Legislature(1999 - 2000)
01/18/2000 01:35 PM Senate L&C
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SENATE LABOR AND COMMERCE COMMITTEE
January 18, 2000
1:35 p.m.
MEMBERS PRESENT
Senator Jerry Mackie, Chairman
Senator Tim Kelly, Vice Chairman
Senator Dave Donley
Senator Lyman Hoffman
MEMBERS ABSENT
Senator Loren Leman
COMMITTEE CALENDAR
SENATE BILL NO. 177
"An Act relating to insurance trade practices; and providing for an
effective date."
-HEARD AND HELD
SENATE BILL NO. 176
"An Act permitting a physical fitness facility or gymnasium to
limit public accommodation to only males or only females."
-SCHEDULED BUT NOT HEARD
PREVIOUS SENATE COMMITTEE ACTION
SB 177 - No previous Senate action.
SB 176 - See L&C minutes dated 1/13/00.
WITNESS REGISTER
Bob Lohr
Director, Division of Insurance
Department of Community and Economic Development
PO Box 110805
Juneau, AK 99811
POSITION STATEMENT: Supports SB 177
Michael Lessmeier
State Farm Insurance
431 N. Franklin
Juneau, AK 99801
POSITION STATEMENT: Opposes SB 177
John George
National Association Independent Insurers
3328 Fritz Cove Road
Juneau, AK 99801
POSITION STATEMENT: Commented on SB 177
Mike Ford
Attorney, Legislative Legal and Research Services
Terry Miller Legislative Office Building
State Capitol
Juneau, AK 99801
ACTION NARRATIVE
TAPE 00-02, SIDE A
Number 001
CHAIRMAN MACKIE called the Senate Labor and Commerce Committee
meeting to order at 1:35 p.m. Present were Senators Hoffman,
Donley, Tim Kelly, and Mackie, Chair. The first order of business
to come before the committee was SB 176, however Chairman Mackie
announced the prime sponsor was not ready to proceed, therefore the
committee took up SB 177.
SB 177-INSURANCE TRADE PRACTICES & ACTS
SENATOR DONLEY explained that SB 177 makes a series of reforms in
the current Insurance Consumer Protection laws. The Division of
Insurance (DI), under existing law, does not have the authority to
protect individual consumers from individual unfair trade practices
acts or violations of unfair acts by insurance companies. It only
has the authority to intervene on behalf of consumers in Alaska if
there is a pattern of unfair trade practices acts by insurance
companies.
SENATOR DONLEY referred to a handout that compares legislation in a
number of different states and the Insurance Consumer Protection
Act. Many states do have the authority to protect consumers from
unfair trade practices acts but that protection is not available to
Alaskan consumers. Nationally, more evidence is being put forward
about the types of acts that insurance companies are performing to
block legitimate claims. It is in the best interest of an
insurance company to slow down the payment of claims given that
insurance companies can make more money by investing claims while
the company litigates them. Because insurance companies make a
huge amount of their income from investments, it is becoming harder
to get a fair claim settlement. Insurance companies are refusing
to pay claims until claimants threaten to take them to court. The
Division of Insurance should be able to step in when such acts
occur.
SENATOR DONLEY explained that the Alaska statutes require insurance
companies to treat consumers fairly. SB 177 will empower the DI to
protect consumers when it believes something is wrong. Most people
believe the DI already has that power. People are discouraged when
it comes to dealing with insurance companies and need protection
from the DI. It is very difficult to actually prove a pattern of
unfair trade practices acts by the insurance companies.
SENATOR DONLEY noted Section 4 of SB 177 gives people who come
forward with information to the director of DI immunity from
liability. Section 5 applies to both first and third parties;
exceptions are listed in Sections 7 and 11. This bill simply
expands the protections of Sections 7 and 11 to protect third party
claimants as well as first party claimants. First party is the
relationship between the consumer and the insurance companies. A
third party is someone that benefits from the insurance you buy,
someone who has a claim against you. A policy holder's insurance
company handles a claim that has a third party beneficiary.
