Legislature(1999 - 2000)
02/29/2000 01:40 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE LABOR AND COMMERCE COMMITTEE
February 29, 2000
1:40 P.M.
MEMBERS PRESENT
Senator Jerry Mackie, Chairman
Senator Tim Kelly, Vice Chairman
Senator Dave Donley
Senator Loren Leman
Senator Lyman Hoffman
MEMBERS ABSENT
All Members Present
COMMITTEE CALENDAR
SENATE BILL NO. 177
"An Act relating to insurance trade practices; and providing for an
effective date."
-MOVED CSSB 177(L&C) OUT OF COMMITTEE
SENATE BILL NO. 279
"An Act relating to the redemption of shares of certain Alaska
corporations."
-SCHEDULED BUT NOT HEARD
PREVIOUS SENATE COMMITTEE ACTION
SB 177 - See Labor and Commerce Committee minutes dated 1/18/00.
SB 279 - No previous action to record.
WITNESS REGISTER
Mr. Bob Lohr, Director
Division of Insurance
Department of Community and Economic Development
P.O. Box 110805
Juneau, AK 99811
POSITION STATEMENT: Available to answer questions on SB 177.
Mr. Michael Lessmeier
State Farm Insurance
431 N. Franklin, Suite 400
Juneau, AK 99801
POSITION STATEMENT: Opposed to SB 177.
MR. John George
National Association of Independent Insurers
3328 Fritz Cove Rd.
Juneau, AK 99801
POSITION STATEMENT: Opposed SB 177.
Ms. Virginia Rusch, Assistant Attorney General
Division of Fair Business Practices
1031 W 4th Ave., Suite 200
Anchorage, AK 99501
POSITION STATEMENT: Answered questions regarding SB 177.
Mr. Mike Schneider
880 N St. #202
Anchorage, AK 99501
POSITION STATEMENT: Supported SB 177.
Ms. Jan Bouch
P.O. Box 102323
Anchorage, AK 99510
POSITION STATEMENT: Supported SB 177.
ACTION NARRATIVE
TAPE 00-05, SIDE A
Number 001
SB 177-INSURANCE TRADE PRACTICES & ACTS
CHAIRMAN MACKIE called the Senate Labor and Commerce Committee
meeting to order at 1:40 p.m. and announced SB 177 to be up for
consideration. He said there was some concern in dealings by third
party claimants that needed to be clarified. Senator Donley was
going to work with the insurance industry to see if they could put
something together.
SENATOR DONLEY said he had a proposed CS. In the last meeting
there was testimony from some of the insurers saying that the
Division of Insurance already had the authority to deal with these
types of issues. The Attorney General's opinion (in their packets)
supported the Director of the Division of Insurance that it doesn't
have that authority now. This legislation would give them that
authority.
Whether there could be third party litigation is resolved in a new
section 6 which makes it very clear that the changes would not
create a private cause of action against an insurer by a third
party claimant.
A third question was regarding a fear of some in the industry that
if you empowered the Division of Insurance to investigate
individual acts, would they levy overzealous fines for individual
acts that were violations of the trade practices. Section 8 deals
with this by adding language that makes it clear that one of the
factors the director would consider when deciding whether to levy
a fine for a violation was whether or not the it was a single act
or trade practice.
SENATOR DONLEY moved to adopt the CS 1LS0902H/Ford 2/21/00. There
were no objections and it was so ordered.
SENATOR LEMAN asked regarding section 6 where it says these
provisions do not create a private cause of action against an
insurer by "a third party claimant". He said that everywhere else
it says "by an insured or a third party claimant." He assumed this
does not intend to protect against a creation of a private cause of
action against an insurer by an insured. He asked if they
intentionally left out "insured" and what was the reason.
Number 367
SENATOR DONLEY replied that the only two sections of the Claims
Practices Act they are amending to add third party claimants to are
subsections 7 and 11. They currently only apply to first party
insureds and not the third party. Section 6 specifies that in
those two sections that change does not create a third party
claimant action. Those are the only two changes they are making to
the status quo.
MR. MICHAEL LESSMEIER, State Farm Insurance, said he thought the CS
made things worse, not better. It creates the very real
possibility that what's being done by this legislature is to create
a new private civil cause of action that was never intended by this
act. The reason he feels so strongly is that it's not just the two
provisions referenced by Senator Donley that are changed here. The
other provisions are changed as well with a specific reference to
an individual act. The Director already clearly has the power to
address an individual act, but when you change the statutory
scheme, you get one step closer to creating a new private civil
cause of action - never the intent of anyone.
