Legislature(2001 - 2002)
05/04/2002 09:05 AM Senate L&C
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ALASKA STATE LEGISLATURE
SENATE LABOR & COMMERCE COMMITTEE
May 4, 2002
9:05 am
MEMBERS PRESENT
Senator Ben Stevens, Chair
Senator Alan Austerman
Senator John Torgerson
Senator Bettye Davis
MEMBERS ABSENT
Senator Loren Leman
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 274(L&C)
"An Act relating to the qualification of a physician used for an
employer's independent medical examination and to the authority
of the Alaska Workers' Compensation Board to provide an expedited
hearing when an employee needs medical treatment; and providing
for an effective date."
MOVED SCSHB 274(L&C) OUT OF COMMITTEE
CS FOR HOUSE BILL NO. 246(JUD)
"An Act relating to regulation of a person providing insurance
for the cost of medical care, to confidentiality of insurance
records, to insurance hearings, to insurance fees, to annual and
quarterly statements by insurers, to managed care insurance, to
taxes on insurance, to insurer certificates of authority, to risk
based capital for insurers, to unauthorized and nonadmitted
insurers, to surplus lines insurance, to health insurance, to
life insurance, to annuity insurance, to consumer credit
insurance, to insurer liquidation, to multiple employer welfare
arrangements, to the Alaska Insurance Guaranty Association, to
hospital and medical service corporations, and to regulation of
insurance producers, agents, brokers, managers, and adjusters;
and providing for an effective date."
MOVED CSHB 246(JUD) OUT OF COMMITTEE
SENATE CS FOR CS FOR HOUSE BILL NO. 393(L&C)
"An Act relating to unfair and deceptive trade practices and to
the sale of business opportunities; amending Rules 4 and 73,
Alaska Rules of Civil Procedure; and providing for an effective
date."
MOVED SCSHB 393(L&C) OUT OF COMMITTEE
CS FOR HOUSE BILL NO. 499(JUD)
"An Act declaring legislative intent to reject the continuity of
enterprise exception to the doctrine of successor liability
adopted in Savage Arms, Inc. v. Western Auto Supply, 18 P.3d 49
(Alaska 2001) as it relates to products liability; providing that
a successor corporation or other business entity that acquires
assets of a predecessor corporation or other business entity is
subject to liability for harm to persons or property caused by a
defective product sold or otherwise distributed commercially by
the predecessor only if the acquisition is accompanied by an
agreement for the successor to assume the liability, results from
a fraudulent conveyance to escape liability for the debts or
liabilities of the predecessor, constitutes a consolidation or
merger with the predecessor, or results in the successor's
becoming a continuation of the predecessor; defining 'business
entity' that acquires assets to include a sole proprietorship;
and applying this Act to the sale, lease, exchange, or other
disposition of assets by a corporation, a limited liability
company, a partnership, a limited liability partnership, a
limited partnership, a sole proprietorship, or other business
entity that occurs before, on, or after the effective date of
this Act."
MOVED CSHB 499(JUD) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
HB 274 - See Labor and Commerce minutes dated 3/14/02.
HB 246 - See Labor and Commerce minutes dated 4/30/02.
HB 393 - See Labor and Commerce minutes dated 4/30/02.
HB 499 - No previous action to record.
WITNESS REGISTER
Representative John Coghill
State Capitol Bldg.
Juneau AK 99811
POSITION STATEMENT: Sponsor HB 274.
Representative Lisa Murkowski
State Capitol Bldg.
Juneau AK 99811
POSITION STATEMENT: Sponsor of HB 246.
Mr. Bob Lohr, Director
Division of Insurance
Department of Community and Economic Development
3601 C Street, Ste. 1324
Anchorage AK 99503
POSITION STATEMENT: Commented on HB 246.
Ms. Katie Campbell, Life and Death Actuary
Division of Insurance
Department of Community and Economic Development
POB 110805
Juneau AK 99811-0805
POSITION STATEMENT: Commented on HB 246.
Representative Gary Stevens
State Capitol Bldg.
Juneau AK 99811
POSITION STATEMENT: Sponsor of HB 393.
Mr. Gene Dau
AARP
Juneau AK 99801
POSITION STATEMENT: Supported HB 393
Ted Pease, Atty
Burr, Pease & Kurtz
810 N St.
Anchorage AK
POSITION STATEMENT: Supported HB 499.
Mr. Jim Powell, Atty
550 W 7th Ave.
Anchorage AK 99501-3563
POSITION STATEMENT: Opposed HB 499.
