SB 95 INSURANCE AGAINST UNINSURED DRIVERS  SHERMAN ERNOUF, legislative aide to the Senate Labor and Commerce Committee, testified on the Labor and Commerce committee substitute. It reduces the maximum mandatory offer of uninsured/underinsured motorist coverage to $500,000 per person and $1,000,000 per incident. Uninsured/underinsured motorist coverage protects the vehicle owner against being injured in an accident with an at-fault motorist who has no bodily injury liability insurance. UI motorist coverage applies only if the uninsured motorist is legally liable for the resulting injury. Uninsured motorist coverage puts the injured insured in the same position as he/she would be in if the motorist responsible for the accident had bodily injury liability insurance. The injured driver who cannot be compensated for an injury by a negligent party who has no insurance, can turn to his/her own insurance company for compensation. In effect, the injured driver's company must take the place of the at-fault motorist who has no liability insurance. Three years ago the Alaska Legislature passed legislation which required Alaskan insurers to make a mandatory offer of uninsured/underinsured motorist coverage of $1 million per person, and $2 million per accident. This mandatory offer has increased the cost of liability insurance for all policy holders. CSSB 95 (L&C) seeks to assure the Alaskan consumer competitive automotive insurance premiums by encouraging a competitive marketplace. The bill would encourage a competitive market by requiring insurance companies to offer a lower mandatory offer allowing smaller companies to enter the market if the cost of reinsurance drops. Number 392 SENATOR TAYLOR noted two major issues that have surfaced since the bill was originally filed. He asked Mr. Ernouf to summarize the two district court cases that resulted in two different judgements. MR. ERNOUF deferred the question to Don Koch of the Division of Insurance. He stated CSSB 95 (L&C) was a consensus approach to the offer problem. The two court cases pertain to the triggering mechanism problem. SENATOR TAYLOR commented the offer issue is non-controversial; but the underinsured insurance dilemma needs to be addressed. He stated the uninsured motorist issue was addressed with SR 22 since a driver must establish and prove that he/she is insured before his/her license is returned. He asked Mr. Ernouf for the definition of "underinsured." MR. ERNOUF responded that definition is what caused the dilemma with the two court cases, since the triggering mechanism by which the court will decide which part of underinsurance has to be paid is unclear. He added that issue has gone around full circle in the Labor and Commerce Committee. SENATOR TAYLOR asserted it requires the Legislature to establish a policy call. Number 345 DENNIS BROWN, President of the Alaska Independent Insurance Agents and Brokers, (AIIAB) gave the following testimony in opposition to CSSB 95 (L&C). The AIIAB opposes mandatory offers of uninsured motorists and underinsured motorists based on two issues: availability of markets; and possible escalation of the auto premium. Traditionally, uninsured and underinsured motorist premiums have not played a large part of the overall insurance dollars spent on the coverage, that coverage being a fraction of the auto insurance cost. In the past few years the cost of the uninsured motorist has risen at a faster rate than what AIIAB has seen in other classifications, such as automobile liability insurance. With passage of CSSB 95 (L&C), AIIAB would anticipate a further acceleration of the auto insurance premiums in the state, possibly bringing it to the highest level in the country. The AIIAB has learned by experience in California and New Jersey that this creates both political problems for the Legislatures, as well as problems for the insurance-purchasing public. The companies that left those states would not hesitate to leave Alaska. Second, the bill is confusing, not only for the industry, but for the consumer. When an insured buys auto liability coverage there are two factors that are considered: cost and protection. If the buyer has little or no assets, cost is the driving factor. If the consumer has assets, while cost plays a part, protection is a mandatory factor. In the purchase of uninsured/underinsured motorist coverage, the primary factor will most likely be cost which will only drive insurance rates higher. As premiums rise, more will drop out of the insurance mechanism putting further pressure on those who remain insured. AIIAB urges returning to the system of buying uninsured/underinsured motorist coverage up to the limit that is purchased for the third party liability coverage with recovery limited to those limits, with offsets provided by the responsible motorist. Number 320 SENATOR TAYLOR questioned the statement, "with recovery limited to that which was chosen by the responsible motorist." MR. BROWN replied, "The AIIAB would urge that if the purchaser of the uninsured motorist coverage had third party liability coverage, that is coverage that is attributed to somebody that he or she runs into, that the corresponding uninsured motorist coverage that they have purchased would equal that. If they were involved in an accident and the responsible party, especially the underinsured motorist, had a policy of $50,000, that there would be a total of $300,000 applicable to that loss, with the first $50,000 paid by the responsible party, and the balance paid by the underinsured motorist coverage provided to the policyholder." SENATOR TAYLOR asked for further clarification of Mr. Brown's two statements. MR. BROWN replied, "We would urge we go back to a system of buying uninsured motorist and underinsured motorist coverage up to the limit that is purchased for the third party coverage and recovery limited to those limits with offsets provided by the responsible motorist." He explained the uninsured motorist limits purchased by the policyholder would equal the third party liability coverage amount. SENATOR TAYLOR asserted it should be the purchaser's choice to choose the amount of liability coverage on oneself and on the amount he/she wished to