offered  that  HB  357 sets  up  an  E&O  insurance                                                               
program, but  the recovery  fund is  a collateral  program within                                                               
the bill.                                                                                                                       
                                                                                                                                
REPRESENTATIVE LEDOUX  maintained her concern that  since $15,000                                                               
is currently  not adequate  to cover claims  in the  surety fund,                                                               
that HB 357 will not rectify the problem.                                                                                       
                                                                                                                                
MR. FEEKAN opined that the  insurance industry believes requiring                                                               
mandatory E&O insurance will remedy  many of the issues facing it                                                               
since  most claims  are made  against the  E&O insurance.   Thus,                                                               
requiring a  minimum of $100,000  E&O insurance, as  other states                                                               
have done, should  remedy the matter.  Another  approach that the                                                               
insurance industry could  take would be to  increase license fees                                                               
in order  to increase the  surety/recovery fund.  He  opined that                                                               
raising  the  license  fees  would  cost  real  estate  licensees                                                               
considerably  more  than the  proposed  $200  premium annual  fee                                                               
proposed in HB 357.                                                                                                             
                                                                                                                                
3:22:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  NEUMAN referred  to  a  committee packet  handout                                                               
titled,  "Mandated  Program Chart  as  of  January 1,  2008"  and                                                               
inquired as  to the  amount projected for  Alaska as  compared to                                                               
the other states listed.                                                                                                        
                                                                                                                                
MR. FEEKAN reiterated  the claim limit for most states  is set at                                                               
$100,000  per claim.    The aggregate  claim  amount varies  from                                                               
$300,000 to $500,000, except that  Kentucky's aggregate is set at                                                               
$1 million.   Alaska's aggregate would likely be  set at $300,000                                                               
to  $500,000, he  opined.    He referred  to  the column  labeled                                                               
"Deductible" and  said that $1,000  damages means  the deductible                                                               
is set  at $1,000 and  "0 defense"  means there is  a zero-dollar                                                               
defense.    In further  response  to  Representative Neuman,  Mr.                                                               
Feekan pointed  out that an  individual licensee's  premium would                                                               
cost approximately $200 per year  and the broker's premiums would                                                               
cost  $2,000  per  year  for   $1  million  of  insurance  policy                                                               
coverage.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  NEUMAN offered  his understanding  that an  agent                                                               
would  pay a  $200 annual  premium to  cover unexpected  problems                                                               
that may arise  in a real estate transaction.   If an issue arose                                                               
that the agent did not know  existed, the repair would be covered                                                               
under the agent's E&O insurance, he said.                                                                                       
                                                                                                                                
MR. FEEKAN noted his agreement.                                                                                                 
                                                                                                                                
3:25:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO  inquired  as   to  whether  the  agent  is                                                               
responsible  for repairs  such  as a  cracked  foundation if  the                                                               
owner  hires a  home inspector  whose report  concludes that  the                                                               
foundation is sound.                                                                                                            
                                                                                                                                
MR. FEEKAN  answered that  the licensee or  broker would  have to                                                               
have had knowledge of the cracked  foundation.  He noted that E&O                                                               
insurance covers items that the  licensee is not aware or matters                                                               
that  the licensee  should have  known.   In further  response to                                                               
Representative Gatto, Mr.  Feekan noted that Alaska  law does not                                                               
require real estate  agents to perform discovery so  it would not                                                               
be the agent's duty to find the cracked foundation.                                                                             
                                                                                                                                
CHAIR  OLSON  pointed out  that  generally  an agent  will  refer                                                               
owners to a list of home  inspectors and the owner can select one                                                               
to perform the work.                                                                                                            
                                                                                                                                
MR.  FEEKAN  noted  his  agreement and  added  that  brokers  and                                                               
licensees  often  recommend  home  inspectors  and  engineers  be                                                               
consulted to provide their expertise to the buyer or seller.                                                                    
                                                                                                                                
3:27:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER inquired  as to  whether the  shift to  a                                                               
recovery  fund,  which would  require  consumers  that have  been                                                               
defrauded to seek  a court judgment, will  also create additional                                                               
expenses for the consumer.                                                                                                      
                                                                                                                                
MR. FEEKAN  answered that  a consumer  is not  required to  go to                                                               
court.  However,  the real estate licensee is  required under the                                                               
E&O policy to notify the E&O  insurance company when a client has                                                               
a problem.   The process used is that the  client will notify the                                                               
broker when  he/she discovers a  problem and the  broker notifies                                                               
the E&O  company.   The E&O  investigator would  then investigate                                                               
the claim.  However, the  insurance company will often attempt to                                                               
settle  the claim  outside  of  court.   In  further response  to                                                               
Representative  Gardner, Mr.  Feekan noted  that most  E&O claims                                                               
that  consumers  consider to  be  fraud  are actually  considered                                                               
negligence in the real estate  industry and are covered under the                                                               
E&O policy.   "Fraud is something extremely  difficult to prove",                                                               
he said.                                                                                                                        
                                                                                                                                