ACTION NARRATIVE
TAPE 02-28, SIDE A
Number 001
HB 274- WORKERS' COMP: MEDICAL EXAM
CHAIRMAN BEN STEVENS called the Senate Labor & Commerce Committee
meeting to order at 9:05 am and announced HB 274 to be up for
consideration.
REPRESENTATIVE COGHILL, sponsor of HB 274, said that it ran into
a problem with due process with the expedited hearing and that
was deleted. Now the doctors are simply required to have a
license in a place where the examination occurs.
SENATOR TORGERSON moved to adopt the CS to HB 274, LS0 983\L.
There were no objections and it was so ordered.
SENATOR AUSTERMAN moved to pass SCS HB 274(L&C) with individual
recommendations and $0 fiscal note. There were no objections and
it was so ordered.
HB 246-OMNIBUS INSURANCE BILL
CHAIRMAN STEVENS announced HB 246 to be up for consideration.
REPRESENTATIVE LISA MURKOWSKI, sponsor, said this bill was
requested by the Division of Insurance. She said that it was much
more comprehensive last year and that they had dealt with the
Gramm-Leach-Blighly provisions. She said the changes in terms of
policy matters are limited to two areas. The first is as they
related to multiple employer welfare arrangements. Essentially,
past employee welfare benefit plans have been regulated as an
insurer. HB 246 sets up a less burdensome regulatory structure
for them. The other area is issues that relate to the
confidentiality of records. HB 246 provides for confidential
information sharing arrangements. Confidentiality provisions are
required for Alaska to remain accredited by the National
Association of Insurance Commissioners.
She said that the other provisions correct existing insurance
laws. Essentially, the director went through the insurance
provisions and did a lot of the cleanup, addressing things like
fees for late payment of premium taxes, establishing minimum
benefit levels for stop loss insurance contracts and for the
first time, it provides for an annual fee to operate as a joint
insurance arrangement. It also revises the assessment formula for
the guarantee fund and has more corrections and clarifications.
SENATOR TORGERSON asked if the joint insurance arrangements
affect the AML-JAI's. He also had questions on the
confidentiality on page 36 where, "the director may withhold the
rating form from public inspection for as long as the director
determines that it is necessary to protect the service
corporation" is deleted and replaced with "confidential". He
wanted to know why they did that.
REPRESENTATIVE MURKOWSKI replied that Director Lohr was on line
to answer the last question and pointed out that the joint
insurance arrangements are discussed under section 48.
MR. LOHR, Director, Division of Insurance, answered Senator
Torgerson's last question saying that basically there are certain
types of documents that are invariably declared confidential by
the division including work papers from an examination by the
division. The degree of confidentiality associated with a case by
case determination is not enough to satisfy other states or the
National Association. Basically, a state that shares the contents
of an exam with other states is information that will not get out
to the public or to third parties. This language is designed to
do exactly that.
SENATOR TORGERSON noted his concern was with section 58 on page
36.
MS. KATIE CAMPBELL, Life and Health Actuary, said this particular
provision, section 3, they put in a definition of what it
actually means to be confidential. This provision was tightened
up a little bit, because Blue Cross/Blue Shield is the only
entity that has to file rates with the division and they're very
concerned that they're the only ones who have to file, so all the
details of the rating information are kept confidential for
proprietary reasons.
SENATOR TORGERSON asked what impacts this has on joint insurance
arrangements.
MS. CAMPBELL explained that although the division doesn't have
regulatory authority over JAI's, they are often asked to be
brought into that to do some work on it and there are costs
associated with it.
MR. LOHR added that basically JAI's are not in the business of
insurance. The chapter that sets them up states that
specifically.
However, each of the JAI's from time to time accuses
the other ones of intruding into what is the business
of insurance, which would then become regulated by the
division to the extent that they are going outside the
boundaries of the joint insurance arrangement.
The expenses are born by the fee payers to the division, since
they are entirely a fee-supported agency. So the fees are passed
on to the JAI's.
SENATOR TORGERSON asked what other JAI's the state has besides
AML.
MR. LOHR replied that there is Alaska Public Entities Insurance.
SENATOR TORGERSON said this would only affect them if they step
outside of their statutory authority.
MR. LOHR replied, "That's correct. It's only if they stray into
the area of regulating activity outside of the bounds of the JAI
organizing statute."
SENATOR TORGERSON moved to pass SCSHB 246(L&C) from committee
with individual recommendations and the $0 fiscal note. There
were no objections and it was so ordered.