He said he wanted to comment next on the letter he wrote to the
Committee. In it he asked what the need for this legislation was
and where does the director lack authority.
In 1976 Governor Hammond introduced this act and it's very clear
from a letter he wrote that he intended to allow the director the
authority to address individual acts. The other thing that's clear
is that he intended that this be regulatory in nature and that it
not create a new private civil cause of action.
Thirdly, he tried to point out that the director under the current
statutory scheme clearly has the power to address individual acts.
This is made clear in a number of different places in the statute.
Most specifically, AS 21.36.150 which allows the director to
investigate and take action when he believes an insurance business
is engaging in "an unfair or deceptive act or practice." There
would be no reason to distinguish an act from a practice if you
couldn't do something about the individual act. There's a similar
reference in AS 21.36.320.
We have a scheme set up here with individual sets of requirements
on the parts of insurers. There is also a very general power on
behalf of the Director of the Division of Insurance to address and
penalize individual acts.
Fourth, there is a model National Association of Insurance
Commissioner Act and Governor Hammond based his act on it. The
model act contains some very important language in two respects.
It clarifies that a director is allowed to act in individual
situations, but it also says very clearly that nothing contained in
this act is designed to create a new private civil cause of action.
"If you're going to do anything with this legislation, please
include that language." Insert it where Senator Donley's language
is which would limit it to the two sections in question. This is
because in the legal business, if you limit something to those two
sections, by implication you're saying it's O.K. that it only
applies to these two sections. Otherwise, he guaranteed that they
would be in court litigating what the effect of these changes is.
The other thing this act does which the model act never does is it
attempts to change or create a relationship between an insurance
company and a third party claimant. The insurance company has a
contractual relationship with the insurers. The insurer may be
defending the insured from a third party claimant and at the same
time, this legislation creates duties and obligations to that third
party claim. That is fundamentally inconsistent with the duties
and obligations owed to the insured in many instances and is really
unnecessary. It's also unnecessary because in 1997, this
legislation passed comprehensive tort reform that basically
penalized the party who does not take a responsible litigation
stand.
His final comment was regarding the policy change in the "dominant
cause" change in section seven. Our Supreme Court addressed that
issue recently in the Bongen v. Kodiak Electric Ass'n, 925 P.2d
1042 (1996) case. They looked at the policy issues that would
justify making the very change that is proposed by this legislation
and didn't think they should do that (not prohibit the enforcement
of clear and specific policy language and we encourage you not to
do that also). If there is need for language of this type, let the
market system address it. This language could very well have a
negative affect, because it actually encourages people not to buy
the comprehensive insurance. As long as they can drag in another
potential cause, even if there's an excluded cause, there's an
argument for coverage. This has been the experience of some
states. He believes they should allow the parties to simply
contract. As long as the language is clear, let it be enforced.
MR. LESSMEIER continued by noting that this bill also has some
subtitles and complexities to it that are very significant. It
does things that may not be readily apparent and things they
believe are not in the best interests of Alaskan consumers.
Number 969
SENATOR LEMAN said regarding his last point, if you decline
earthquake coverage and there's an earthquake event which causes
something that happens in your house that starts a fire and your
house burns down. But you have fire insurance, so they should not
deny the claim as the contingency insured against is the dominant
cause, because the dominant is the loss - is your house burning
down. The [indisc] occurs because an excluded risk (earthquake) is
also in the chain of causes.
MR. LESSMEIER answered that was exactly the situation. Say the
earthquake was the substantial factor in causing the loss and then
there was a fire. Then the earthquake is an excluded cause and the
person chose not to purchase earthquake insurance. There would be
coverage under this provision or you would at least be involved in
a huge argument about what was the dominant cause. This is one of
the concerns. These issues are very difficult to predict and very
difficult to resolve. They create a whole Pandora's box for
litigation about what is covered and what isn't.
CHAIRMAN MACKIE wanted to understand that point a little better and
asked if they are saying in this bill if there's an earthquake and
it caused something to go wrong with the power system which caused
the fire in your house and the house burns down; if the earthquake
was the dominant cause and was excluded from your policy, right now
you're out of luck.
MR. LESSMEIER agreed that was right.
CHAIRMAN MACKIE added that with this your house burned down and the
insurance company would be required to replace the house.
MR. LESSMEIER said that was correct. If the earthquake was the
dominant cause and that can be established, with this bill the
result wouldn't change, but you would be involved in an argument as
to what was the dominant cause - the earthquake or the fire.
Without this bill, if the earthquake was excluded and was a
substantial factor in causing the loss, the loss would not be
covered.
