Legislature(1999 - 2000)
02/26/1999 03:19 PM House L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 82 - IMMUNITY:CLAIMS ARISING FROM Y2K PROBLEMS CHAIRMAN ROKEBERG announced the committee's next order of business was HB 82, "An Act relating to immunity for certain claims arising out of or in connection with the year 2000 date change; and providing for an effective date." The chairman commented he wanted to focus on some of the insurance aspects of the Y2K problem and impacts on the business community. Mentioning a very recent possible committee substitute (CS), he indicated the bill drafter, Mike Ford, would be available for discussion. Chairman Rokeberg stated he would entertain a motion to adopt Version H as a working draft. Number 1308 REPRESENTATIVE HALCRO moved that the committee adopt Version H, proposed CS for HB 79, labeled 1-LS0398\H, Ford, 2/26/99, as a working document. There being no objections, it was so ordered. Number 1327 CHAIRMAN ROKEBERG explained some of his motivations in working with the drafter that resulted from the previous bill hearing [February 12, 1999]. Granting a blanket immunity for small businesses would be inconsistent with the legislation's goal of making sure all businesses focus on becoming compliant and should not be penalized if good faith efforts have been made and due diligence has been done. Blanket immunity to those small businesses would give them a "free ride." The chairman indicated the proposed CS was more of limited immunity bill, limiting the liability from causes of action. He stated he was also sensitive to the criticisms about what the bill should or should not contain, noting Representative Murkowski had made some good points, especially regarding what constitutes due diligence. Subsections (a)(1) through (a)(6) of Section 1, beginning on page 1, line 13, outline the plan for due diligence created by the drafter and [committee] staff. Chairman Rokeberg indicated there were some problems with taking this approach in the writing of statute - stipulating what constitutes a plan - because any deviation from that plan might jeopardize the ability to assert the defense. He stated he thought this was best left for the House Judiciary Standing Committee, noting this draft sent a message to the state regarding what the House Labor and Commerce Standing Committee thought people should be doing. The chairman indicated this issue was somewhat beyond this committee's purview. The House Judiciary Committee could determine whether that specific language should be replaced with more generic language concerning good faith effort and due diligence, which would allow the courts to decide what the most reasonable test for that would be. He invited Mr. Ford to come forward, complimenting him on the bill's drafting. Number 1507 MIKE FORD, Legislative Counsel, Legislative Legal and Research Services, Legislative Affairs Agency, came forward to testify. Number 1524 CHAIRMAN ROKEBERG indicated he would review the bill first and then Mr. Ford could review it as well, making any appropriate corrections. The chairman referred to page 2, subsection (b)(1), beginning on line 13, as the "geek clause," intended to exclude people in the software, hardware, et cetera, businesses from receiving the protection provided in subsection (a). [Subsection (b)(1) read: "(b) The defense in (a) of this section may not be asserted (1) by a business that manufactures or sells software, firmware, microcode, hardware, or embedded microchips that create, read, write, calculate, compare, sequence, or otherwise process data that consists of dates, times, or both dates and time if the business represented that the software, firmware, microcode, hardware, or microchips were year 2000 date change compliant; this paragraph does not apply to a business that only rents or leases software, firmware, microcode, or hardware that is manufactured by another person or;"]. CHAIRMAN ROKEBERG commented this subsection said that if someone was in the business and had a contractual obligations, those obligations should be enforced. He noted there was a witness from the business who wished to testify from Anchorage on this. The chairman suggested "sells" should be inserted on line 19 in the exception, "this paragraph does not apply to a business that only rents or leases software, firmware, ...", to exclude a retailer like COSTCO [COSTCO Wholesale Corporation] from subsection (b)(1). Chairman Rokeberg said he was not sure the drafter had understood the chairman's intentions with regards to subsection (b)(2), ["(b) The defense in (a) of this section may not be asserted ... (2) in an action based on a contract."] Noting the committee had discussed that the contractual cause of action would be the foundation of almost all of these actions, he indicated the intention had been to allow the defense to businesses involved in contracts, with the exception of those businesses specified in (b)(1), with the previously-mentioned exclusions. Number 1653 CHAIRMAN ROKEBERG commented the standards for bringing a class action suit [subsection (c)] had not changed from the previous version. Subsection (d)(1) limits any award to economic damages except for the case of fraud. He noted this was consistent with all of the other bills, referring to Congress's Senate Bill 96 (S.96) introduced by Senator McCain which contained a prohibition on punitive damages. Subsection (d)(2) set out that the civil action had to be submitted to mediation conducted under the Alaska Rules of Civil Procedure before a court action. The chairman said he further planned to ask Mr. Ford to insert a "cure" section, stating, "Before you can bring a cause of action, you should have the right to remediate by curing the problem before you go to the next step, which is mediation, and then the next step, which is the courts." The chairman indicated a major objective of the legislation was compliance and remediation to avoid litigation. Chairman Rokeberg stated the balance of the bill was basically the same as the previous version, indicating he thought the repeal amounted to a defacto statute of limitations. He mentioned to Mr. Ford their previous discussion regarding the six steps of a due diligence plan, the controversy over whether that should be more generic and be left to the courts, and the chairman's preference for allowing the House Judiciary Committee to debate that issue. Number 1784 MR. FORD noted it was a difficult decision, because if it was specified as in the bill people certainly knew what they needed to do, yet there was the risk something important may have been omitted. If it was made more generic, simply saying "'Do the right thing,'" then it was up to the courts to decide. Mr. Ford indicated this could be desirable because the courts could examine the situations at the turn of the century and decide what the law means at that time. He said there were benefits and penalties for both approaches. CHAIRMAN ROKEBERG stated he thought one of the biggest problems would be the embedded chip problem, and there was no real way to do much about it in advance. Number 1824 REPRESENTATIVE MURKOWSKI stated she personally would prefer not to have the specifics in the legislation, but suggested, if that was to be retained, everyone could be satisfied by saying, "'The business makes the following efforts, including but not limited to the following,'" She indicated this would set out minimum specifics one would expect to