Legislature(2001 - 2002)

04/18/2002 02:22 PM TRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
            SB 327-MOTOR VEHICLE LIABILITY INSURANCE                                                                        
CHAIRMAN JOHN  COWDERY called the Senate Transportation  Committee                                                            
meeting to  order at 2:22 p.m. and  announced SB 327 to  be up for                                                              
SENATOR  DAVE DONLEY,  sponsor of  SB  327, said  a recent  Alaska                                                              
Supreme Court decision in State Farm  Mutual Auto Insurance versus                                                              
{indisc.]  held  that  uninsured/underinsured   motorist  coverage                                                              
includes  any  punitive  damages  if  the  coverage  for  punitive                                                              
damages  is   not  specifically   excluded  under  the   insured's                                                              
liability policy.                                                                                                               
SENATOR  DONLEY said  he is  very  pro-consumer when  it comes  to                                                              
insurance  and he could  understand  why a consumer  would  want a                                                              
windfall    from    punitive    damages    from   his    or    her                                                              
uninsured/underinsured  policy, but  no public  policy exists  for                                                              
such activity,  unless you're planning on  successful subrogation.                                                              
He stated:                                                                                                                      
     The whole  intent of punitives  is to deter  bad action.                                                                   
     If  your   first  party  insurance   is  going   to  pay                                                                   
     punitives, there's  no deterrence with the  exception of                                                                   
     successful subrogation.                                                                                                    
He said in this case, he agrees with  the insurance companies, but                                                              
his concern, from the consumers'  point of view, is that this will                                                              
raise the cost of coverage.                                                                                                     
SENATOR DONLEY  said this  bill is intended  to reverse  that case                                                              
and clearly  say that  insurance companies  don't have  to provide                                                              
punitive  damages  coverage  as   part  of  uninsured/underinsured                                                              
coverage when they say they are not going to.                                                                                   
Additionally, Section 2 mandates  an offer of medical coverage. He                                                              
believes  it is  important  that  people be  given  the option  of                                                              
purchasing a  primary health  insurance policy. Medical  insurance                                                              
is very good  for people to have  and it is good public  policy to                                                              
encourage people to  buy it, because it protects  them. He said he                                                              
would be  willing to give  up the "each  renewal" language  in the                                                              
bill as long as  the option of health insurance was  made with the                                                              
initial  offer. He added  that insurance  is the  only area  where                                                              
discounting is  forbidden because  it is important  that insurance                                                              
agents take the time to explain everything  to their customers. He                                                              
hoped they were doing that.                                                                                                     
The   other  provision   in   the   bill  deals   with   expanding                                                              
comprehensive coverage to include  the cost of replacing defective                                                              
or worn out safety belts in vehicles.  Alaska statute mandates the                                                              
use of safety belts and since equipment  wears out, the idea is to                                                              
allow 50 percent reimbursement for  seat belt replacement from the                                                              
comprehensive  insurance. He  believes this  would be good  public                                                              
policy. He thought  the insurance industry would  whine about this                                                              
item not being a true part of comprehensive coverage.                                                                           
SENATOR   DONLEY   said   some   provisions   were   added   about                                                              
confidentiality  of insurance  records and  they are supported  by                                                              
the industry,  but he would defer  to the division to  explain it.                                                              
Amendment  C.1  clarifies  current   statutes  on  "UM"  and  "UI"                                                              
coverage. He stated:                                                                                                            
     Coverage  shall  be made  only  when a  direct  physical                                                                   
     contact between  the insured and the  underinsured motor                                                                   
     vehicle has occurred   - and this is a  problem that was                                                                   
     brought  to my  attention at  one point.  If you have  a                                                                   
     chain reaction  accident, number 1 here is  an uninsured                                                                   
     driver, plows  into number 2  and number 2  is propelled                                                                   
     into  number  3.  Well,  you  have  no  direct  physical                                                                   
     contact  between  1 and  3 and  so  there  has been  the                                                                   
     argument  raised in  the past that  the uninsured  UM/UI                                                                   
     doesn't  cover  you for  this  because this  person  had                                                                   
     insurance  - they  hit you  - although  it wasn't  their                                                                   
     fault.  You  don't have  a  claim against  this  person,                                                                   
     because it  really wasn't their fault. Right?  They were                                                                   
     pushed into  you by this  uninsured driver. And  this is                                                                   
     an effort  to make  it crystal clear  - I don't  believe                                                                   
     that people should be denied  the protection of their UM                                                                   
     and  UI because  of this  - but  just to  make it  extra                                                                   
     clear,  that's what  the attempt  is here  - is to  help                                                                   
     with this chain reaction type argument…                                                                                    
SENATOR ELTON  noted the amendments  had not been moved,  but they                                                              
were addressed and  he had a question about the  amendment and the                                                              
SENATOR WARD  moved to adopt Amendment  1, labeled C.2,  and asked                                                              
for  unanimous  consent.  There  were  no objections  and  it  was                                                              