CHAIR  OLSON  offered  that  oftentimes   it  is  easier  for  an                                                               
insurance company to  settle nuisance claims out  of court rather                                                               
than incur legal expenses.                                                                                                      
                                                                                                                                
3:29:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER   offered  her  understanding   that  the                                                               
difference  between the  surety  fund and  the proposed  recovery                                                               
fund  is that  a recovery  fund requires  an uncollectible  court                                                               
judgment that has not been covered by E&O insurance.                                                                            
                                                                                                                                
MR. FEEKAN responded that many  claims allege that a criminal act                                                               
like fraud  has been committed  in order  to get the  claim heard                                                               
before an administrative law judge.   The broker prevails most of                                                               
the  time when  they oppose  the claim,  he opined.   He  further                                                               
opined that  the surety fund rarely  pays out.  Thus,  to require                                                               
claims  to   be  uncollectible   judgments  tends   to  eliminate                                                               
frivolous lawsuits.                                                                                                             
                                                                                                                                
REPRESENTATIVE GARDNER asked whether  the proposed solution would                                                               
add cost and delay to the consumer with a legitimate claim.                                                                     
                                                                                                                                
MR. FEEKAN answered  that the claim process that  the E&O company                                                               
uses  is to  first investigate  the case  and determine  that the                                                               
claim  is not  covered by  the policy  since the  act constitutes                                                               
fraud.                                                                                                                          
                                                                                                                                
3:31:53 PM                                                                                                                    
                                                                                                                                
MR. FEEKAN,  in response to Representative  Gardner, advised that                                                               
the consumer  is made  aware from the  outset that  E&O insurance                                                               
does not  cover claims based  on fraud.   In further  response to                                                               
Representative Gardner,  Mr. Feekan reaffirmed  his understanding                                                               
that the  consumer would get  a copy of  the denial.   He offered                                                               
that the E&O insurance company could  decide to pay the claim and                                                               
then attempt to collect the claim from the licensee.                                                                            
                                                                                                                                
CHAIR OLSON confirmed  that the consumer would receive  a copy of                                                               
the denial in  writing from the E&O insurance  company because it                                                               
would constitute bad  faith on the part of  the insurance company                                                               
if it did not do so.                                                                                                            
                                                                                                                                
MR.  FEEKAN  noted  his  agreement  that  all  parties  would  be                                                               
notified of the outcome on a claim.                                                                                             
                                                                                                                                
3:33:03 PM                                                                                                                    
                                                                                                                                
MR. FEEKAN,  in response to Representative  Neuman, answered that                                                               
the   findings  and   recommendations   from   the  Division   of                                                               
Legislative Budget  and Audit (LB&A)  from the audit of  the AREC                                                               
were  incorporated  into   HB  357.    In   further  response  to                                                               
Representative  Neuman, Mr.  Feekan offered  that the  last audit                                                               
conducted by LB&A in 2004  on the AREC made recommendations which                                                               
were  carried forward  to  the  most recent  audit  of the  AREC.                                                               
Therefore,  the  industry is  attempting  to  address the  issues                                                               
raised by LB&A in HB 357.                                                                                                       
                                                                                                                                
3:34:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  LEDOUX  expressed  concern   that  a  jury  trial                                                               
process  would take  longer to  complete  than an  administrative                                                               
hearing.                                                                                                                        
                                                                                                                                
MR. FEEKAN  answered that  a claim against  the surety  fund uses                                                               
the  same  process  of  hiring  attorneys  in  an  administrative                                                               
hearing as a jury trial would.                                                                                                  
                                                                                                                                
REPRESENTATIVE  LEDOUX  maintained  her  concern,  based  on  her                                                               
experience,  that a  trial would  take longer  from inception  to                                                               
judgment than an administrative hearing.   She inquired as to the                                                               
length of time  for an administrative hearing  involving a surety                                                               
fund dispute.                                                                                                                   
                                                                                                                                
MR.  FEEKAN  responded  that  the   process  is  required  to  be                                                               
completed in 120 days.                                                                                                          
                                                                                                                                
REPRESENTATIVE  LEDOUX opined  that 120  days is  a "drop  in the                                                               
bucket" in terms of a jury trial.                                                                                               
                                                                                                                                