CHAIRMAN MACKIE asked what was wrong with that picture. If you're
sitting at home and there's an earthquake and your house crumbles,
obviously you're not covered, because you didn't have earthquake
insurance.
MR. LESSMEIER said that was right.
CHAIRMAN MACKIE said if you're sitting at home watching TV, your
house shakes a little bit and then your house bursts into flames,
you are covered from fire loss. He had a hard time with the family
not being able to have their house replaced because it burned down
in front of their eyes.
MR. LESSMEIER responded if the cause is a substantial factor and is
clearly excluded in the insurance contract, that exclusion would be
enforced. If it's not clearly excluded, all you're doing is
enforcing the contract between the parties. This bill changes the
contract between the parties and says they cannot contract no
matter how clear it is. The difficulty is that it may encourage
someone not to get earthquake insurance which is a potential
problem, because people may receive coverage for something they are
not paying for.
Number 1194
CHAIRMAN MACKIE asked if he was still concerned about the third
party claimant lawsuits.
MR. LESSMEIER said that concern does exist and language in section
6 reads that the provisions of (a) (7)or (11) of this section do
not create a private cause of action against an insurer by a third
party claimant. The difficulty with that language is what about
the other sections and a private cause of action against an insurer
period? The intent of this law when it was originally created was
to be regulatory in nature. It wasn't intended to create a private
cause of action against an insurer by a first party or a third
party claimant. This now seems to indicate that part of it is
intended to create a private cause of action. If you're going to
pass this, he recommended that they take the NAIC model language
and substitute that for section 6. He repeated, "Nothing herein
shall be construed to create or imply a private cause of action for
violation of this act."
CHAIRMAN MACKIE asked Senator Donley if he had an opportunity to
look at that language, because it appears that wasn't addressed and
it was what he was trying to accomplish. He asked if by specifying
the provisions of (a)(7) or (11), that throws in to question the
other sections which currently are not of issue.
MR. LESSMEIER said that was correct. Someone would argue that and
they would have a good argument.
CHAIRMAN MACKIE asked Senator Donley if he had a reason to craft
things that way.
SENATOR DONLEY replied that he did it because these are the only
sections that they changed. He didn't want to change the status
quo, and since what Mr. Lessmeier is suggesting is the status quo,
he didn't have a problem with substituting that language for
section 6.
Number 1380
SENATOR KELLY asked if they make that substitution in section six,
where would his objections remain.
MR. LESSMEIER explained if the earthquake is clearly excluded under
their policy right now and the earthquake is substantial factor in
causing the loss, then there would be no coverage under current
law. If we change the law and the earthquake is still excluded as
a cause and is a substantial factor in causing the loss, but not
the dominant factor, it is covered.
CHAIRMAN MACKIE asked what happened if it was the dominant factor.
MR. LESSMEIER answered if it was the dominant factor it would be
excluded. When they pass this law, they take away the ability of
an insurer to offer a coverage that is based on a substantial
factor. Instead you force everyone to offer a coverage based on a
dominant cause. This is significant in Alaska, because we are
exposed in terms of earthquake claims and we want to have people
purchase that insurance. That way everyone spreads in the risk.
CHAIRMAN MACKIE asked for clarification if under the proposed
language an earthquake happens and is determined to be a dominant
cause of the reason your house burning down, is your house covered.
SENATOR DONLEY answered that that depends on whether the court
finds the earthquake to be the dominant cause or a secondary base.
A determination must be made. Under existing law, if it's just
substantial cause, they don't pay. This version, drafted by the
Division of Insurance, requires that it be a dominant cause for
them not to have to pay.
SENATOR MACKIE asked if it's the dominant cause, do they have to
pay.
MR. LESSMEIER answered if it's the dominant cause, under this
language, and it's excluded, the insurance companies do not have to
pay.
SENATOR MACKIE asked what the problem is.
MR. LESSMEIER responded that the difficulty is if you pass this
law, you take away the right of an insurance company to sell to an
insured a product that may be more affordable; a product that maybe
more will buy; a product that contains an exclusion that is none
the less very clear, but applies if it is just a substantial factor
in causing a loss which may be what people want.
SENATOR MACKIE said that it increases their liability.
MR. LESSMEIER responded that it increases liability and it
increases cost.
SENATOR LEMAN said he thought State Farm or any insurance company
would say they wouldn't sell home insurance without earthquake
coverage.
MR. LESSMEIER informed them that State Farm had given back $12
million in the State of Alaska in 1997/98 because of claims
experience.