SENATOR DONLEY pointed out that existing law basically states that
insurance companies cannot offer a claimant less than the amount
the claim is actually worth because it is very hard to actually sue
an insurance company. If that is appropriate for first parties
then it should be made available for third parties as well. If the
insurance company recognizes that a claim is worth a certain
amount, it should be obligated to pay that amount.
Number 686
CHAIRMAN MACKIE asked if the third party will have the right to sue
the insurance company instead of the policy holder. He stated that
under current law one cannot sue an insurance company - the only
option is to sue the insured person.
SENATOR DONLEY explained that a third party should not have to take
a settlement offer from an insurance company that is less than the
actual damages. The legislation only prohibits an insurance
company from offering a lesser amount.
Number 872
CHAIRMAN MACKIE asked Mr. Lohr if a third party can sue the
insurance company directly for the damages owed.
MR. BOB LOHR, Director of the Division of Insurance, replied that
only a first party claimant has the right to sue an insurance
company.
Number 913
SENATOR DONLEY explained that SB 177 is aimed at avoiding abuse by
insurance companies. It gives the power to DI to prevent insurance
companies from offering lower amounts for claims to first and third
party claimants without first finding a pattern of such activities.
He noted the last section of the bill contains a definition of
probable causation. It was added at the recommendation of the DI
to clarify the meaning for insurance policies in Alaska.
Consumers should not have to go through intricate legal arguments
to get insurance companies to pay for damages. Insurance companies
need to act with the DI so they can adjust their rates accordingly.
Number 1240
CHAIRMAN MACKIE asked Senator Donley how often insurance companies
give lesser amounts than the actual damages are worth and what led
him to believe these changes are necessary.
SENATOR DONLEY explained that he hears from a lot of people about
this type of activity going on with insurance companies. Also,
many national articles have appeared, specifically about Allstate,
so it is not just a problem in Alaska. He thought that many claims
are being handled fairly but there are cases in which an insurance
company is not handling claims fairly because it knows that unless
a pattern can be proven there will be no consequence. He repeated
that most consumers in Alaska think they are protected.
Number 1339
MR. LOHR stated the majority of insurers write small numbers of
policies. Alaska's current insurance statute does not grant the
private right of action to victims of abusive practices. Mr. Lohr
referred to O.K. Lumber vs. Providence Washington Insurance
Company, a 1988 Alaska Supreme Court case.
MR. LOHR gave six examples of unfair claims settlement practices
listed in AS 21.36.125: misrepresentation, advertising of
guaranteed association membership, false advertising, listing,
boycott coercion and intimidation, and premium financing. Mr. Lohr
explained that a pattern must be committed so frequently as to
commit malpractice. He said the DI pondered how often the pattern
would have to occur before it can take action. DI worked on AS
21.36.125 between 1984 and 1989 and came to the conclusion that one
percent or more of claims per year are bogus or are not handled
properly. That is a very high threshold to trigger and, to his
knowledge, it has not been triggered by any company in Alaska. DI
believes that Section 125 is not set at a realistic level. The
heart of the issue lies within the language of Section 125. It is
not the role of the DI to penalize honest mistakes.
Number 1648
CHAIRMAN MACKIE asked if SB 177 will give the DI the power to take
action in just one case, instead of several.
Number 1682
MR. LOHR said it would. The insurance consuming public and the
insurer community would benefit by the change in this legislation.
Mr. Lohr then referred to a case entitled, State Farm Insurance
Company v. Bongen, in which a D-9 cat operated on behalf of Kodiak
Electric to clear a right-of-way caused a land slide that damaged a
house.
Number 1850
SENATOR KELLY asked if the insurance company that insured the house
was the same that insured the D-9 Cat and, if not, why the owners
of the house did not sue the D-9 Cat owner.
MR. LOHR explained that the D-9 Cat was operated on behalf of
Kodiak Electric and was clearing a right-of-way on the top of a
hill.