be followed, but that perhaps there might be more that could be looked to. By spelling out items one through six, if a business hadn't satisfied number four, it had not done its due diligence. Representative Murkowski noted she thought this caused concerns but the language could be finessed. CHAIRMAN ROKEBERG directed this to Mr. Ford. Number 1872 MR. FORD pointed to (a)(5) ["(5) comply with industry regulations or requirements related to the year 2000 date change, including testing information systems for compliance with the year 2000 date change; and"]. He commented they didn't know what these industry regulations or requirements were and then they went on to say, "including testing ..." Mr. Ford stated under Alaska's ["our"] laws "including" means "including but not limited to," so they already had an example of what Representative Murkowski had spoken of. He said, "This is a provision that isn't exactly the only thing we need to do. Where it says, 'Do these things and maybe something else if it's an industry regulation requirement.'" He indicated the committee could follow Representative Murkowski's suggestion. Mr. Ford confirmed using "including" before the six items accomplished that purpose, stating, "Make efforts to avoid damages claimed including the following six things, that means including but not limited to." CHAIRMAN ROKEBERG noted the committee could make that change, asking Mr. Ford if it would be helpful. Number 1941 MR. FORD said it satisfied some of the mentioned concerns; the list is no longer limited. Mr. Ford indicated the downside, not necessarily a bad thing, was that this would require a business to pay attention to other possible things outside the six listed items in order to make the strongest defense. He further commented he thought it was a good idea. CHAIRMAN ROKEBERG confirmed it still required a business to do the original six items. Therefore, he said, it could still be argued that these were too specific, "too much of a plan to stipulate statute." He confirmed a failure to do one of the listed items raised the implication that the defense could not then be applied, noting that became problematic. Number 2013 REPRESENTATIVE MURKOWSKI added there might be items which would absolutely have to be performed in certain industries like utilities, but which would not be necessary in other industries like banks or grocery stores. She stated she thought the more general they could make it, while still giving guidelines, the better off they would be. CHAIRMAN ROKEBERG commented on the need to give it some flexibility without being too specific. MR. FORD noted the federal law did that. Number 2054 REPRESENTATIVE HALCRO agreed with Representative Murkowski, noting testimony from Commissioner-designee Poe on HB 57 before the House Community and Regional Affairs Standing Committee regarding the efforts to check village clean water systems for any black boxes. Representative Halcro indicated private enterprise wanted to avoid Y2K failures in the interest of business success, and the committee should be very protective of good faith efforts. CHAIRMAN ROKEBERG stated he would not object to making those changes in this section and thought the committee was generally in agreement. Number 2109 REPRESENTATIVE MURKOWSKI asked Mr. Ford where the generic reference was in the McCain legislation [S.96]. MR. FORD noted there was a good faith limitation under Section 5 [Section 5(d)] which stated damages were not received, except for economic losses, if due diligence and reasonable care were demonstrated. He confirmed he did not believe "due diligence" and "reasonable care" were defined. [Section 5(d) of S.96 IS: "(d) GOOD FAITH LIMITATION.-Damages in a Y2K action may not be awarded, except for economic loss, against any defendant who demonstrates that the defendant exercised due diligence and reasonable care to prevent or remedy the Y2K failure according to generally accepted standards of care and effort in the business activity in which the defendant was engaged."] CHAIRMAN ROKEBERG indicated that was the direction they were heading. He asked Mr. Ford if they would lose anything by not being specific, or if there were other considerations. MR. FORD replied it was probably better to use a generic provision in an area like this where less rather than more was known because the court could come in and say that, given what was known at that time, due diligence was or was not exercised. He commented that was sort of what the courts were designed for, and that the principle of negligence has always been based on a reasonable person. He noted this was really just an application of the reasonable person principle. Number 2160 CHAIRMAN ROKEBERG indicated they wanted to make this state statute, coordinated or similar to federal statute, but: 1) they did not know whether the federal legislation would pass, 2) the federal legislation contained provisions for state law. The chairman noted his idea was that they should pass a state law in the event the federal legislation did not pass, but support the federal legislation if it passed. He indicated a state law could also be useful in addition to federal legislation if anyone went "venue shopping," or something similar. The chairman noted he would entertain a motion for a conceptual amendment from Representative Murkowski. Number 2208 REPRESENTATIVE MURKOWSKI moved that the committee make a conceptual amendment, Conceptual Amendment 1, adopting the language in S.96 [S.96 IS] regarding good faith limitations. CHAIRMAN ROKEBERG indicated some of the economic loss language was already in the bill. He asked if there were any objections to the amendment. There being none, Conceptual Amendment 1 was adopted. Number 2240 CHAIRMAN ROKEBERG restated his previous comments on subsection (b)(1), including the insertion of "sells," on line 19 between "only" and "rents". MR. FORD noted it looked like this was only intended to apply to manufacturers, not to those selling other manufacturers' software like COSTCO. CHAIRMAN ROKEBERG questioned whether the drafting included service providers, commenting that was his intention. He clarified for Mr. Ford that he wanted to exclude the retail shop, but not the software or hardware consultant firm that sold and/or consulted "in the whole electronic area." Number 2323 REPRESENTATIVE MURKOWSKI suggested changing the language on line 14 [page 2] so subsection (b)(1) read: "(b) The defense in (a) of this section may not be asserted (1) by a business that manufacturers or services software, ..."; and changing the language on line 19 [page 2] so that the exception read: "this paragraph does not apply to a business that sells, rents or leases ...". She indicated this would accomplish both of the chairman's intentions. REPRESENTATIVE HALCRO questioned how this would apply to CompUSA [CompUSA Management Company] which both sold and serviced computer equipment. Number 2359 CHAIRMAN ROKEBERG asked Mr. Ford to stand by, and stated the committee would take testimony from Scott Thorson in Anchorage. He confirmed Mr. Thorson had received Version H, the proposed CS. Number 2412 SCOTT THORSON, President and Owner, Network Business Systems (NBS), testified next via teleconference from Anchorage. He indicated he had received the proposed CS only five minutes before, but had been listening intently to the committee's discussion regarding some of the bill's provisions. Mr. Thorson stated Network Business Systems