CHAIRMAN MACKIE asked if State Farm's premiums have gone down by
$12 million.
MR. LESSMEIER said no, that was actual money. State Farm Mutual is
a mutual company. When their loss experience is better than they
predict it will be, money is given back to the people who buy their
insurance.
CHAIRMAN MACKIE asked Mr. Lessmeier to work with Senator Donley on
some of his issues.
SENATOR DONLEY commented that Mr. Lessmeier had a different
definition for causation, but the Department supports the
definition that's in the legislation and he thought it was a better
policy call. He could understand insurers wanting to offer a lower
cost product, but as a regulated monopoly, it's important for the
legislature to make sure the consumers are protected. The average
consumer would have a very difficult time understanding why they
have fire insurance when their house burns down, but they don't
have coverage because the substantial (not the dominant) factor was
an earthquake.
He said the Director raised the other point that these are
contracts of adhesion. It's very difficult to go to State Farm and
say your contract says you exclude such and such. I want to pay you
some more money and get something that makes it the dominant cause.
They say no, your only choice here is to buy earthquake insurance
instead. That's prohibited in many cases, but he would still like
to insure his house if an earthquake created some cause of events
that created a fire which burned his house down. He won't have
that option, because they wouldn't offer that option and because
they're a big company they won't negotiate with you one on one.
They have what they offer and you either buy it or not.
Number 1716
SENATOR HOFFMAN wanted to follow up on Senator Leman's point and
asked if the insurance company looked at requiring earthquake
insurance or would they still have the flexibility to do that.
Also, there is the potential for premiums to rise.
MR. LESSMEIER said this is an incredibly difficult issue which has
been addressed in California and there has been an attempt to
address it on a national scale. The difficulty is that you have a
potential disaster that raises the real potential of wiping out an
insurance company or several insurance companies.
The question is if you have a major earthquake in California where
they have just passed state legislation to create a fund requiring
everyone to contribute to it, because a lot of people will not
purchase it and some companies do not want to write it, because the
risk is so huge. That's the problem with this kind of an issue.
He didn't know how State Farm would solve this problem in Alaska.
The concern is with cost. It's great to be able to offer people as
broad a coverage as possible, but that always comes at a cost.
Every time you raise the cost, there are certain people who can't
afford it or won't afford it. You see that with uninsured
motorists. The question is where do you strike the balance. They
say the policy issues of this provision were before the Supreme
Court which debated them. Their decision, and there was a really
excellent well-written descent by Justice Matthews and a well-
written opinion written by the other justices, which they could
look at.
SENATOR KELLY said that was probably not a good argument; he might
be liable to create support for this legislation that he doesn't
like. He asked if most State Farm home owners in the Anchorage
area have earthquake insurance.
MR. LESSMEIER said he didn't know, but would find out.
SENATOR DONLEY ventured to say that most people don't have
earthquake insurance because it's not a standard element of a
policy.
Number 1870
MR. LOHR, Director, Division of Insurance, commented that Mr.
Lessmeier's statement that the specific need for the change to
single act had not been established in previous testimony was not
correct. He could give them three examples where he believed
enforcement would have been appropriate based on a single example.
The first issue was the rate disallowance after the expenses were
incurred. The second issue was significant delay in payment of a
large medical expense affected the credit of the policy holder.
The third would take a reading in full.
On November 19, 1999 an insurance company was notified that it had
violated AK 21.36.125 (2) failure to acknowledge and act promptly
upon communications regarding a claim arising an insurance policy
as well as 3 AAC 26.050 which requires the completion of a claim
investigation within 30 working days using due diligence.
Investigation showed that the insurer took 71 days beyond the date
on which all of the information was received in order to process
the claim. The consumer was harmed and the claim review process
found the charges to be medically unnecessary and denied the claim.
Because of the serious day in knowing whether the claim would be
accepted, the consumer continued to receive medical treatment. She
was not informed the charges would not be covered until she
incurred an additional $1,500 in charges.
SENATOR KELLY asked what kind of claim that was.
MR. LOHR answered that it was a health insurance claim.
SENATOR KELLY asked if it was a group claim.
MR. LOHR said he couldn't tell if it was group or individual, but
he would check.
CHAIRMAN MACKIE asked where the language was in the bill that would
keep that from happening.
MR. LOHR said if this single act had occurred, it would be an
appropriate candidate for the Division to consider enforcement
action. Under current statute, they believe they could not enforce
based on that violation of statute and regulation (because it is
not a general business practice or is not a pattern of violation).