MR.  FEEKAN noted  that  attorneys he  polled  who practice  real                                                               
estate law said  the reason that they do not  use the surety fund                                                               
as a remedy is due to  the limit of $15,000 coverage; the damages                                                               
are generally  higher than the  limit and there is  no settlement                                                               
process.   The  purpose  of  the surety  fund  is  for fraud  and                                                               
deceit, he noted.   He further opined that  most attorneys prefer                                                               
to file an E&O insurance  claim since legitimate claims generally                                                               
settle out of court.                                                                                                            
                                                                                                                                
3:37:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX  noted that  there is a  difference between                                                               
legitimate  claims and  small claims  actions.   She pointed  out                                                               
that it  is possible to be  defrauded for an amount  ranging from                                                               
$5,000 to  $10,000, which may appear  to be a nuisance  suit, but                                                               
actually is legitimate,  but of a small nature.   She opined that                                                               
a court case ranging from $5,000  to $10,000 could take up to two                                                               
years to obtain a judgment.   Once the court action is completed,                                                               
the parties would still need to file with the surety fund.                                                                      
                                                                                                                                
3:37:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER pointed  out  that  the proposed  statute                                                               
requires  that a  case  must be  filed within  two  years of  the                                                               
knowledge of the fraud.                                                                                                         
                                                                                                                                
MR. FEEKAN noted  his agreement that the surety  fund or recovery                                                               
fund both would have a two-year  statute of limitations.  He said                                                               
he could  not recollect  any instance  in which  a broker  took a                                                               
case  to small  claims court.   Instead,  these cases  are claims                                                               
brought against the E&O insurance company, he specified.                                                                        
                                                                                                                                
3:38:48 PM                                                                                                                    
                                                                                                                                
MR.  FEEKAN, in  response to  Representative LeDoux,  agreed that                                                               
there are  numerous cases  brought against  the surety  fund that                                                               
claim  fraud.   However, the  majority of  these cases  stem from                                                               
problems  with  the  property  that were  not  disclosed  by  the                                                               
seller.                                                                                                                         
                                                                                                                                
3:39:47 PM                                                                                                                    
                                                                                                                                
JENNIFER  STRICKLER, Chief,  Professional Licensing,  Division of                                                               
Corporations,  Business,   and  Professional   Licensing,  Juneau                                                               
Office,   Department   of   Commerce,   Community,   &   Economic                                                               
Development (DCCED),  said that  the division  generally supports                                                               
reform of the surety fund  and concurs with the recommendation of                                                               
the  September  7, 2007,  LB&A  audit  that  the AREC  should  be                                                               
extended  until 2016.    The division  also  agrees that  certain                                                               
aspects of  the surety  fund should  be changed.   This  bill, as                                                               
currently drafted,  would establish  mandatory E&O  insurance for                                                               
all  real  estate  licensees.    The  Division  of  Corporations,                                                               
Business,  and   Professional  Licensing  has  worked   with  the                                                               
Division of  Insurance on the  issues of requiring  mandatory E&O                                                               
coverage for real estate licensees  and recommends that HB 357 be                                                               
amended.                                                                                                                        
                                                                                                                                
MS.  STRICKLER referred  to proposed  AS 08.88.071(a)(11),  which                                                               
read:                                                                                                                           
                                                                                                                                
      establish the minimum terms and conditions of errors                                                                      
     and omissions coverage required by licensees to comply                                                                     
     with  the  insurance   requirements  of  AS  08.88.172,                                                                    
     including  coverage requirements,  limits of  coverage,                                                                    
     deductible  amounts,  and limitations  on  cancellation                                                                    
     terms;                                                                                                                     
                                                                                                                                
MS.  STRICKLER  expressed  concern  that  AREC  is  a  regulatory                                                               
licensing entity  not equipped  to establish  insurance coverage.                                                               
Instead, she  offered that the  Division of Insurance would  be a                                                               
more appropriate  entity.  Other professional  licensing programs                                                               
that  require insurance  coverage have  parameters identified  in                                                               
statute,  such  as  construction   contractors.    Ms.  Strickler                                                               
pointed out  that proposed AS 08.88.071(a)(12)  would require the                                                               
AREC  to procure  and make  available E&O  insurance policies  to                                                               
licensees through  the bidding  process.   However, the  AREC may                                                               
not be the appropriate entity  to procure and administer coverage                                                               
and the  AREC should  not be  engaged in  promoting the  sales of                                                               
insurance.   Proposed AS 08.88.172(c)  would allow  an individual                                                               
to independently obtain E&O insurance  coverage that the division                                                               
deems  is  appropriate.   However,  the  licensees E&O  insurance                                                               
coverage should not  be subject to the  parameters established by                                                               
AREC.    She  pointed  out  that HB  357  does  not  provide  any                                                               
alternative  for   licensees  who   are  unable  to   obtain  E&O                                                               
insurance.   Further,  she questioned  whether the  recovery fund                                                               
should  be  made   available  to  those  unable   to  obtain  E&O                                                               
insurance.    She  acknowledged  that  this  type  of  system  is                                                               
currently  used  by  other  states.     Thus,  the  division  has                                                               
contacted  Idaho with  respect to  the program.   She  offered to                                                               
work with  industry and the  legislature to address  the concerns                                                               
the  division has  with HB  357.   In  response to  a request  by                                                               
Representative  Gardner,  Ms.  Strickler   offered  to  make  her                                                               
written testimony available to committee members.                                                                               
                                                                                                                                