was one of the largest computer networking companies in Alaska, currently employing 45 people, and was one of the few locally owned and operated companies in its market space operating in the state. He said he would not follow his prepared testimony, in order to focus on the committee's discussion regarding manufacturers and sellers of software products, indicating he was not sure the committee realized how little control a service provider such as NBS had over the products it resold. Network Business Systems has zero control over the current Y2K compliance status of any given product in the marketplace. For example, Microsoft Corporation's (Microsoft) Windows 98 operating system has been promoted as fully Y2K compliant but recently a "patch" has been released to address Y2K deficiencies. Mr. Thorson noted this problem was pervasive throughout the industry, stating, "If you think about all of the products that are out there in operation, all the different model numbers and part numbers, all the different code that's in hardware, in embedded systems and in software, and realize that in each of the cases, each product, there have been numerous revisions in the process and the procedures in which a service provider like Network Business Systems would use to mitigate Y2K problems. As an example, Novell [Novell, Incorporated] has released, I believe, two or three different patches for their NetWare operating system Version 3 in the last six months I believe there's been three..." [TESTIMONY INTERRUPTED BY TAPE CHANGE] TAPE 99-17, SIDE B Number 0001 MR. THORSON continued, "... we may find ourselves in a situation to where the manufacturer has changed the process to make a particular product Y2K compliant. We don't know anything about that because the only way that you find out about these things is when you're actively searching information about a given product, and we may or may not know that they've changed their process -- and now Y2K ... the calendar clicks over to January and all of a sudden this guy's product, for whatever it is, doesn't work. I'm not sure that it's fair that we're held liable for it simply because we did the due diligence, we followed the manufacturer's process at the time that we did the work, and brought that product into year 2K compliance, but subsequently since we did that work, the manufacturer has changed the process in which to do that." CHAIRMAN ROKEBERG commented that Mr. Thorson was seeking some immunity along with everyone else because he was subject to the same problems. Number 0048 MR. THORSON said they were pretty much at the mercy of the manufacturer. He indicated he was very pleased such legislation was being brought forward because he had been considering leaving the Y2K business entirely. He commented it was a bad thing to do because their customers were not technically qualified to address these problems, but there was a significant risk to his company. His insurance agent has said it is impossible for them to get any E&O [errors and omissions] coverage at this time for Y2K issues. CHAIRMAN ROKEBERG indicated this was illuminating because these were the professionals needed to fix people's networks. Number 0082 MR. THORSON agreed, noting NBS was currently providing support for approximately 450 networks. Many of their customers have delayed Y2K mitigation because of the customers are aware of the manufacturer's rapidly evolving environment. CHAIRMAN ROKEBERG asked if the customers were waiting for all the patches because it was cheaper to have NBS do all the work at once. Number 0103 MR. THORSON replied it was cheaper than having NBS come back three or four times to update patches the manufacturer said were no longer current. He confirmed this presupposed the customers assumed their hardware and software were almost compliant initially. Mr. Thorson noted a lot of the previously-discussed steps of mitigating Y2K problems made some sense, closely mirroring the process NBS used. He said there were some minor changes, commenting, " I could send you some documentation that we use as an example that would lay out the steps that we currently follow for doing this. The only area of trouble that I see there is item number 5, where it says, 'comply with industry regulations or requirements.' There are no industry regulations that I'm aware of and I'm not really sure requirements would be the right word. I think that a word that would be more useful would be something like 'process or procedure that's designed by the manufacturer' because that's typically the guidance or the guidelines that we as a technology company use to mitigate Y2K problems." CHAIRMAN ROKEBERG questioned whether Mr. Thorson wasn't under a contractual obligation to bring a particular network into Y2K compliance when he was hired and paid by that business to do that. Number 0171 MR. THORSON said NBS used language in its contracts with customers for Y2K work that absolved NBS of liability if the system did not work. The reason that language was included is because they are depending on the manufacturers to tell them the correct way to fix the problem without having any way of knowing whether the process the manufacturers have created will work; therefore, NBS cannot give any guarantees. There are also a lot of other issues involved. For example, most networks are set up with software and hardware from multiple manufacturers: software from Microsoft, Novell, Corel [Corel Corporation] et cetera, and hardware from Hewlett-Packard [Hewlett-Packard Company], Compaq [Compaq Computer Corporation], Cisco [Cisco Systems, Incorporated], et cetera. These various products can react with each other in very unpredictable ways when combined into a network. For example, when NBS creates a new network, they are expecting these products to interface together in a certain way, but this doesn't always happen, and the manufacturers aren't even aware of some of these problems. Mr. Thorson indicated that fixing Y2K problems was not a black and white science. They checked every product by part number, obtaining the Y2K compliance process for that product from the manufacturer, generally downloading the information from the manufacturer's website. If NBS does this Y2K compliance work in March of 1999, for example, and then in July of 1999 the manufacturer of one small component embedded inside one of the servers changes the Y2K compliance process for that component, there will be a problem on that network when the year 2000 date changes unless NBS catches this change somehow, although NBS might not have any reason to revisit that manufacturer's website. Mr. Thorson indicated they could not give a guarantee because they couldn't know if the manufacturer's Y2K compliance process was correct and would not change after they had performed the work; they had to take the manufacturer's process at face value. Number 0328 REPRESENTATIVE HALCRO referred to a previous House Community and Regional Affairs Standing Committee hearing on HB 57 [February 4, 1999], a bill that granted immunity to state government, municipalities, school districts, et cetera. He commented another Representative had noted even the federal government was not receiving guarantees from its Y2K contractors, which Representative Halcro said had sounded strange at that time. However, he indicated Mr. Thorson's testimony made this situation understandable. He asked if this was a common contract clause in Mr. Thorson's industry - that they could not be held liable because they were depending on information from the manufacturer. Number 0371 MR. Thorson replied he thought it was a fairly common way for companies like his to mitigate this risk as much as possible. They have no way of knowing for sure that once a given piece of hardware or software will really work once it is brought into Y2K compliance per the manufacturer's recommendations; there are too many variables. For example, he noted that even if they had the resources to check the seven or eight million lines of code in Microsoft's Windows 98, Microsoft restricted that source code information from the public domain. REPRESENTATIVE HALCRO asked if Mr. Thorson thought the mere fact that "they" [the businesses] had hired NBS to address the Y2K problems in their systems showed "they" [the businesses] were attempting to address any potential problems in good faith. Number 0438 MR. THORSON answered in the affirmative. He indicated he believed any company doing the best it could do, with what it had to work with, should not be held liable. Number 0470 REPRESENTATIVE MURKOWSKI indicated her concern that Mr. Thorson was considering getting out of the Y2K business at this point because of the potential for liability. She referred to the McCain legislation [S.96], noting the federal legislation basically said that anybody other than a manufacturer was only liable if there were instances of fraud [or] failure to exercise reasonable care. She commented this might be something the committee would want to look at in terms of how they could provide some measure of protection to those providing the service. CHAIRMAN ROKEBERG indicated there would be a definition problem with the language in HB 82; they would have to define manufacturers as those that create the source code, but those code writers aren't manufacturers per se. He asked Mr. Thorson whether the creation of the code in the software was the ultimate problem. Number 0560 MR. THORSON said it was. He knew of only four methods by which software could be Y2K compliant and it had to do with the formatting of a four-digit year date field. He commented software was also at the heart of hardware. Mr. Thorson said he believed the ultimate responsibility for Y2K compliance needed to be with the manufacturer of the hardware or the software, provided that manufacturer be defined as the person who was actually responsible for creating and selling the product into the distribution channel, not the distributor. For example, someone who creates a line of business software products relying on Microsoft SQL Server. He stated, "They may be using Microsoft SQL Server as the underlying engine of the database that their line of business software application runs on. In that situation there's two components: there's Microsoft's responsibility to be sure that SQL Server is Y2K compliant, and the manufacturer or the creator of the line of business applications that's taking that Microsoft SQL Server database engine and then adding code on top of that to create a package that manages a doctor's office or something like that." CHAIRMAN ROKEBERG agreed there was overwritten code, but asked, "What about the issue that revolves around legacy software like COBOL or UNIX programs that are old and they're still -- (indisc.) almost embedded in the software (indisc.) larger mainframes or (indisc.) other servers?" Number 0658 MR. THORSON replied that was a real problem, commenting he didn't operate in that area and hadn't give it much thought. Noting he hated to "throw gasoline on the fire ... a little bit," Mr. Thorson stated, "To take it one step further, there's also, you know, like COBOL code and FORTRAN code and a lot of the old legacy hardware products as well, you know, down in the ROM [read-only memory] chips and in different pieces of hardware, there's memory chips that have programs hard-coded into the chip itself. And in many cases, the person who wrote that code or the manufacturer that created that chip may not even be in business any longer." CHAIRMAN ROKEBERG indicated Mr. Thorson's statement that he was considering getting out of the Y2K mitigation business concerned the chairman. The chairman noted it seemed Mr. Thorson was asking to be granted some limited form of immunity for his work. Number 0720 MR. THORSON stated that was correct, emphasizing he did not expect any government entity or agency to give him blanket immunity for doing poor work. Mr. Thorson indicated he had no problem with his business being held responsible for mistakes it might make in the performance of a Y2K compliance job for a customer; for example, failing to check the server or failing to check the Y2K compliance of a software product with the manufacturer. However, it was very difficult for him, from both the financial responsibility and moral perspectives, to accept the prospect of being considered at fault if someone's product failed even though NBS had done the work that could be done to see if that product was, in fact, Y2K compliant. He noted he wasn't looking for "a free ride;" he was looking for help to manage a problem he really had no control over. CHAIRMAN ROKEBERG referred to Mr. Thorson's service contract provisions. Number 0792 MR. THORSON replied they'd done the best they could do, but it was his understanding that still was not a strong position to be in. He commented $600 million was a figure used in the industry for the cost of resolving the Y2K problem; the legal liability was estimated to be over $1 trillion. The current industry thinking is that the liability will exceed the generated revenue by almost a factor of two and that seems a "bad bet to go against." CHAIRMAN ROKEBERG said those were the Gartner Group, Incorporated's numbers and had been mentioned quite frequently. MR. THORSON indicated he did not have the specific origin of those numbers with him. He thanked the committee for the opportunity to testify and praised the committee for bringing this kind of bill in front of the legislature. Number 0886 CHAIRMAN ROKEBERG, in an aside, commented that was a very key area because of the embedded chips (indisc.). The chairman confirmed there were no other witnesses in Anchorage. He invited Marianne Burke of the Division of Insurance forward, noting a memorandum [in the committee packet, dated February 24, 1999] had been sent out to a number of insurers. The chairman said Wally Cathcart of Cathcart Limited had replied. The memorandum's first question was: Do current E&O [errors and omissions] and D&O [directors and officers] policies protect against Y2K failure claims? [Additional memorandum questions: "2. Are Y2K failure policies readily available? 3. What would be the impact of requiring these policies to cover Y2K failures? 4. What has the insurance industry been doing to ensure Y2K compliance of the industry itself?] Chairman Rokeberg discussed Mr. Cathcart's response to the first question and Mr. Cathcart's indication that Y2K insurance was very limited or almost impossible to get. He asked for Ms. Burke's comments. [Mr. Cathcart's response read: In response to your FAX of 2/24/99 the following is my response to the questions posed. These answers are after consulting with major carriers who are involved in the D&O and E&O coverages. No. 1 - Standard E&O policies routinely include a Y2K Exclusion. On a case by case basis underwriters may delete the exclusion after a careful review of Y2K questionnaires. D&O policies may have an exclusion, be silent or offer coverage on a limited basis. Any Y2K coverage on a D&O policy will be for claims brought by third parties. No. 2 - No - Insurance Carriers view Y2K failure claims to be foreseeable, known events. (Last year there were some policies available for very large companies (Fortune Five-Hundred) but underwriting was very strict and very few if any [were] written.