CHAIRMAN MACKIE asked if that was the discussion they had in the
first meeting when Mr. Lohr told the committee why this bill was
necessary.
MR. L0HR said the second example involved a claim in excess of
$183,000. This involved a life insurance company selling health
insurance. The policy holder faced a medical claim between May 15,
1997 and June 28, 1997 amounting to more than $186,000. They were
finally paid on December 11, 1997 - five or six months beyond the
ending of the claim period. The plaintiff stated that the
treatment had been precertified and the company purposely dragged
its feet to avoid paying a large amount. The plaintiff was
concerned that continued failure to pay would jeopardize his
family's physical and financial well-being. They were concerned
about potential lack of access to health care, loss of credit
rating, or other costs incurred because of the companies' failure
to timely pay the hospital. The company replied that their own
nurse case reviewer never notified their own claim office of the
certification. They paid outstanding claims totally $183,189 and
several other smaller payments starting September 11 and ending
January 27, 1998. Although the claims were eventually paid, the
delays in handling them violated AS 21.36.125(2). That would not,
in their opinion not constitute a fine because it is a single act,
but it involves considerable customer harm.
The third example was a life insurance company and coverage under
an international student insurance program between October 30 - 31,
1998. The insured filed a claim on December 28 - two months later.
Approximately six months later, about one quarter of the medical
expenses were paid. The company denied the remainder as "no
notification received." The Division made repeated attempts to
contact the company with no response. Approximately two months
later an additional fifty percent was paid by the company, but with
no explanation of the outstanding amount. This international
students account was turned over to a collection agency and
repeated threatened with possible legal action, and levied
financial charges on the pending payment. The company admitted the
claims were not properly handled. On January 18, 2000, the company
notified the Division that they had paid an additional amount and
had refunded his policy deductible that had been incorrectly
withheld. The delays in handling this matter violated that same
section of statute sited previously.
SENATOR KELLY asked if anyone there though they had no grounds to
pursue that administratively.
Number 2195
SENATOR DONLEY said the Attorney General's opinion in writing says
they can't.
CHAIRMAN MACKIE asked Mr. Lessmeier to explain why they should have
been able to do it.
MR. LESSMEIER responded that there are two statutory provisions
that allow them to do it. There has never been any question that
the Division has the power to investigate. The question then
becomes do they have the power to act or to take administrative
action if it is only a single act. Again, he referred the
committee to AK 21.36.320 and AK 21.36.150. 320 says on the
complaint of a person or on the motion of the director, the
direction may conduct an investigation to determine whether a
person is engaged in an unfair method of competition or deceptive
act or practice prohibited by this chapter. 150 also contains the
same reference to unfair or deceptive acts or practice.
CHAIRMAN MACKIE asked where it says they can act on it.
MR. LESSMEIER replied in 150 it says if the report charges a
violation, they have to give notice of a hearing.
SENATOR DONLEY asked what the problem was with making it clear.
MR. LESSMEIER said that the problem they always had has to do with
changing the regulatory scheme that is currently in effect and
moving away from a regulatory scheme that is modeled after the NAIC
model act towards something that changes that.
The committee has agreed to address one of their biggest concerns
on how this may be used to create a private civil cause of action.
If the concern is to clarify the director's power to investigate
and sanction individual acts, we need to be aware of a couple of
things. The way the scheme is set up now, he clearly has that
power, but the power is to be used selectively. There is a reason
the procedure is a little more burdensome than the other procedure.
It exists in two different places.
The model act allows the director to act on individual situations
and allows him to do so expressly based on a finding of a flagrant
violation. That's what they prefer.
CHAIRMAN MACKIE said if our Attorney General is telling the
direction he can't act on it, he thought they were obligated to
clarify it.
TAPE 00-06, SIDE B
Number 2280
MR. LESSMEIER said he was curious if in the almost 25 years this
has been on the books, there has ever been a time when the court
has said they couldn't act.
SENATOR DONLEY proposed an amendment that might have to go some
place other than section 6. He moved to delete section 6 and to
add, "Nothing contained herein shall be construed to create or
imply a private cause of action for the violation of this act."
The intent is to include this bill and not the whole insurance code
statute. There were no objections and it was so ordered.
MR. LOHR said he would try to address section 7. Assistant
Attorney General, Virginia Rusch, author of the opinion on section
.150 is here also. It was the Division's view that the Bonden
decision by the Supreme Court was both surprising and distressing.
Since the court's action, the Division has seen a proliferation of
more strident and inclusive exclusionary language policy revision
with respect to multiple causation loses. Their increased use by
insurers as a vehicle is for possibly trying to escape coverage.