SENATOR KELLY asked if anyone ever paid for damages caused to the
house by the landslide.
MR. LOHR said he is unsure, but there may have been collateral
damages paid.
SENATOR KELLY asked why the home owner did not sue Kodiak Electric.
MR. LOHR named all the parties involved in the case and said the
Supreme Court determined that the earth movement exclusion was
unenforceable.
SENATOR KELLY asked if the insurance policy contained a specific
exclusion for earth movement.
MR. LOHR said it did.
CHAIRMAN MACKIE asked what SB 177 will do to insurance rates.
MR. LOHR said he is unsure but the DI has authority over rate
making for insurance companies. The DI did not see a dramatic
reduction in 1996 when this kind of coverage was added to quite a
few homeowner policies.
Number 2007
SENATOR DONLEY explained contracts of adhesion. In 1996 insurance
companies started adding this adhesion to policies which actually
changed homeowners' policies. The rates were not affected, but the
coverage was significantly reduced by the addition of this specific
clause in the homeowner's policy. Now, more companies are adding
this provision.
Number 2095
MR. LOHR explained that the DI supports what Senator Donley said
about not creating a private cause of action with respect to the
language.
CHAIRMAN MACKIE asked if the DI just needs the authority to cover
the person trying to sue the insurance company, which it cannot do
now.
MR. LOHR said that is correct.
SENATOR HOFFMAN asked Mr. Lohr what he envisions will happen to
insurance rates if this legislation becomes law.
MR. LOHR predicted that it will significantly impact insurance
rates.
SENATOR HOFFMAN asked if there would be a change in litigation.
MR. LOHR said if there is a general ambiguity with respect to
creating private cause of action he believes that could become a
significant industry expense.
Number 2216
CHAIRMAN MACKIE asked if this bill becomes law this year, what will
happen to people who have the exclusion clause in their policies
that may be in effect for two years.
MR. LOHR said he believes that it would actually change within the
policy and the policy would still be effective without writing a
new one.
MR. MIKE FORD, attorney with the Legal Services Division, explained
that a statute deals with those specific issues. If the
Legislature makes a change to insurance laws, the change does not
go into effect until the policy is renewed. It does not effect an
existing policy.
CHAIRMAN MACKIE asked Mr. Ford if it is his interpretation that SB
177 will not have a third party lawsuit ability toward insurance
companies in Alaska.
MR. FORD stated that is correct.
Number 2285
MR. MIKE LESSMEIER, State Farm Insurance Company, explained that he
has concerns about the third party policy. If the committee
decides to carry on with the bill, the language of the bill needs
to be changed or clarified. Mr. Lessmeier gave some statistics on
State Farm Insurance Company claims.
TAPE 00-02, SIDE B
Number 2305
MR. LESSMEIER explained that according to the Division of Insurance
web site's most recent data, in 1997 only 52 complaints were filed
against State Farm. It does not say how many of those complaints
resulted in action by the division. He said, "If we are looking at
changing the statutory scheme in the third party context, we need
to look at the power given to the Director of the Division of
Insurance. I believe that there are already two statutes that give
the division the authority to take action for a single act."
Mr. Lessmeier read from AS 21.36.150.
Procedures as to undefined practices. (a) If the director
believes that a person engaged in the insurance business is
engaging in this state in an unfair method of competition or
in an unfair or deceptive act or practice in the conduct of
the business that is not defined as being unfair or deceptive
under this chapter, the director shall hold a hearing on the
matter, if the director believes it would be in the public
interest to do so after giving notice of the hearing and of
the charges. Upon conclusion of the hearing the director shall
make a written report of the findings of fact relative to the
charges and serve a copy upon the person and any intervenor at
the hearing.
MR. LESSMEIER said the director has the authority to act. If the
act is committed more than once the director does have the power to
take action. He noted that one of the significant things about
the duties that are created in terms of settlement has to do with
duties that are owed to an insured by the insurer and the duties by
the insurer to a third party. The Supreme Court ruled that the
duties between these parties are not the same. The tort reform
legislation that was passed in 1997 changed the law to provide
significant incentives for both sides in litigation to take fair
positions. It created significant penalties for a party who does
not make a responsible litigation decision.