3:43:30 PM                                                                                                                    
                                                                                                                                
JEFFREY  TROUTT,  Deputy  Director, Juneau  Office,  Division  of                                                               
Insurance,   Department  of   Commerce,  Community,   &  Economic                                                               
Development  (DCCED),  for  the  record,  disclosed  that  he  is                                                               
married  to a  realtor.   He  related that  the  division has  no                                                               
objection to mandatory E&O for  licensees.  However, the division                                                               
is concerned  that mandatory E&O  insurance may not  be available                                                               
at the rate  stated for premiums of $200 annually.   The division                                                               
would  like  the opportunity  to  examine  E&O policy  rates  and                                                               
whether the  proposed policy  limit of $100,000  is set  too low.                                                               
He  noted  that  the  remedy   for  repairs  such  as  a  cracked                                                               
foundation may be  more costly than the limit.   The division has                                                               
concern  about  the  availability  of  an  insurance  carrier  to                                                               
provide  affordable E&O  insurance.   Even if  a company  were to                                                               
offer  E&O  insurance, the  division  is  concerned whether  that                                                               
company will  always do business  in the  state.  He  pointed out                                                               
that the  division can solicit  for companies to provide  the E&O                                                               
insurance, but  the division  cannot force  a company  to provide                                                               
E&O  insurance to  all  licensees.   If  mandatory E&O  insurance                                                               
isn't  affordable, a  real estate  licensee  may not  be able  to                                                               
renew his/her real estate license.   He offered his understanding                                                               
that an  amendment may be  under consideration that  will address                                                               
that issue.   He questioned whether  the AREC would also  need to                                                               
obtain a  license in order  to procure  insurance.  He  closed by                                                               
noting the division's intent to  perform due diligence and garner                                                               
enough information to  provide answers to some of  the issues the                                                               
division currently has with HB 357.                                                                                             
                                                                                                                                
3:48:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  inquired as to  why a real  estate broker                                                               
or licensee is required to have a principal office in the state.                                                                
                                                                                                                                
CHAIR OLSON  answered that  the provision  is in  HB 357  so that                                                               
out-of-state firms will not obtain  licensure in the state simply                                                               
as  it would  cost  less to  set  up a  real  estate business  or                                                               
because the  agents can no longer  work in their home  state [due                                                               
to disciplinary action taken].                                                                                                  
                                                                                                                                
REPRESENTATIVE  GARDNER further  inquired  as to  whether a  real                                                               
estate licensee  must work under  a broker since  the requirement                                                               
for licensure is mandatory insurance.                                                                                           
                                                                                                                                
MR.  TROUTT answered  that under  the bill,  a real  estate agent                                                               
would be required  to obtain E&O insurance.  He  related that the                                                               
prospective  realtor could  begin  work in  a  brokerage firm  to                                                               
become  familiar  with  the  real  estate  laws.    He/she  could                                                               
concurrently apply  for E&O insurance  while his/her  real estate                                                               
application is processed.                                                                                                       
                                                                                                                                
3:51:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  expressed concern that a  person would be                                                               
prevented from selling  real estate if he/she was  denied the E&O                                                               
insurance.                                                                                                                      
                                                                                                                                
MR. TROUTT noted his agreement.   He offered that the Division of                                                               
Insurance shares the same concern with HB 357.                                                                                  
                                                                                                                                
3:51:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO offered his  understanding that mobile homes                                                               
are considered  personal property,  but not  real property.   The                                                               
LB&A  audit findings  and recommendations  suggested mobile  home                                                               
transactions  should be  eligible  under the  Real Estate  Surety                                                               
Fund (RESF).                                                                                                                    
                                                                                                                                
MS. STRICKLER related that the  AREC discussed that specific LB&A                                                               
recommendation.    The  AREC  maintains  that  mobile  homes  are                                                               
personal property.   She acknowledged that the  AREC and division                                                               
are at odds with that specific LB&A recommendation.                                                                             
                                                                                                                                