[)] No. 3 - At this date I do not think this is possible. No. 4 - Insurance carriers are developing their own compliance policies and will provide status upon request. Since the Y2K problem has become a coverage issue the insurance industry has devoted extensive effort in providing information and requiring written documentation of compliance.] Number 0979 MARIANNE K. BURKE, Director, Division of Insurance, Department of Commerce and Economic Development, came forward to testify next, indicating John Ference, acting Deputy Director, the supervisor responsible for reviewing company filings was also present. Ms. Burke indicated the Y2K issue was a very major problem, as had been testified to previously. Unlike most risks one seeks insurance to cover, there is no precedent for Y2K. Basically there's no way to underwrite - for an insurer to determine how much it needs to charge - for this type of coverage. The Division of Insurance has received a quite a few inquiries from insurance companies regarding their particular filings. In summary, without being able to quantify what a potential risk may be, it is very difficult for a insurance company to determine what a premium should be. The division is charged with making sure the companies also stay solvent, not taking on risks which would put them into an insolvent situation. The comments and discussion regarding Y2K coverage have been occurring since the 1970s, contrary to what people might think. The committee has received eloquent testimony that the solution was not ever really in one company's or one person's hands because there are a number of software and hardware packages from different manufacturers, with software programmed by different programmers. Number 1094 MS. BURKE stated giving the assurance that a system was Y2K compliant boggled her mind because of all the different components. She referred to the multi-million lines of code and noted the companies have been quick to want make it clear they do not cover Y2K exposure. Ms. Burke mentioned the legal loophole that could arise if companies stated they did not cover Y2K; an attorney could say the company had not said they did not cover some other calamity. If a company says it doesn't cover something, the inference is made that it covers everything else. Ms. Burke confirmed it was extremely difficult to get E&O or D&O coverage that would include Y2K, but that it was available for a price. She noted it was a gamble, one that really concerned her as a regulator regarding anyone taking on that liability on a mass basis. She questioned what this could do to the solvency of those companies. Number 1192 CHAIRMAN ROKEBERG indicated the committee had received a letter from VECO Corporation requesting that existing E&O and D&O insurance be statutorily mandated to be applicable to this situation. However, his review of the circumstances and Ms. Burke's testimony seemed to indicate this would be bad public policy because it could potentially jeopardize the solvency of the state's insurance industry. He noted this was because of the unknown factors in the underwriting and the fact that there was a foreseeable risk. He asked Ms. Burke to comment on Mr. Cathcart's response that an endorsement could be added to a policy after careful review of a questionnaire. Number 1266 MS. BURKE said that was true. If the client can demonstrate that it is Y2K compliant to the underwriter, the client can get a rider for the appropriate premium. Ms. Burke noted this concerned her because she wondered how anyone could be absolutely sure they were completely Y2K compliant. However, she commented there were no guarantees in the realm of insurance; it is a matter of taking risk and one does whatever one can to minimize and control those risks. Ms. Burke indicated it was a very strict area of underwriting and the division required an insurance company to provide the division with the underwriting information. She commented the division had had to work very carefully not to give one company an advantage over another since this could get into proprietary information and everything that came into the division was public information. CHAIRMAN ROKEBERG questioned whether the division had been monitoring this situation. Number 1349 MS. BURKE stated the division was in a very unenviable position. The division has to be Y2K compliant as a regulatory agency, but it also has to make sure the insurance industry is Y2K compliant so that the claims could be paid as they came due. Number 1374 REPRESENTATIVE HALCRO referred again to HB 57, granting immunity to state and municipal [governments], noting Commissioner-designee Poe [Department of Administration] had spoken of "deep pockets." Representative Halcro asked if Ms. Burke supported granting some kind of immunity to private enterprises that could show they had tried to address this problem in good faith. Number 1425 MS. BURKE replied she would qualify any kind of support, questioning what was "good faith." She stated any granting of immunity had to be so carefully worded to: 1) avoid giving carte blanche for someone to sit back and do nothing, 2) to avoid situations where fraudulent claims could be made. However, she said the thought of the potential litigation was worse than the thought of the claims because of litigation's expense. From a realistic point of view, she thought legislation was needed to limit potential litigation but needed to be carefully crafted. Ms. Burke indicated it didn't seem to be good public policy to hold people liable for something for which there was no precedent. REPRESENTATIVE HALCRO indicated testimony on S.96 related that the combined exposure of tobacco, asbestos and breast implant, superfund lawsuits, et cetera, combined, would pale in comparison to the Y2K exposure. He asked if he was hearing that Ms. Burke would support this, with adequate protections. Number 1571 MS. BURKE answered in the affirmative, commenting she always hated to say she supported something in the abstract. CHAIRMAN ROKEBERG stated the bill's concept was to minimize the amount of litigation and therefore minimize potential claims made against the insurers. He mentioned case law regarding the "Cincinnati Insurance Company." Chairman Rokeberg asked if this legislation would lower the amount of claims that might ultimately be found to be payable if certain case law went against certain insurers. Rephrasing, he stated, "In the overall spectrum, wouldn't this bill be good for insurance companies, 'cause it would limit the amount of claims ... if any at all occur." Number 1652 MS. BURKE indicated the legislation did not specifically address claims against insurers. Ms. Burke indicated she thought the worst litigation would be over whether or not coverage existed, stating, "I do think this would help to minimize the situation, and at least have control [over] the upper limits." CHAIRMAN ROKEBERG asked Mr. Ford if Version H granted immunity to the officers or directors of a corporation that performed due diligence and made a good faith effort as