The Division's statutory duty is to review policy language to
ensure that it is neither ambiguous nor misleading. However, even
when the best drafters put together clear language, sometimes
customers are left confused or surprised at the more limited nature
of the coverage than what they had either understood or assumed at
the time the coverage was provided. There needs to be a balance.
He thought consumer protection needed to be balanced along with the
abilities of the companies to earn a reasonable return on the
investment and not face catastrophic losses. There are extensive
regulatory provisions that address the financial health of
insurance companies and they do their best to enforce those also,
including providing early warning to any domestic company that
might appear to be headed for trouble. If ever necessary, there
are the backstop measures of the guarantee associations and the
ultimate, receivership, which they hope would not have to be used
in any case.
Number 2159
MR. JOHN GEORGE, National Association of Independent Insurers, said
he could add that current trade practice law was put into effect in
1976, the very year he became the Deputy Director of the Division
of Insurance. He worked there for 12 years under the current law;
and he couldn't think of a case where they were unable to
investigate a single incident. He couldn't think of a case where
they found someone was doing something on purpose and that they
hadn't done it more than once. They found some trade practices
more on agents and on brokers than insurance companies.
The examples that Mr. Lohr gave regarding a health insurance claim,
he asked how many claims a year would that health insurer handle -
thousands. That was one example; if there's two examples there's
no question it would be a trade practice. If you handle 5,000
claims and one of them was handled improperly, the Director can
investigate that. The cure in Director Lohr's opinion is to
penalize them, fine them, and make them sorry they did that for
that one occurance. It doesn't help the guy that got his money
late or get enough.
CHAIRMAN MACKIE asked what would be the problem with including the
language since there was disagreement between attorneys on this
thing.
MR. GEORGE replied if you find a single violation, you don't handle
it as a trade practice subject to a $25,000 fine.
SENATOR DONLEY said they don't fine a single practice like that.
MR. GEORGE said there are plenty of remedies without treating it as
a trade practice.
CHAIRMAN MACKIE said his question is whether it's one or twenty.
He asked why they would not protect the interests of one person by
allowing the director to investigate that and take action on that
person's behalf, because it might be the only claim he had in his
life.
MR. GEORGE said first there is no question they can already
investigate. If it's investigated as a trade practice, you'd have
to find more than one under a current law. If the offense has been
committed by, for example, the company waiting over 120 days. You
can't tell them to go back and cure it in 60 days. This doesn't
get more money to the person that was aggrieved. It's a fine that
goes into the general fund. An insurer handles thousands and
thousands of claims and if you can only find one incident, it's a
mistake.
CHAIRMAN MACKIE said if it's a simple mistake that can be
rectified, no one's going to get in too much trouble. But if it's
a deliberate act, isn't that something that's worth investigating.
MR. GEORGE said the Division still can and does that.
CHAIRMAN MACKIE said new language would clarify that.
MR. GEORGE said they didn't handle it as a trade practice.
SENATOR KELLY said he didn't understand the language about trade
practice.
MR. GEORGE explained it's the penalties and what you do about it.
SENATOR KELLY asked if they were talking about section 8 or 7.
MR. GEORGE said, "Just in general."
SENATOR KELLY said he was under the impression that whether the
violation is a single act or a trade practice is determined by the
amount of loss caused by the violation and the amount of benefit
derived. It's up to the director whether or not it's regarded as
a trade act or trade practice.
SENATOR DONLEY said he thought Mr. Lessmeier and Mr. George were
doing their jobs, but to represent to the committee at this point
that it's clear they can take action on single actions, he could
almost guarantee them that if the Division took an act on a single
action and their client didn't agree with it, they would be in
court with other attorneys arguing against their authority to take
disciplinary actions based on single actions. Their
representations to the legislature has no binding on what they do
later on in a court action to defend themselves against the
authority of this Department to take single action.
Also, regarding Mr. George's comment about two examples being no
question of a trade practice, he suggested if there were two
examples and their clients felt it was in their best interests to
fight any disciplinary action, they would be in court arguing that
the two examples doesn't constitute a trade practice, also.
Whether or not they would prevail is a question. The question
should just be taken off the table and allow the Division to do
what a majority of the states do.
To bring up the red herring that they're going to get $100,000 fine
for a single act is just really misrepresenting the situation to
the committee. Regulators know it would never stand up to court
scrutiny and it's not appropriate. It will be based on graduated
fines based on the seriousness of offense.