MR. LESSMEIER stated it is not always in the best interest of an
insurance company to pay what a suing party asks for. If that
happens, the insured will have to pay more because the insurance
premiums will ultimately go up. The case that the DI referred to
was a State Farm case. The language that was stated in the State
Farm case has been litigated to make it more clear and less
ambiguous and the new language has been in effect for quite some
time. Now, new language is proposed in SB 177, perhaps with good
intentions, but it is totally different. If the new language is
enacted, it will have to be litigated to find the boundaries. Mr.
Lessmeier reminded the committee that this language appeared before
the Supreme Court. He urged the committee not to overrule what the
Supreme Court turned down.
Number 1864
CHAIRMAN MACKIE asked Mr. Lessmeier what his major objection is to
what Senator Donley is proposing.
MR. LESSMEIER stated that what Senator Donley is proposing would
create additional duties in the regulatory setting to a third
party, duties that an insurance company does not have at this time.
Mr. Lessmeier referred to section 5, page 2, of the bill.
Number 1758
CHAIRMAN MACKIE asked if the new language would give a third party
the power to take action if the case is not fairly handled.
MR. LESSMEIER stated that they already have the power to do that in
AS 21.36.15(a). The director clearly has the power to take action
on a specific act. The definition of a business practice in the
division's own regulations is much more restrictive than one
percent of the claims. It is repeated without reasonable
explanations. An insurance company can make a mistake once and the
division will not sanction it, but the company cannot make the same
mistake twice, or the division will sanction the company for it.
SENATOR DONLEY asked Mr. Lessmeier to be a little more specific as
to what his objection is to the bill. He asked why the Legislature
should not make the language clear that the director has the
authority to take action in a single case.
MR. LESSMEIER referred to the O.K. Lumber case, ruled on by the
Supreme Court and stated the director clearly has the power to
take action for repeated violations of the specific standards
without explanations. He asked why the director needs more
specific power than what the division is granted.
Number 1522
SENATOR KELLY asked if statistics are available for Allstate, State
Farm, and Aetna on the website.
MR. LESSMEIER gave some statistics on Allstate Insurance Company,
State Farm Insurance Company, and Aetna Insurance Company.
SENATOR DONLEY explained that the way the law is now, the director
does not really have the authority to act.
Number 1343
MR. JOHN GEORGE, National Association of Independent Insurers
(NAII), said that he has a unique perspective because he was the
Director for DI from 1984-1988. Mr. George said that not many
people are actually going to agree with an insurance company on
what the claim amount should be. It is hard for the director, or
anyone else, to decide what claim is actually unfair. At some
point some claims must be litigated, that is part of the process of
insurance claims. The DI takes a lot of complaints, and they also
resolve a lot of complaints. The DI may not think it has the
authority that it needs.
CHAIRMAN MACKIE asked the director of DI if he thinks he does have
the power to act on a single case and, if he does not believe that,
why.
MR. LOHR referred to AS 21.36.125 and AS 21.36.150 and stated that
he has talked to the Attorney General's Office who told the DI to
take it easy when it comes to complaints that do not have a pattern
of practice elements.
SENATOR DONLEY referred to section 5 (7).
Number 737
SENATOR KELLY asked if there has to be at least one case of bad
faith.
MR. LOHR said they find hundreds of cases each year that they deal
with in a certain manner. The DI tries to nudge them in the right
direction.
Number 642
CHAIRMAN MACKIE stated it is hard to get a handle on all of the
cases that get turned into the DI. He announced the committee will
be holding this bill so that people can provide some factual
information about the cases themselves.
There being no further testimony, CHAIRMAN MACKIE announced SB 177
would be scheduled for a second hearing. He adjourned the meeting
at 3:02 p.m.
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