reviewed by the courts. Number 1707 MR. FORD answered in the affirmative, but noted there was enough room that there would continue to be litigation. Even though the courts might find that there is immunity, there would still be arguments over the key provisions. However, this is a big step in the right direction. REPRESENTATIVE HALCRO asked if there was a way to make the loser in litigation pay. MR. FORD replied, "(Indisc.) our system of civil justice here, the loser does pay. We have an excellent system, I think, as far as efficiencies in managing civil litigation. So, we have a number of things in our law presently that tend to make people resolve their differences before litigating it." Number 1808 CHAIRMAN ROKEBERG commented that was the bill's purpose, indicating the steps of a cure remedy, mediation, the courts with limitations to actual damages, were all ways to minimize this burden without removing the rights of those that had been damaged to seek a cause of action. That is the balancing act. This is not intended to be pure immunity; it's just a short-term tort reform for this particular issue. Chairman Rokeberg confirmed from Ms. Burke that Alaska businesses should not expect to be covered for Y2K unless they had special riders or other provisions, or had been noticed that their policies covered it. Number 1870 MS. BURKE added the division had some wording it would like the committee to consider. She commented it would be helpful to Mr. Thorson. On page 2, line 14 [subsection (b)(1)], she suggested "a business that manufacturers, sells, services [,] designs or provides services in connection with the sale of software, firmware ...". Ms. Burke noted, then, if any of those people represented that it was Y2K compliant, they did not have the protections. CHAIRMAN ROKEBERG said that was the committee's point, commenting he thought Mr. Thorson was arguing for the converse - minimizing the scope. Number 1974 REPRESENTATIVE MURKOWSKI asked what the division was doing to make sure the entities it regulated were communicating to their clients that the clients were not insured for Y2K failure. Number 2010 MS. BURKE replied, "We started two years ago with the domestics in this state, requiring them to do a number of the things you list here as well as a number of other things. Our authority goes toward those companies. Now, every company is domiciled in some state - that is all the domestics and the foreign companies. Each state is doing the same thing. Collectively we have decided that's the best way to address the companies' compliance." She said all they could do was what industry standards indicated was appropriate. Ms. Burke noted so much of the data of an insurance company was date sensitive and commented that although they had begun this process two years ago, she had no illusions anyone could tell her they were absolutely Y2K compliant. REPRESENTATIVE MURKOWSKI confirmed the companies had at least made the notification, were going through the education process, and the awareness was out there. Number 2104 CHAIRMAN ROKEBERG thanked Ms. Burke for her testimony. He referred to page 2, subsection (d)(1), "(1) damages may be awarded for economic losses only unless the business against whom the action is brought committed fraud; and" and asked Mr. Ford's regarding the possible addition of "misrepresentation." He confirmed fraud and misrepresentation were different things, questioning whether a higher level of damages might be triggered if both occurred. Additionally, he asked what was typically done in the contract law about that. Number 2179 MR. FORD replied he thought they were mentioning an intentional act when discussing fraud; misrepresentation may or may not be intentional. Adding "misrepresentation" without preceding it with "intentional" expands the group that could be held liable for these kinds of damages. REPRESENTATIVE MURKOWSKI referred to the use of the term "intentional wrong-doing" in the federal legislation. MR. FORD indicated he thought that was the same thing as the fraud concept, stating, "It's an intentional act when you know what you're saying is wrong." CHAIRMAN ROKEBERG confirmed from Representative Murkowski that the federal legislation allowed for punitive damages. The chairman proceeded, commenting he thought the federal legislation excluded the joint and several liability damage concept and he would like that added to HB 82. Number 2276 MR. FORD said Alaska did not have joint liability. He commented Alaska had had several liability but that was changed by initiative in the 1980s, he thought. Number 2310 CHAIRMAN ROKEBERG referred to his previously-mentioned remediation and cure element, stating, "I think in all instances that prior to getting into mediation we should have the step of cure available as a remedy to everybody." He indicated even those businesses excluded from immunity by (b)(1) should have that right. The chairman moved a proposed conceptual amendment, stating, "I'd move a conceptual amendment number 2 to add the cure - remediation and cure to the (indsc.--interference with microphone) all instances." He asked if there was any discussion or objection to Conceptual Amendment 2, "to add remediation and cure to all parties involved." There being no objections, Conceptual Amendment 2 was adopted. CHAIRMAN ROKEBERG stated this brought the committee back the issue in subsection (b) which Mr. Thorson had testified on. The chairman noted Representative Murkowski's thought about using language from S.96, the federal legislation. Number 2443 REPRESENTATIVE MURKOWSKI indicated this provided that the immunity defense could not be asserted by a manufacturer, and the alternate language removed anyone else who had fraudulently represented and had engaged in intentional wrongdoing from the immunity protection. She commented they could probably provide protection to those like Mr. Thorson by doing it this way. CHAIRMAN ROKEBERG said, "Well, he's (indisc.) consider a computer consultant that deals and services and perhaps..." [TESTIMONY INTERRUPTED BY TAPE CHANGE] TAPE 99-18, SIDE A Number 0001 CHAIRMAN ROKEBERG continued, "... nor is the source code software writer, so, I mean we're looking at manufacturers of both hardware and software here, I think. I guess the one thing I'd like to include, though, is the software writers that made the original screw-up, if you will, ... that caused this problem in the first instance." The chairman indicated he was not in favor of the limited immunity applying to a computer consultant who wrote incorrect code for a hardware or software manufacturer. Number 0069 MR. THORSON suggested using the industry term "software developer" instead of "software manufacturer." CHAIRMAN ROKEBERG asked whether someone hired as a consultant to write code, and who made an error, would be included in that definition. MR. THORSON affirmed that. CHAIRMAN ROKEBERG asked Mr. Ford if he had any comments. MR. FORD questioned whether someone "develops" hardware as well. Number 0166 CHAIRMAN ROKEBERG commented he thought so, noting that it would be a manufacturer or developer of software, firmware, microcode, hardware, et cetera. However, by omission that excludes service and maintenance providers. The chairman stated, "And the rationale would be the testimony we heard, that these people -- I guess what troubles me is - what I was trying to get at originally when we were working on this draft - was including the contractual