3:52:23 PM                                                                                                                    
                                                                                                                                
SHARON WALSH,  Administrator, AREC Anchorage Office,  Division of                                                               
Corporations,  Business, and  Professional Licensing,  Department                                                               
of  Commerce, Community,  &  Economic  Development (DCCED),  said                                                               
that  the  AREC maintains  its  position  that mobile  homes  are                                                               
personal property and disagrees  with the LBA recommendation that                                                               
mobile homes  be subject  to RESF claims  and be  considered real                                                               
property.                                                                                                                       
                                                                                                                                
REPRESENTATIVE GATTO  noted his  agreement that mobile  homes are                                                               
personal property.   However, he pointed out that  the LB&A audit                                                               
recommends amending statutes to  specify mobile home transactions                                                               
be subject to RESF claims.                                                                                                      
                                                                                                                                
MR. TROUTT  inquired as to  whether a  mobile home attached  to a                                                               
foundation is considered real property.                                                                                         
                                                                                                                                
MR. FEEKAN answered that mobile  home transactions do not require                                                               
the involvement  of licensed real  estate agents unless  the sale                                                               
includes real property.                                                                                                         
                                                                                                                                
REPRESENTATIVE  NEUMAN agreed  that  sometimes  mobile homes  are                                                               
located on a parcel of land connected to water and sewer.                                                                       
                                                                                                                                
3:55:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE LEDOUX  inquired as to  whether an office  with no                                                               
staff constitutes a principal office.                                                                                           
                                                                                                                                
MR. TROUTT opined that a principal  office for real estate is not                                                               
in operation unless there is staff.                                                                                             
                                                                                                                                
REPRESENTATIVE  LEDOUX  further  inquired  as  to  the  rationale                                                               
behind requiring  a physical  office in the  state.   She pointed                                                               
out that  a Washington lawyer  is eligible to practice  in Alaska                                                               
so long as he/she passes the  bar examination and meets the other                                                               
requirements for licensure.                                                                                                     
                                                                                                                                
MR.  FEEKAN  answered that  a  real  estate  broker must  have  a                                                               
physical office  in the state and  not a cyber office.   The AREC                                                               
has established  requirements for recordkeeping,  trust accounts,                                                               
and  most statutes  [for other  professions]  require a  physical                                                               
office in the state in order  to operate, he offered.  In further                                                               
response to  Representative LeDoux,  Mr. Feekan answered  that an                                                               
office provides a physical place for  the public to meet with the                                                               
licensed broker or realtor.                                                                                                     
                                                                                                                                
REPRESENTATIVE GATTO pointed out  that otherwise someone could be                                                               
offering a real estate transaction,  but be physically located in                                                               
other countries such as Pakistan.                                                                                               
                                                                                                                                
3:58:31 PM                                                                                                                    
                                                                                                                                
CHAIR OLSON,  in response to Representative  LeDoux, offered that                                                               
one  added protection  to  the  public is  that  lawyers must  be                                                               
admitted to the bar.                                                                                                            
                                                                                                                                
MR.  FEEKAN  specified  that  real  estate  brokers  that  employ                                                               
licensees must have a "brick and  stone facility" in the state in                                                               
order for  the broker to  operate, the  public to visit,  and the                                                               
AREC to inspect records.                                                                                                        
                                                                                                                                
3:59:54 PM                                                                                                                    
                                                                                                                                
MR.  TROUTT  speculated  that  an  attorney  is  subject  to  the                                                               
jurisdiction  of the  court  in Alaska,  but  single real  estate                                                               
transactions may  not require enough personal  contact to warrant                                                               
personal jurisdiction.  However, a  building would provide a more                                                               
solid jurisdictional foundation.                                                                                                
                                                                                                                                
REPRESENTATIVE   LEDOUX   maintained   her   concern   with   the                                                               
requirement in HB 357 for a  broker to maintain a physical office                                                               
in the state.                                                                                                                   
                                                                                                                                
MR. FEEKAN, in response to  Representative Gardner, answered that                                                               
a person  could obtain  a loan  on a mobile  home, but  could not                                                               
obtain a  mortgage on  a mobile home  unless the  transaction was                                                               
for real property.                                                                                                              
                                                                                                                                
[HB 357 was held over.]                                                                                                         
                                                                                                                                
                                                                                                                                
4:01:33 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
There being no further business before the committee, the House                                                                 
Labor and Commerce Standing Committee meeting was adjourned at                                                                  
4:01 p.m.                                                                                                                       
                                                                                                                                

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