During the term that Mr. George was Director of the Division of
Insurance the mission statement had no insurance protection for
consumers component. It wasn't until 1987 or 88 that the mission
statement was amended to specifically state one of their missions
was to protect insurance consumers.
MR. GEORGE said the Division can take action on individual acts
that are not trade practice. They have been fixing things for
years. The concern is that you don't want it to happen again.
CHAIRMAN MACKIE asked about the person who didn't get any monetary
relief.
MR. GEORGE answered that any action the Director of the Division of
Insurance takes is penalty against the insurer, but you don't
collect the fine and give it to the aggrieved party.
SENATOR KELLY said in the three examples the claim had been paid.
So the question gets to be now what do they do.
Number 1744
MR. LOHR noted that often when the Division brings an accusation
against a company for a violation of Alaska statutes, that will
lead to a hearing date and settlement discussions with the company.
Those settlement discussions may occur after the consumer is made
whole or partially whole. The initial goal is to address the
individual consumer rights. As a follow up measure very often the
Division would include remedial measures along with any
administrative fine that might occur to try to reform future
conduct. That capability in certain limited cases, certainly not
for innocent mistakes, is something appropriate for the Division to
have.
CHAIRMAN MACKIE asked under either scenario of current or proposed
law, the individual consumer would be made whole first. That is
his main concern.
MS. RUSCH, Assistant Attorney General, explained under current
procedure the Division's consumer protection staff typically gets
complaints where a consumer may be unhappy that the it took the
insurers so long to pay their health claims. Staff would
communicate with the insurer and try to get things settled. Most
problems should be resolved right there. But if it was impossible
to resolve the matter at that level, the next step would be to call
the AG's office to see if there is a violation of statute. Under
current statute, if it was a single act, she would have to advise
the Division of AS 21.36.125. She found language in a Supreme
Court case, State Farm v. Nicholson, 777Pacific2nd11/52. The Court
said under that statute an insurance company only violates the
chapter if it "engages in certain prescribed acts with such
frequency as to indicate a practice." The Alaska Supreme Court has
said a single act is not under a violation. So the Division could
not bring an enforcement act if the insurer refused to resolve it
on their own and they could not impose any penalty. With the words
"single act" added, as proposed in this bill, the Division would
have that enforcement power as well as what they currently have to
work through their consumer protection division to resolve it.
Another point, to answer their question, in the penalty provision
in AS 21.36.320 there is currently language saying the director can
order restitution as well as impose a penalty. She personally
hasn't had any experience with that happening, but it appears to be
a power the director has. If he can enforce for a single act, he
can use that power also to order restitution. If he can't enforce
a single act, he can't order restitution.
SENATOR KELLY asked if restitution shouldn't be the province of the
courts.
Number 1540
MS. RUSCH answered that's not at all the kind of situation she
imagined this operating in. She thought if in one of the delayed
health claims, for example, or where the woman in the first example
didn't get a rejection of payment of a certain type of treatment
until after she had gone ahead with it for three months or it could
be under a situation where failure to act on it in a timely way was
found to be a violation; then a penalty would be appropriate.
Instead of imposing a $1,000 penalty on the insurance company for
its late treatment, the director might provide for some restitution
be made to that claimant for the damage of the late decision. Not
based on the decision of whether they should have paid it or not to
begin with.
Number 1457
MR. MIKE SCHNEIDER, Anchorage attorney, said insurance issues had
been the focus of his practice for 25 years. He said clearly the
hypothetical by Senator Mackie where the homeowner has his house
burn down, has fire coverage, wakes up, finds he's in the streets,
and wonders what happened; that is going to continue to be the
outcome unless there is a legislative change like the one proposed
here. The person in the hypothetical could be either democrat or
republican, subsistence person or neurosurgeon. They would
probably wonder why their elected representatives, given the
opportunity, didn't do something to make reality conform to their
reasonable expectations of coverage. And that's really all this
bill does in that subsection. The choice today really is for the
committee to decide whether it really wants to protect State Farm
and All State or Alaskans of all types, all races, and all
political affiliations from the kind of surprise that would be
suffered by the individual in Senator Mackie's hypothetical.
Insurance companies handle tens of thousands of claims, so the
question of what it takes for an act to become a practice is like
asking how many angels can dance on the head of a pin or how far is
a long way. You get away from that imponderable if the Division is
given the opportunity to do more than investigate.
There seems to be the suggestion from those who oppose this bill
that they are turning a junk yard dog lose on "our friends" at All
State and State Farm. In the many years he has been in Alaska, he
would view the Division of Insurance as overworked and underloved.