HB 393-SALES OF BUSINESS OPPORTUNITIES
CHAIRMAN STEVENS announced HB 393 to be up for consideration.
REPRESENTATIVE GARY STEVENS, sponsor, said that this is not
intended to hurt legitimate businesses at all and Avon ladies are
exempted.
MR. GENE DAU, AARP, supported HB 393. He said a lot of senior
citizens are trying to supplement their income and adds in a
paper could be scams catch their eyes real fast. Passing HB 393
would help seniors be less vulnerable to this type of scam.
MS. CINDY DRINKWATER, Assistant Attorney General, said this is a
good consumer protection piece of legislation. From an
enforcement perspective this bill is important because it
requires registration similar to how other states deal with
business opportunities and allows the department to find
something out about these businesses ahead of time. They
anticipate that there would be a lot of sellers of business
opportunities who would not register. She said that this is
important legislation.
SENATOR AUSTERMAN said there was an indeterminate fiscal note
with the bill and he raised the question about what the actual
cost would be. He asked if the legislature was going to find out
how much it was going to cost next year when the department
requests new employees.
MS. DRINKWATER replied that it is possible that they will be
asking for additional funds, but at this point they don't have a
sense of how many enforcement actions they would have to take and
how many registrations there might be. At this point, they are
anticipating they will be able to afford this because it is the
kind of work they do.
SENATOR AUSTERMAN said he appreciated the fact that they are
anticipating absorbing all the cost on this.
CHAIRMAN STEVENS said he anticipated the discussion about the
$250 - $500 threshold would continue because Senator Leman still
has concerns about it. He suspected it would be raised again and
asked her to reiterate why they chose $250 instead of $500.
MS. DRINKWATER replied that initially the department proposed a
$200 threshold because they wanted to protect as many consumers
as possible. Other states use a range of $200 - $500. They know
there are a number of fraudulent "busops" out there that have
payment requirements far less than even $200. When the House
added "an aggregate of $10,000" there was the concern that there
are scam artists bilking hundreds of people out of a relatively
small amount of money hoping they would sneak through law
enforcement radar and people wouldn't feel like they wouldn't
have to vigorously protect their investment. They felt at some
point that a line has to be drawn somewhere, so they drew one
that other states had drawn.
The department did an informal survey to find if other states
found the $500 was reasonable or whether it should be lowered.
The uniform response was that it's best to keep the threshold
amount as low as possible for the reasons she already suggested.
In state's where there is a $500 threshold busops will sell their
product for $495 and that same package would be sold for $199 in
a state with a $200 threshold.
The purpose of keeping it at the lower amount is to
throw the net as widely as they could to include as
many fraudulent sellers as possible. It seems like the
real objection to the $500 amount is from the direct
callers association, but they would be exempt under our
exemption #5. So, they wouldn't be affected by that
provision anyway.
SENATOR AUSTERMAN asked how many complaints do they get a year.
MS. DRINKWATER replied that in 2001 there were six busop
complaints. She said they average 6 - 8 complaints per year and
they are aware of 8 - 12 additional complaints from Alaskan
consumers that were filed with the Federal Trade Commission. That
number might seem low, but it is viewed as only the tip of the
iceberg. Also, people are often surprised to find that there is a
consumer protection unit in state government again. There are a
variety of reasons that people may not file complaints currently.
SENAATOR AUTSERMAN moved to pass SCS HB 393(L&C) out of committee
with individual recommendations. There were no objections and it
was so ordered.
HB 499-SUCCESSOR LIABILITY FOR PRODUCT LIABILITY
CHAIRMAN STEVENS announced HB 499 to be up for consideration.
REPRESENTATIVE ROKEBERG, sponsor, said this legislation in part
overturns an Alaska Supreme Court case, at the invitation of the
court that indicated they made their ruling because the Alaska
Legislature never spoke on this issue - successor liability in
tort cases of product liability, only. The issue before the
legislature is, should the State of Alaska adopt the U.S.
standard of "continuation of enterprise in successor liability
tort cases," which has been dismissed by the overwhelming
majority. Forty-six states expressly rejected in the current
third restatement of torts which was the 1998 edition.
HB 499 answers that question with a resounding 'no' by
adopting the four exceptions to the general rule of
successor liability, which is set forth in the third
restatement of torts. This would make Alaska's law
conform with the rest of the country.