SENATOR WARD moved to adopt Amendment 2, labeled C.1.                                                                           
SENATOR ELTON objected  to ask a question. He said  he thought the                                                              
way to  fix that  problem is addressed  on line  19 where  it says                                                              
"may be made only where direct contact  between the motor vehicles                                                              
has  occurred." That  language  will  remain in  the  bill and  he                                                              
wasn't sure how the amendment fixes the situation.                                                                              
SENATOR DONLEY agreed  and said that Mike Ford,  Division of Legal                                                              
Services,  could explain  it. He  said he didn't  want any  clever                                                              
insurance  lawyer  thinking  that  they can  avoid  coverage  just                                                              
because they're looking at this problem. He said:                                                                               
     I think they should pay in this  circumstance, because I                                                                   
     think  it's  real  unfair  to   deny  coverage  in  this                                                                   
     circumstance.  I want to  make that  real clear for  the                                                                   
MS.  SARAH MCNAIR-GROVE,  Property Casualty  Actuary, Division  of                                                              
Insurance,  said  this  was  the  first time  she  had  seen  this                                                              
language and she wanted to look at it before commenting.                                                                        
SENATOR DONLEY  said he would talk  to Mike Ford again  to see why                                                              
he thought this was a good fix.                                                                                                 
SENATOR  ELTON asked  if it  would be  easier to  not advance  the                                                              
amendment now.                                                                                                                  
SENATOR DONLEY said that would be all right.                                                                                    
SENATOR WARD  moved to  withdraw his motion  to adopt  Amendment 2                                                              
(C.1) and  asked for unanimous  consent. There were  no objections                                                              
and it was so ordered.                                                                                                          
SENATOR ELTON said he didn't understand  "successful subrogation."                                                              
SENATOR DONLEY explained:                                                                                                       
     In  uninsured/underinsured  coverage, this  first  party                                                                   
     insurance,  you buy this  insurance to protect  yourself                                                                   
     against the losses incurred  to you by a third party. If                                                                   
     an uninsured  driver hits you, you've got  insurance for                                                                   
     that. Your insurance  company pays you. They  now have a                                                                   
     claim against the person that  hit you and that's called                                                                   
     a  subrogation  - where  they  can  sue that  person  on                                                                   
     behalf of  your claim  that they paid  - the court  fees                                                                   
     they should have paid…                                                                                                     
     My  argument on whether  or not  your insurance  company                                                                   
     should pay  you punitive damages  that you were  awarded                                                                   
     from that  person who hit you  is that it  doesn't deter                                                                   
     that person at all, because  they're not paying it. Your                                                                   
     insurance  company is  paying  it. Right?  And the  only                                                                   
     exception  to that  might  possibly be  if  you want  to                                                                   
     think that  your insurance company  now has a  claim for                                                                   
     the punitive  damages they  paid you  on the court  fees                                                                   
     that you have…                                                                                                             
SENATOR ELTON said  that made sense, but it seems  if they want to                                                              
do that because  it takes some of the costs out  of the system and                                                              
they  are doing  that,  one of  two  things could  happen:  either                                                              
insurance rates don't  rise as quickly or they  would drop because                                                              
those costs disappear from the system.                                                                                          
SENATOR DONLEY  said this was a  fairly new case that  created the                                                              
problem and:                                                                                                                    
     Hopefully  insurance  rates won't  rise  as quickly  and                                                                   
     hopefully  you'll deter people  from retrenching  in the                                                                   
     amount of insurance they're  selling too, because one of                                                                   
     the dangers,  of course, is  the market would  become so                                                                   
     unattractive  that they just  decide not to  participate                                                                   
     in the marketplace.                                                                                                        
MR. MIKE  LESSMEIER, representing  State  Farm Insurance,  said he                                                              
knew of one company that quit writing  excess insurance because of                                                              
this problem. He noted it would basically  require people to pay a                                                              
premium so  they can  collect punitive  damages from someone  else                                                              
under the guise  of punishing them.  He said it makes no  sense at                                                              
all because they end up punishing themselves. He maintained:                                                                    
     We  think  that  uninsured   and  underinsured  motorist                                                                   
     coverage   was  created   to   compensate  people   from                                                                   
     uninsured and  underinsured drivers  and we need  to get                                                                   
     back to that. We think this  will have a positive effect                                                                   
     on losses…                                                                                                                 
SENATOR WILKEN  asked if State  Farm or other insurance  companies                                                              
in  Alaska track  their  annual losses  or  reimbursements due  to                                                              
uninsured motorists.                                                                                                            
MR. LESSMEIER  replied that  he was  sure they do.  To get  a rate                                                              
approval from the Division of Insurance,  they have to justify the                                                              
rate based  on loss experience. He  said he would be happy  to get                                                              