purchase in case he/she was struck by an uninsured motorist. He asked Mr. Brown if he believes the amounts of each policy should be the same. MR. BROWN replied the AIIAB's position is that the purchaser would have an option to buy an amount of uninsured/underinsured motorist coverage equal to the amount in the liability policy. SENATOR TAYLOR asked if the purchaser would have to choose the same amount of coverage for both policies. MR. BROWN answered, "No, we are not saying that, but the problem that we have is when you purchase uninsured motorist or underinsured motorist limits, greater than what you are willing to buy for liability insurance for yourself, that is the problem we are having." Number 260 SENATOR TAYLOR asked why that would be a problem as it would only trigger in the event an individual hit someone with a lesser amount of coverage, or no coverage at all. MR. BROWN stated, "In an ideal world, it would be great, but in the world of practicality, as we see it, as an association, is that it is going to drive the auto rates completely out of sight. There has to be an outward pressure, or an outward movement of premiums that one has to buy to buy a family auto policy." SENATOR TAYLOR discussed the following scenario. "Mr. Brown, unless I'm misunderstanding you, what you are saying is that whenever two people have been responsible drivers and have purchased insurance, and each purchased insurance for amounts they decided was a fair risk that they should take, and that they should spend that amount of money to buy the insurance, then unfortunately, these two responsible drivers have run into one another. What you are basically saying is the insurance industry should only have to pay off on one policy, and that is the cheapest policy. Otherwise it will drive rates right through the ceiling, right?" MR. BROWN reiterated the AIIAB's position is that the whole problem is over the underinsured motorist coverage. AIIAB's goal is to have the insured be allowed to purchase that protection for uninsured motorists equal to his/her liability limit. He stated, "If a person bought $500,000 worth of underinsured motorist coverage and had third party liability coverage for $500,000, and that person was involved in an accident with an individual who carried a $100,000 policy limit, and the claim was worth $500,000, there would be recovery from the individual for $100,000, and the person would have the opportunity to collect from his/her underinsured motorist coverage for the other $400,000. That is what the AIIAB would like to achieve, instead of stacking the underinsured motorist limits over the policy of the driver responsible for the accident." Number 231 SENATOR TAYLOR said, "Let's say I have the $300,000 underinsured policy, and you have the $100,000 policy, and you run into me and cause $400,000 worth of damage. I have the right to sue you because you had a liability policy good for $100,000. So I get to sue you and your company confesses policy limits. They kick in $100,000. I've been paid by you all I can get out of your policy. Now, I, being a responsible motorist, had gone and purchased underinsured motorist coverage of $300,000. I've got $400,000 worth of damages. There are two scenarios that can now occur. One scenario is that my policy that I purchased face value, that said $300,000, is only good for $200,000 because you want to add the $100,000 I got from the other guy. In other words, you want me, on my policy, to be subrogated to the third party who was liable. So I can recover a maximum total of $300,000, and you say that somehow this is something I paid for. No, I paid for $300,000 of underinsured from your company. Your policy of $100,000 you paid for yourself, that is outside of the contract I have with you. The second scenario is, as you call, stacking, and stacking says I go after the bad guy that ran into me. I get $100,000 from him and since I still have $300,000 of stipulated damages, over and above that, I then turn to my own carrier, and of course I'll have to file suit because they will never voluntarily come in and give that money to me. I'll have to bring a suit in court against my own insurance company for that $300,000 of underinsured coverage that I had purchased in good faith in the first place. Under one district court judge, he says you can't stack, and under the other district court judge, he says you can. Isn't that the problem we got?" MR. BROWN stated he would agree. SENATOR TAYLOR commented, according to Mr. Brown, those two people who had paid a fair, actuarially-justified, Commissioner of Insurance-reviewed premium will cause devastating impacts to the industry if we make those two companies meet their contractual requirements. MR. BROWN clarified the AIIAB's position is that it would drive the auto premium rates upward. Whether the carriers are willing or unwilling to do this is a matter for the insurance industry to decide. The AIIAB's membership consists of people at the point of contact, they sell the product to the consumer and know whether markets exist and what drives the costs. The uninsured motorist rates have doubled over the past few years. The AIIAB is questioning at what point does the consumer pay enough before the marginal ones drop out. SENATOR TAYLOR replied he understands the consumer aspect of the problem, and he does not want to do anything that will encourage the insurance industry to bill the consumer at higher rates. He asked if his actuaries have been selling insurance based upon the fact that only half of the claims would have to be paid off. "Your policy wouldn't get touched as long as you could tap the other guy's policy, so you'd get that premium for free, and also get an offset every time that you had an opportunity to push the coverage off onto Brand X company instead of having to pay under your underinsured motorist provision that you sold your own customer. MR. BROWN disagreed, and noted that all rates are loss-driven. The amount paid out in the form of losses, is directly reflected in the rates charged. If they are going to pay more out in losses under the underinsured motorist section, obviously that rate will increase. Number 140 SENATOR TAYLOR stated