Section 2, (a)(4)(1),(2),(3) and (4) language are a direct quote
out of the third restatement of tort, which provides that any
time a successor should be liable for product liability is if you
agreed to it, if there is a fraudulent conveyance, if there was a
consolidation or merger and when the successor becomes a
continuation of the predecessor or mirror continuation where
ownership of the corporation is similar or the same as its
succeeding business. The Supreme Court accepted the mirror
continuation theory, but they also adopted the continuation of
enterprise theory, which in his study of the issue, allows the
court to do whatever they want to do in terms of applying
liability.
Justice Eastaugh said that he believed that the minority view
could be adopted by the State of Alaska because there weren't any
economic studies justifying that position otherwise. Almost all
the other states in the Union rejected that theory and it's no
wonder there are no economic studies. He went on to say that he
felt the accumulated good will in any kind of a transaction
should be adequate to cover any unforeseen future liabilities. He
thought that was extraordinary.
REPRESENTATIVE ROKEBERG said the retroactivity part of this bill
is to an on-going court case.
A Kenai District Court ruling was appealed to the
Supreme Court to find out basically what the real law
was in the State of Alaska and the ruling in this
particular case came in the middle of the Cole Case
that has been remanded back to the Kenai Superior
Court. So, it becomes an issue of should the
legislature insert itself in an existing on-going court
case. In fact, by the Supreme Court adopting a standard
or a rule that doesn't conform to the rest of country
and apply it to something already happened, the Supreme
Court is retroactively applying the standard.
He submitted that the legislature has the same power and even the
obligation to make sure the law of the land is the law of Alaska,
also. Another aspect is that it's very clear that in a court case
that hasn't reached its final conclusion going through the
various levels of appeal, that there's no vested right to claim
that there's a problem of the state getting involved with this.
The final determination has not already occurred. So,
it's clear in the law that unless there's a judgment
that's been fully vested, that that's a property right.
Statements have been made and you'll hear it that what
the state is doing is an inverse condemnation. By
passing this law, we'd be making a taking of this
judgment. That's not true. What I find interesting as
an old law school dropout is, and a student of
constitutional law, is that the basic principle of that
was articulated by Chief Justice John Marshal in 1801
in the Schooner Peggy Case…which said unless you had a
vested right, it wasn't a taking.
MR. TED PEASE of Burr, Pease and Kurtz, Counsel for Savage Arms,
Inc., supported HB 499 in relation to their court case with
Western Auto. This bill provides fairness and predictability
[indisc.].
I think a recitation of [case between] Arms and Western
Auto will make clear the unfairness of the Supreme
Court's ruling and the devastating effect it has on
companies like Savage Arms to purchase assets from
another company and the find out they're subject to a
code of liability for defective product manufactured by
that other company, a liability that was unknown at the
time of the sale.
MR. PEASE gave the committee an outline of the relevant
facts.
On April 8, 1989 Kenai, a boy named Taylor was badly
injured when a model 125, 22 caliber rifle
malfunctioned. That gun was manufactured in 1982 by a
company called Savage Industries, Inc. who had been
making firearms for some time. Savage Industries sold
the gun to Western Auto and sold it a purchaser in
Maine in 1983 and then the gun went through a
succession of owners and ended up in Kenai in the gun
shop where it was purchased by the Taylor boy's father.
On February 2, 1988, Savage Industries was in serious
management trouble and filed for chapter 11 bankruptcy.
This is before the accident ever happened. The accident
occurred more than a year later. Savage Industries had
gone bankrupt and had no insurance. In the meantime,
following the chapter 11 filing, an international
publicly traded corporation called Challenger became
interested in purchasing a substantial portion of the
assets of Savage and carrying on the gun manufacturing
business. There is a subsidiary shop called Savage
Arms, Inc. In the sale negotiated with Savage
Industries and approved by the bankruptcy court, Savage
Arms, Inc. purchased a large portion of the assets of
Savage Industries. The assets purchase included the
manufacturing plant in Massachusetts, the Savage name,
the core product [indisc.], but not the model of the
gun that injured the Taylor boy, and machinery. The
sale concluded in November 1989 and Savage Arms
thereafter manufactured and sold firearms under the
Savage name and it continues to do so today.
Now, at the time of the sale, no lawsuit had been filed
and neither Savage Industries nor Savage Arms knew of
the accident in Kenai. Over a year after that
[indisc.], in December 1990, the plaintiff, Taylor,
sued Savage Industries from Kenai.