language, where ideally (indisc.) should be protected by (indisc.) contracts, and therefore you should be able to enforce those contracts against them (indisc.) because of this privity of contract thing. So, that to me should be the prevailing entity there. On the other hand ... I want to assist these types of businesses so they will maintain their activities in bringing the world into [Y2K] compliance." He told members that Mr. Thorson, former president of the "Resource Development Council" [Resource Development Council for Alaska, Incorporated] and active in the Anchorage community, was a credible person whom he had known for a number of years. Number 0313 REPRESENTATIVE HARRIS referred to page 2, line 19 [and 18], "... this paragraph does not apply to ...". He proposed perhaps inserting there the type of business that Mr. Thorson had talked about. CHAIRMAN ROKEBERG commented they needed to clarify that this was a retail outlet, suggesting "sells at a retail level". REPRESENTATIVE MURKOWSKI added, "Retail seller." CHAIRMAN ROKEBERG noted several other states had adopted that particular provision. Commenting that was an easy fix, he reminded committee members the issue was who should be excluded from the grant of limited immunity. It is the manufacturer of the hardware and software; it is the software developer if they define that person as someone who writes the code. He confirmed including that definition made it easier from a drafting standpoint. MR. FORD said he could work up something like that. Number 0409 REPRESENTATIVE HALCRO referred to page 2, line 14, "(1) by a business that manufactures or sells software, ...". He suggested the elimination of "or sells" on this line, indicating it seemed redundant and confusing if "sells" will be included on line 19 [lines 18 and 19: "... this paragraph does not apply to a business that only rents or leases software, ..."]. He suggested simply limiting it to manufacturers on line 14. CHAIRMAN ROKEBERG suggested the phrase, "manufacturers or develops". REPRESENTATIVE HALCRO said it could be creators or developers. REPRESENTATIVE MURKOWSKI agreed with "manufacturers or develops". CHAIRMAN ROKEBERG commented that was the code writer, known as the "software developer" per Mr. Thorson's testimony. REPRESENTATIVE HALCRO added that if he was Microsoft, he not only manufactured software, but he also sold it to the COSTCOs, CompUSAs, et cetera. Number 0479 CHAIRMAN ROKEBERG indicated the writer, the software developer, of a bad Y2K patch which he made available on the Internet would be culpable if someone relied on that patch. The chairman proposed using "manufacturers or develops" on line 14, removing "sells" on line 14, and inserting "sells" on line 19. He asked about adding "retail or wholesale" on line 19, noting it was really the retail business but questioning whether they should include wholesalers. Number 0529 PAM LaBOLLE, President, Alaska State Chamber of Commerce, commented she believed COSTCO was a wholesaler by definition. MR. FORD said he believed COSTCO was a hybrid, selling retail to the public but wholesale to businesses, with divided hours. CHAIRMAN ROKEBERG asked whether they wanted to include wholesale sellers of software, as well. MR. FORD agreed they would probably want to do that. REPRESENTATIVE MURKOWSKI suggested therefore leaving it as "sells". CHAIRMAN ROKEBERG agreed, commenting on keeping it simple. Number 0595 REPRESENTATIVE HALCRO made a motion to amend page 2 as follows: on line 14, delete "sells" and insert "develops"; and on line 19, insert "sells" between "only" and "rents". CHAIRMAN ROKEBERG labeled it Conceptual Amendment 3 and asked whether there was any objection. There being no objection, Conceptual Amendment 3 was adopted. He then asked whether line 21 should be deleted [subsection (b)(2), "(2) in an action based on a contract."]. MR. FORD explained, "Because subsection (a) allows you to assert the defense, in any civil action you need (b)(2) to allow [an] action based on contract to go forward on the contractual provisions, and not to supply additional provisions that could be used in that case." Number 0679 REPRESENTATIVE MURKOWSKI pointed out that it was an "or." She asked whether it was any action based in contract. MR. FORD answered, "Right. If you, in fact, ... aren't going to affect the contract action, then you need to have this provision in here. If I have a contract with you that says A, B and C, and I breach one of those provisions, you're going to sue me on that contract, and I could not assert this remedial process as a defense in that action." Number 0713 CHAIRMAN ROKEBERG indicated that was a somewhat troubling policy call because he wanted to maintain the right of contract to sue. He mentioned discussions with Mr. Ford, noting they both agreed a substantial amount of litigation would be under contract theory. The chairman questioned that if any kind of immunity was excluded, the situation was returned to suing under contract. MR. FORD said he believed there would be significant litigation on a contract basis. However, one can sue for economic damages without having a contract. Mr. Ford stated, "And if so, then having these provisions in here would be good because, then, this encourages those people to make those remedial efforts. The question you have to answer here is whether you'd want the remedial efforts to apply in a contract lawsuit. If you think that has merit, then we'll need to change this, so that in a contract lawsuit they would also have this ... as a defense." CHAIRMAN ROKEBERG said he was torn about which way to go. On one hand, the obligation of a business is the issue. On the other hand, if they don't grant the immunity, he questioned the reason for a bill. The chairman commented that almost all of the actions would be contract actions, with few, if any, personal injury actions. Number 0858 REPRESENTATIVE HALCRO noted Mr. Thorson had testified that in his contracts with clients, it clearly stated that although he was doing the work, he could not be held responsible if something was not Y2K compatible. Representative Halcro posed a situation where the inverse was true: A hypothetical Mr. Jones owned the same kind of company and was guaranteeing to clients that he could fix their problems, and then claimed immunity under subsection (b)(1) when something happened and the problems weren't fixed. He asked whether subsection (b)(2) wouldn't then provide the person harmed the right to sue based on the contract. Although Mr. Jones would be listed as having immunity, he would have signed a contract that stated certain provisions and agreed to certain things. MR. FORD specified that under this provision, someone who has a contract was not immune and did not have this defense. Number 0924 CHAIRMAN ROKEBERG indicated they were now leaning toward deleting it and allowing the defense to stand. He commented they had narrowed the scope of subsection (b)(2), the "geek clause," and he thought he would leave the right of the privity of contract to stand, which it would anyway. He asked for confirmation that they were not affecting that in any way, and that it stood alone. MR. FORD affirmed that. CHAIRMAN ROKEBERG said the policy call, then, was whether to grant the immunity defense in contract cases. He asked, "If we don't agree to that, then why have the bill, almost?" Number 0977 MR. FORD replied that if they made a distinction on a contract basis, in this situation they were