information on  why their rates have  grown for the  committee. He                                                              
     You look at State Farm last  year - lost nationwide $5.1                                                                   
     billion  - the  worst  loss ever.  In  Alaska we're  not                                                                   
     doing  much better.  We, in  [the] automobile  insurance                                                                   
     market -  as I  understand it the  reason that the  cost                                                                   
     continues  to go  up is  because  you look  at costs  of                                                                   
     medical that continue to rise  and the cost of repairing                                                                   
     automobiles  has  continued  to  rise.  The  issue  with                                                                   
     respect to  uninsured and underinsured  premium coverage                                                                   
     that we have  always struggled with, and  I know Senator                                                                   
     Donley  was here when  we created  this system, is  that                                                                   
     that  coverage has  changed and evolved  over the  years                                                                   
     and it's  great coverage in  Alaska. And Senator  Donley                                                                   
     has  insured that  it's great coverage,  but there  have                                                                   
     been things  that have been  tacked on to  that coverage                                                                   
     by  the  courts…the  [indisc.] case  that  created  this                                                                   
     excess  insurance issue  - that  was a  huge payout  for                                                                   
     State  Farm and  the simple  fact is  that frequency  of                                                                   
     loss and severity of loss are  what drive rates. And the                                                                   
     experience has not been good…                                                                                              
MR.  LESSMEIER  said  it  is  impossible  to  eliminate  uninsured                                                              
motorists. Massive  bureaucracies have  been created to try  to do                                                              
that, but they can give each individual  the ability to choose how                                                              
much  protection  they  want to  insure  themselves  for.  Senator                                                              
Donley has  created a system that  he thought was the best  in the                                                              
country, but it doesn't have anything  to do with the frequency of                                                              
loss or the severity.                                                                                                           
SENATOR WILKEN said he was interested in those numbers.                                                                         
SENATOR ELTON asked  if the losses are attributable  to investment                                                              
losses or to what they pay out in claims.                                                                                       
MR. LESSMEIER  replied that he understands  the figure to  be just                                                              
the loss.                                                                                                                       
SENATOR ELTON asked that a representative  of the Division testify                                                              
on the bill as amended.                                                                                                         
MS.  MCNAIR-GROVE  said that  she  believed  the committee  had  a                                                              
letter  from the  Director  of the  Division  in  support of  this                                                              
legislation.  The  medical  expense  coverage option  is  of  some                                                              
concern  because  that  would  require  a signed  waiver  on  each                                                              
renewal. She questioned  what would happen if  the insured forgets                                                              
to send it back with their check.                                                                                               
SENATOR DONLEY  asked her how important  that is to  the division.                                                              
He  wouldn't oppose  deleting on  line 24,  page 2,  "and at  each                                                              
renewal offer".                                                                                                                 
MS. MCNAIR-GROVE  said she  didn't believe it  would do  that. She                                                              
again questioned  what the  insurer would do  if they don't  get a                                                              
signed waiver on the renewal and  whether they would automatically                                                              
supply coverage.                                                                                                                
CHAIRMAN COWDERY asked if the division  had any suggestions on the                                                              
subject of uninsured motorists.                                                                                                 
MS.  MCNAIR-GROVE  said  that  they don't  have  a  solution;  the                                                              
coverage isn't  very expensive, but  the cost is  increasing every                                                              
MR.  LESSMEIER added  that the  offer idea  is a  good thing,  but                                                              
there is  probably no  way they  can have  a signed written  offer                                                              
every time.                                                                                                                     
SENATOR  WILKEN  asked  if,  when  one  signs  up  for  automobile                                                              
insurance, the  agent would ask, "By  the way, do you want  to buy                                                              
medical insurance?"                                                                                                             
MR. LESSMEIER  said when  a customer signs  up for any  automobile                                                              
insurance,  the insurance  agent should  inform the customer  that                                                              
under Alaska  law, he or  she has the  right to buy  uninsured and                                                              
underinsured  motorist coverage  at different  levels. He  thought                                                              
that people have to sign a waiver  if they don't want coverage. He                                                              
said in the context of that discussion,  the insurance agent would                                                              
tell the customer  that he or she has the right  to buy additional                                                              
coverage. That  would be part of  the initial offer and  one would                                                              
sign  one's choice.  He said  the offer  would be  made every  six                                                              
SENATOR  DONLEY said  right now  there is  no mandatory  offering.                                                              
They are discussing whether the offer  should be made initially or                                                              
at every renewal.                                                                                                               
MS. MCNAIR-GROVE commented  that just an offer would  be fine with                                                              
the division.                                                                                                                   
SENATOR  WARD moved  to  pass CSSB  327(TRA)  from committee  with                                                              
individual  recommendations  and  the  accompanying  fiscal  note.                                                              
There were no objections and it was so ordered.                                                                                 

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