HB 120-SERVICE CONTRACT SALES ARE NOT INSURANCE CHAIR ROKEBERG announced that the first order of business would be HOUSE BILL NO. 120, "An Act excluding service contracts from regulation as insurance; and providing for an effective date." Number 0080 REPRESENTATIVE McGUIRE moved to adopt CSHB 120, Version 23- LS0537\V, Ford, 4/8/03, as the working document. There being no objection, Version V was before the committee. Number 0125 RYNNIEVA MOSS, Staff to Representative John Coghill, Alaska State Legislature, testified on behalf of the sponsor, Representative Coghill. Ms. Moss explained that HB 120 basically exempts service contracts from state statute. [The Division of Insurance] was concerned that some premium taxes now collected for home warranties would be lost. Therefore, HB 120 was amended such that those premium taxes on home warranties will continue to be collected by the division, however, those selling home warranties won't be required to be licensed to sell insurance. She noted that there are two amendments for the committee to consider. [Amendment 1] reads as follows: Page 2, line 18: DELETE: ", or a part of the household structure" INSERT: after "system,", insert "or" Line 18 would then read: "limited to a household system or appliance." MS. MOSS explained that [Amendment 1] should solve the concerns that the Division of Insurance has with regard to conflict between home service contracts and home warranties. Number 0248 REPRESENTATIVE McGUIRE moved that the committee adopt Amendment 1. There being no objection, it was so ordered. MS. MOSS offered Amendment 2, which read: Page 2, line 19. Insert: (3) is not a contract of insurance under Alaska law. MS. MOSS explained that Amendment 2 adds the above provision to explain that under Alaska law a service contract isn't a contract of insurance. In response to Representative Berkowitz, Ms. Moss clarified that Amendment 2 would add paragraph (3) under Section 1 and thus Section 2 would move down. REPRESENTATIVE McGUIRE moved that the committee adopt Amendment 2. REPRESENTATIVE BERKOWITZ objected. He then inquired as to the [definition]of a contract of insurance and asked what attaches when a contract of insurance exists. MS. MOSS informed the committee that [Amendment 2] was a suggestion from an attorney who is dealing with service contracts throughout the country. She related her understanding that [Amendment 2] attempts to clarify that service contracts are much different from actual contracts of insurance. Insurance covers repair or replacement from perils such as fires, earthquakes, et cetera whereas service contracts cover repair or replacement from faulty parts or normal wear and tear. REPRESENTATIVE COGHILL pointed out that this is an explicit clarification. Number 0439 REPRESENTATIVE BERKOWITZ asked if there is a problem that this legislation is attempting to rectify. MS. MOSS replied yes. She explained that there are people selling service contracts who are unaware of the fact that the Division of Insurance has, for at least eight years, interpreted service contracts as insurance and [the seller] should have a license to sell insurance. When someone purchases an appliance or radio from Fred Meyer and the cashier asks if the consumer wants an extended warranty or service contract, the [business] is actually violating state statute. REPRESENTATIVE BERKOWITZ inquired as to the special protections that the consumer would receive when the service contract is considered insurance. MS. MOSS answered that she wasn't sure there were any special protections because the only folks aware that the service contracts are supposed to be insurance is the Division of Insurance. In further response to Representative Berkowitz, Ms. Moss specified that this problem was brought forward by some of the folks selling these service contracts. The sellers of these service contracts don't feel that they are selling insurance or covering the recovery of damages from natural disasters or other areas covered under insurance. CHAIR ROKEBERG interjected that this legislation is for a service contract that has legal protections under the contract not as insurance. This legislation attempts to draw a bright line between what's insurance and what's a contract obligation. MS. MOSS, in response to Representative Berkowitz, explained that the language in HB 120 is patterned after language that has been adopted by about six states. This [delineation between service contracts and insurance] is a nationwide trend. REPRESENTATIVE BERKOWITZ said that he was unclear with regard to what the term "contract of insurance" means. As a term of art, "contract of insurance" could include product warranties, he said. MS. MOSS said that perhaps the language [in Amendment 2] should say, "a service contract is not insurance in Alaska law." She noted that insurance is regulated by Title 21. Number 0687 LINDA HALL, Director, Division of Insurance, Department of Community & Economic Development (DCED), said that the things covered [in this legislation] for service contracts are perils that aren't typically covered in an insurance contract, such as wear and tear, mechanical failure, and power surges. Normally, an insurance policy includes a list of perils that is really the insurance contract and those perils are different than those covered by the service contract. REPRESENTATIVE BERKOWITZ posed a situation in which a business sought to insure its computers against power surges. He asked if there would be a conflict if the business had an insurance contract