probably talking about the majority of cases. CHAIRMAN ROKEBERG said the bill had some other merit, because of the class action mandates, limitations to actual damages except in the case of fraud, and so forth. He said it wasn't an easy decision, noting that contracts were the foundation of our entire economy. Number 1016 MR. FORD responded that this situation, though, with so many unknown factors, might justify this; it is basically adding a provision to the contract in statute. CHAIRMAN ROKEBERG pointed out that it was a major step. He asked whether the intrusion on the "privity of contract" was warranted because of the Y2K situation. REPRESENTATIVE HALCRO said he believed it was. The uncertainty is represented by the insurance industry's inability to clearly define the risks and to offer coverage. He said there was a tremendous amount of exposure, but he indicated it was an isolated situation because it was not a recurring event. Number 1084 MR. THORSON told the committee he would not object to leaving in the part of the bill that said if a person had a contract with someone, the language of the contract did not allow a claim of immunity under this bill. When his business does a large job for a customer, such as installing a new network or doing a Y2K audit, they have specific contract that spells out what they will do for that customer and what they are liable for. He indicated he saw a lot of the bill's value for him regarding situations not covered by such a contract. Mr. Thorson gave the example of fixing a customer's broken computer printer once - a service call typically done without a contract - commenting he would be protected against somebody saying "'Hey, these guys came out and fixed my printer one time, and now it doesn't work because it's not Y2K compliant; therefore, they're liable.'" Number 1186 CHAIRMAN ROKEBERG suggested that when someone went and repaired a printer, there was an implied contract and contract law principles would apply. He indicated what bothered him was not this particular situation but the circumstances under which the computer consultant would agree to fix the Y2K problem, fail to do so, then rely on this bill to excuse the failure to perform. In that situation the chairman said he thought the privy of contract should still apply. He said if there is specific language about the Y2K compliance, that should be superior if there is a written contract, wondering if that might be the way to attack it. Number 1249 REPRESENTATIVE MURKOWSKI indicated she had not heard anyone through hearings on the Y2K issue and in conversation giving expressed guarantees that no Y2K failures would occur. She proposed that those service providers who signed a contract guaranteeing they would fix a Y2K problem negated their opportunity for immunity and should stand on their own. CHAIRMAN ROKEBERG asked for Mr. Ford's thoughts. MR. FORD commented that if he were representing someone with a claim, and this language was in the statute, he would simply write the complaint so that it was not based on the contract. He said he wasn't certain that any greater protection would be achieved by leaving it in there, stating, "The contract is what the contract is, and it will be enforced by the courts." He suggested that applying the defense in all cases might be simpler and actually fairer, because everyone would then know what is available and what steps they should take. Furthermore, people would not have to worry about trying to couch a complaint in a particular way to avoid defects. Number 1341 CHAIRMAN ROKEBERG indicated the "case before the bar" was that one had to complete the due diligence, go through the steps, and also explain the breach of contract. He noted that whether to leave it in was a key issue. He suggested that the committee hold off on that amendment. MR. FORD agreed to take the question back to his office for discussion. CHAIRMAN ROKEBERG asked Mr. Ford to address what the relationship would be if both the state bill and the federal McCain legislation [S.96] were enacted, whether or not the federal legislation stayed in its current form. Number 1426 MR. FORD responded, "With the caveat, of course, that we don't know what we will wind up with in this state, and we don't know what they will wind up with in Congress, this bill actually has numerous provisions that are similar to the federal law. The differences really lie, I think, in the area of calculation of damages and also - in their provision - in treating people who rent, sell or lease software or hardware; that provision is fairly complicated in the federal law, and they have a whole process you go through to determine whether a person who rents or leases, et cetera, is going to be liable or not. So, that's more complicated than we have in our bill. I think what they've tried to do here is basically put up some more hoops you have to go through to get to the person who rents and leases but doesn't manufacture; they can be held liable, but you've got to go through a number of steps, and it's pretty difficult, from ... what I can see here. They do have some limitations on damages, depending on the size of your business, and we don't have that in our bill. And the limitations are actually on non-economic damages, not on economic damage; you can collect as much economic as you can prove, but as far as the other side, there's a limitation on that. They don't simply say you can't get any; they say you can only get so much." CHAIRMAN ROKEBERG asked whether punitive damages were capped or excluded. Number 1505 MR. FORD specified that punitive damages were allowed if they were allowed under state law, but non-economic damages were limited. CHAIRMAN ROKEBERG said, "So that would be another reason to have a state law is that under ... this type of a cause of action by excluding punitive damages, that would be controlling (indisc.) in the federal court," confirming from Mr. Ford that was correct under that version. The chairman commented HB 82 would "back-stop" the federal law with a small amount of overlap. He asked Mr. Ford whether this would discourage "forum shopping" to a degree, if the federal law passed, because the bills weren't radically different in approach. MR. FORD said he thought it would do that, commenting that was one reason to have federal legislation. CHAIRMAN ROKEBERG asked whether that was a reason to have state legislation as well. MR. FORD responded, "My advice always is to proceed and not to think about the federal law at all, simply because you don't know what will happen." CHAIRMAN ROKEBERG indicated Congress could still be working on its bill in September, but the Alaska legislature needed to act this legislative session on the Y2K issue. Number 1582 REPRESENTATIVE MURKOWSKI informed members several other states have said the immunity provision does not apply to a health care facility if death or bodily injury results from a failure or malfunction. She asked whether that was something the committee might want to include in the legislation. CHAIRMAN ROKEBERG replied he was open to that idea. One of the biggest concerns has been embedded chips in medical equipment, as failure can be life-threatening. He has seen conflicting reports about the progress of the health care industry in addressing the Y2K problem. Chairman Rokeberg thanked the testifiers, announcing his intention to take up HB 82 the following Wednesday [March 3, 1999]. He indicated HB 82 would be held over.