They don't have the resources to put to bay the entities of the
magnitude that we're talking about here. This is never going to be
a fair fight no matter what they do with the bill. They are just
giving Alaskan insurance consumers on a rare day some shot at a
little hope that when they call the Division, something good might
happen in their life. This would not be a sea level change in the
way things work. It's a small incremental improvement in public
policy and it gives the little guy about one shot in hell once in
a while. He commended it to the committee as an improvement and
asked them to look at his letter which describes a problem that is
rampant, in his experience, where there is virtually no remedy and
where something ought to be done.
He concluded by pointing out that indeed nothing in this bill will
cause a private cause of action. It seems clearly to be the wish
of the legislature not to go in that direction. If they wished to
see insurance consumers treated fairly, they need to give them some
rights and some chance to be represented and some chance to step
into the ring with the big guns like All State and State Farm.
CHAIRMAN MACKIE said the committee was running out of time and
asked if anyone was present from out of town who wanted to testify
on the next bill. (None) He said he intended to bring it up at the
next meeting on Thursday.
Number 1143
MS. JAN BOUCH, Executive Director, Alaska Academy of Trial Lawyers,
said she decided to testify as the family member who deals most
frequently with insurance companies. She was not sure if this was
a practice of the insurance company or not. She has two children
in college, one in California and on in Colorado. Every single
notice that she got back from the insurance company after a claim
was filed said they needed verification of the student's
enrollment. She knows that they have it on file, because she's the
one who provides it at the beginning of every semester. She didn't
know if that constituted a practice within that company or if other
people had the same problem. She said she saved the claim forms
showing the request over and over again. Additionally, she had to
make the long distance phone call to the kids to ask them to get
the information again. Another thing is that almost everyone she
knows is asked to pay for the medical costs up front, because they
aren't getting paid in a timely manner without getting harassed.
Then she would hold the bills, where she wouldn't' get timely
payment which involved interest and other expenses.
She had just received a form for payment that was filed on July 1
for a dental bill that was paid two weeks ago. The harassment
around that was they kept claiming he had another insurance company
which he didn't. She spent innumerable amounts of time on the
phone trying to get this issue clarified. She didn't report them
anywhere; she just wanted it resolved because she was exhausted.
She didn't know how to establish what's an internal practice v.
what is reasonable. The consumer is expected to do their part of
paying up front, file claims and documentation; they have to
continually verify that information over and over again. She said
she has proof of that happening if they need it.
Number 892
SENATOR DONELY moved to pass CS to SB 177 (L&C) from committee with
individual recommendations. SENATOR LEMAN objected saying he
thought they were going to entertain amendments first.
SENATOR DONLEY withdrew his motion.
SENATOR LEMAN moved to delete section 7. Senator Donley objected.
SENATOR LEMAN explained rather than do what Mr. Schneider is
suggesting which will reduce the number of options available to the
small normal average Alaskan consumer and he's concerned about it.
Maybe he should get all-risk insurance for his house. Maybe he can
get the coverage some other way. There will end up being a cost to
it and he thought they should allow the market place to provide for
that option. He thought this went in the wrong direction.
SENATOR DONLEY responded that the only way that analysis would make
any sense on the part of an educated consumer is if they reach the
conclusion that if there happened to be an earthquake, that their
house would catch on fire for some reason or a flood would occur
because of the earthquake. It doesn't make any sense for a
consumer to go through that analysis. Even if the house did catch
on fire and an earthquake was the dominant cause, there wouldn't be
coverage under this language. It's only if it's a substantial
cause. He suggested that while dominant may be appropriate for
excluding coverage, substantial is not. There could be other
substantial causes which should clearly be covered.
SENATOR LEMAN said take an earthquake which causes the power to go
out and so the family in that house uses candles. They fall asleep
and the candles cause the house to burn down. Arguably the
earthquake caused them to change their lifestyle, but he thought
that would be secondary. Senator Donley is saying under that
circumstance it should be covered under fire insurance.
SENATOR DONLEY responded under existing law it would be. The
candles are the cause of the fire and that's covered by homeowners
now as long as you didn't intentionally light the fire yourself.
There was no further debate on the amendment and the secretary
called the roll. SENATORS KELLY, DONLEY, and MACKIE voted yes;
SENATORS HOFFMAN and LEMAN voted no and the amendment was adopted.
SENATOR DONLEY moved to pass CSSB 177 (L&C) from committee with
individual recommendations. There were no objections and it was so
ordered.
CHAIRMAN MACKIE announced that the committee would take up SB 279
at their next meeting and adjourned the meeting at 3:10 p.m.
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