with an insurance company for that purpose. In other words, would the business purchase a service contract from an insurance company, he asked. MS. HALL replied no. Generally, insurance specifically excludes power surges, she noted. She agreed that there is nothing excluding the business from purchasing insurance [that includes] power surges. However, she said that she wasn't aware of insurance companies that sell coverage for power surges. REPRESENTATIVE BERKOWITZ pointed out that one could purchase insurance for defects in materials, workmanship, or normal wear and tear, all of which he characterized as fairly standard [coverage under insurance]. MS. HALL pointed out that typically [coverage for defects in materials, workmanship, or normal wear and tear] are specifically excluded in a standard insurance policy. Your personal computer would be covered under the homeowner's policy. REPRESENTATIVE BERKOWITZ surmised that if a service contract is defined as [specified in HB 120], would there be the risk that a personal computer at home wouldn't be covered under the homeowner's insurance because [the personal computer] is now excluded as part of the service contract. MR. HALL answered that she didn't believe that it would have an effect on changing exclusions on a homeowner's contract. The committee took an at-ease from 10:32 a.m. to 10:34 a.m. Number 0885 REPRESENTATIVE BERKOWITZ informed the committee that insurance is defined in AS 21.90.900(23), which reads: "(23) "insurance" means a contract whereby one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies". He expressed concern that the definition of the service contract excludes insurance and if there is an inconsistency between the definitions of service contract and insurance, there may be ambiguities in the law. CHAIR ROKEBERG related that subsection (e) is basically the bill. This is an attempt to define what is and is not insurance, he explained. REPRESENTATIVE COGHILL remarked that the language proposed in [Amendment 2] is really to specify what a service contract is not. CHAIR McGUIRE related her initial thought to insert the phrase "a service contract is not a contract of insurance under Alaska law". However, now she realizes that the [language suggested in Amendment 2] does modify the earlier definition of service contract and thus is appropriate. She noted that she maintained her motion to adopt Amendment 2. Number 0998 REPRESENTATIVE BERKOWITZ withdrew his objection to Amendment 2. However, he requested that the department review whether there are legal issues that would arise from incompatible definitions of service contracts and insurance. REPRESENTATIVE COGHILL assured the committee that if there are incompatibilities he would work on [correcting them]. There being no further objection, Amendment 2 was adopted. Number 1034 REPRESENTATIVE KERTTULA expressed concern with regard to the definition of household structure excluding insurance for home warranties. She pointed out that the language seems broad and makes her nervous. CHAIR ROKEBERG pointed out that the committee adopted Amendment 1, which should address her concern. REPRESENTATIVE BERKOWITZ highlighted that [with the adoption of Amendment 1] home warranty now means a warranty that covers the entire home. CHAIR ROKEBERG agreed. REPRESENTATIVE BERKOWITZ surmised then that [the home warranty wouldn't include] a roof, foundation, or floor. CHAIR ROKEBERG clarified that those could be service contracts that stand alone or could be part of a home warranty. The idea is to allow home warranties to remain as insurance products while the component parts [falls under] a service contract. REPRESENTATIVE BERKOWITZ related his belief that the entire home is an aggregate of its component parts. REPRESENTATIVE KERTTULA pointed out that the language specifies that a service contract doesn't include the home warranty that covers the entire home. She inquired as to the statutory definition of "household system." REPRESENTATIVE COGHILL highlighted that subparagraphs (A)-(C) [under Section 1] describe what is intended by service contract and thus would be the direction for determining the systems [included]. MS. MOSS noted that there was some thought to listing household systems. However, Legislative Legal and Research Services was concerned that such a list might exclude something [merely] by not including it on the list. CHAIR ROKEBERG remarked that this [legislation] will rely on common sense. Number 1296 REPRESENTATIVE KERTTULA said she understood the intent, but pointed out that the language on page 2, lines 7-8 sort of confuses it. She offered to work with the sponsor. REPRESENTATIVE BERKOWITZ offered to work with the sponsor with regard to the entire home being an aggregate of all the household systems. REPRESENTATIVE COGHILL said that he was willing to entertain discussions on these matters. However, he reminded the committee that these things will be addressed in contractual language. [This legislation] attempts to address what will be regulated. CHAIR McGUIRE noted that on page 2, lines 26-27, "home warranty" is not included and "home warranty" does have a statutory definition. Number 1906 REPRESENTATIVE McGUIRE moved that the committee adopt the House Rules Standing Committee fiscal note. There being no objection, it was so ordered. REPRESENTATIVE McGUIRE moved to report CSHB 120, Version 23- LS0537\V, Ford, 4/8/03, as amended out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 120(RLS) was reported from the House Rules Standing Committee.