TAPE 02-28, SIDE B
[SOME TESTIMONY WAS MISSED IN TURNING THE TAPE OVER]
Western Auto is insured 100% by Allstate [indisc.] and
Allstate defended Western Auto and ultimately settled
with the plaintiff for $5.4 million in June 1995. Now,
Allstate has brought Savage Arms into the litigation,
claiming its entitled to recover the amount of its
settlement with Taylor plus interest and costs, which
now we're told approach $20 million and maybe more.
They argue that Savage Arms was the successor in
liability to Savage Industries, which was a gun
manufacturer under this [indisc.] doctrine that has
been almost universally rejected by those states which
have considered it and which is not the law of Alaska
and which has been criticized and rejected by the
American Law Institute in its third restatement of
torts product liability in section 12.
The American Law Institute is a very prestigious group
that's recognized by all the courts in the country as a
leading authority on all kinds of laws. They do careful
studies, collect data and come out with restatements, which
the Alaska Supreme Court often sites and follows (usually).
They didn't in this case. He said that none of the four
generally accepted exceptions to the successor liability,
which are adopted by the restatement really fit the case,
making it difficult for Western Auto to recover indemnity
from Savage Arms.
So, Allstate urged this other discredited successor
liability, called continuity of enterprise, which could
make Savage Arms liable to Western Auto as a successor
in liability to Savage Industries.
Savage Arms was reviewed by the Alaska Supreme Court before it
proceeded at Judge Link's, who stayed the proceedings,
suggestion. The Supreme Court accepted the petition and on March
2001 handed down the decision that adopted the almost universally
rejected and discredited doctrine of continuity enterprise and
sent the case back to Judge Link for trial, which as set in Kenai
for November 2002. HB 499 specifically disapproves and rejects
the continuity of enterprise doctrine and makes it retroactive to
apply to the pending case. There are two reasons. This is not
accepted law in any state, including Alaska and it will make a
more uniform standard for all companies who are in similar
situations in the future. He cited a case in 1989 called Kichen
v. United States that said:
No person has a vested right in any rule of law
entitling him to insist that it shall remain unchanged
for his benefit. This is true after the suit has been
filed and continues to be true until final unreveiwable
judgment is obtained.
MR. JIM POWELL, Attorney, said he represented Western Auto in
front of Judge Link and he continues representing Allstate and
underwriters who are the carriers for Western Auto and who made
the ultimate payment to resolve the Kevin Taylor injury claim. He
opposed HB 499 because it is special interest legislation
designed to protect a group of Texas investors called Servico
Partners, who before this bankruptcy controlled all the stock
through their various corporations and have, since the
bankruptcy, guaranteed the result to Savage Arms of any judgment,
which is paying for this.
They are attempting by virtue of this legislation to
use the Alaska Legislature to relieve them of their
obligation to pay for any liability coming out of the
litigation in Kenai where Kevin Taylor was injured.
He said the rifle was found, as a matter of law by Judge Link, to
be defectively manufactured and fell apart in Kevin Taylor's
hands, it spun like a baton and fell to the ground discharging a
bullet into his temple causing him serious brain damage and
substantial paralysis from the mid-chest down.
Western Auto was the innocent retailer that sold the firearm
without inspection and under Alaska law, retailers can't be held
liable for the manufacturer's faults. When Servico Partners sold
their interest to the current president of Savage Arms they
guaranteed if there was a judgment of claim arising out of this
incident, they would stand good for it, but now they are
attempting to use the legislature to make good on its promises.
Also, he said it is very rare for the legislature to pass any law
that is retroactive. He thought it would raise constitutional
questions and there might be a question of whether there is a
taking by the state of that cause of action.
10:12 am
SENATOR TORGERSON said the last statement in his memorandum
states the potential liability on the part of the State of Alaska
is $14.5 million and asked how he got from $5.4 to $14.5.
MR. POWELL replied that it includes the cost of defense and the
interest rate is 10.5% per annum. They have made settlement
offers and offers of judgment to Savage for substantially less
than the amount of the liability. "If we are successful in
proving liability which exceeds those offers of judgment, the
interest rate goes to 15.5% under the rules existing at that
time."
REPRESENTATIVE ROKEBERG objected to Mr. Powell's statement that
this is special interest legislation. "This applies to anybody,
any manufacturer."
CHAIRMAN STEVENS said that the decision whether the legislature
should be involved in a Supreme Court decision lies in the
Judiciary Committee and it was his intent to move it there.
SENATOR DAVIS moved to pass CSHB 499(JUD) with attached $0 fiscal
note from committee with individual recommendations. There were
no objections and it was so ordered.
CHAIRMAN STEVENS adjourned the meeting at 10:18 am.
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