if there was a captive population of 100 people on an island, with mandatory insurance, purchased from two companies by equal numbers, one company would never have to pay off on a policy in a given year, depending on who ran into who. When premiums are determined by losses, insurance companies are counting on not having to pay off a percentage of the time based upon the manner in which you interpreted the policy prior to the case. Number 120 MR. BROWN answered he is not testifying on behalf of the insurance industry. The AIIAB's clients are paid by the consumer, and he is testifying on the impact to the consumer. SENATOR TAYLOR asked if the income of AIIAB's members is derived as a percentage of premiums sold to the customer. MR. BROWN answered affirmatively. SENATOR TAYLOR asked if insurance companies have a contractual agreement with AIIAB and refer to AIIAB as their agent. MR. BROWN disclosed in some instances they do. SENATOR TAYLOR said that is why he considered Mr. Brown to be an agent speaking on behalf of those companies when selling a policy. He pointed out the Legislature needs to make a policy call on whether it is good or bad policy to have consumers remain ignorant of what the word "underinsured" means. The lay person believes he should collect the amount of his underinsured policy necessary to pay damages less the amount paid by the underinsured's policy. If that causes premiums to increase, so be it. Number 060 DON KOCH, Division of Insurance, explained CSSB 95 (L&C) began as a repeal of the excess offer legislation that was enacted several years ago. The Division testified to the Labor and Commerce Committee that some room for compromise was necessary, because it believed the mandatory limit in Alaska is the highest in the nation. In view of the Tumbleson decision, the Division felt the issues brought forth in that case needed to be addressed. The Division understood, when the excess offer legislation passed, that underinsured motorist coverage was intended to be excess, so that in the $400,000 example, the $100,000 would be available from the other party, and the full $300,000 would be available as excess insurance. SENATOR TAYLOR asked if the Division interpreted the word "excess" to refer to stacked coverage when the bill passed. MR. KOCH replied affirmatively. SENATOR TAYLOR asked if anyone in the industry would have thought otherwise. MR. KOCH described the disagreement as to what triggered the stacking in the Tumbleson case. His interpretation of the Tumbleson decision is that the coverage is treated as excess, but is only triggered if the other motorist is uninsured. Effectively the case says that uninsured motorist coverage before underinsured motorist coverage is triggered. TAPE 95-22, Side A SENATOR TAYLOR asked if the lay person would think to ask when underinsured coverage is triggered, when purchasing insurance. MR. KOCH felt they would not, and that most producers would not have the time to explain the whole process. Agents have expressed concern about E and O exposure for not adequately explaining the procedure, therefore other alternatives are made more difficult. He pointed out that to the degree the public fails to insure under the mandatory automobile law, there will be more exposure in the uninsured and underinsured area, as more losses arise from it. The automobile insurance premium contains a part that is mandatory: the $50,000; $100,000; and $25,000 liability purchase. The uninsured/ underinsured coverages are mandatory offers but are not required. An insured may elect to waive that insurance. Higher offers of underinsured motorist coverage are increasing in cost, and insurance companies have been able to justify those increases with division actuaries, and it is likely the costs will continue to rise. But that coverage is still an option for the consumer, therefore it should not affect all auto insurance consumers, only those that choose to bear that cost. SENATOR TAYLOR reiterated the Legislature needs to set a policy since the two court decisions are conflicting as to what standard to use. He believed the federal court would adopt the policy once enacted by the Legislature. MR. KOCH implied the proposed Senate Judiciary committee substitute would address both the Tumbleson issue and the mandatory offer limit. SENATOR TAYLOR pointed out that if all drivers had good liability coverage, excess coverage would be unnecessary. MR. KOCH replied that would depend on the amount of liability coverage purchased by consumers, since minimum limits are often inadequate. SENATOR TAYLOR thought it is bizarre that a person who has excess coverage would be paid the full amount if he/she had an accident with an uninsured motorist, but would only collect the offset amount after suing his/her own insurance company if the accident was with an underinsured motorist. MR. KOCH stated some believe a person should only be able to buy for his/her own protection, the amount purchased for third party protection. He disagrees as such a policy would discourage consumers from taking responsibility in protecting themselves as well as others. Number 141 SENATOR TAYLOR felt Mr. Brown alluded to the fact that people should only be allowed to purchase equal amounts of liability insurance and excess coverage. MR. KOCH agreed, and clarified the idea is that an individual should only be able to purchase for their own protection, the amount he/she purchases for the third party's protection. That opinion prevails in many states, although several states are moving toward higher mandatory offers of uninsured/underinsured coverage. SENATOR TAYLOR asked Mr. Koch about the no-fault insurance movement in Alaska, which turned out to be uninsured/underinsured motorist coverage. MR. KOCH replied an individual could purchase uninsured/underinsured motorist coverage prior to that time, but only up the limit of one's third party limits. At that time it was only triggered by uninsured motorists. A few companies voluntarily offered underinsured motorist coverage but there appeared to be no marketing effort for it. SENATOR DONLEY clarified that underinsured motorist coverage was offered with the adoption of mandatory auto insurance in 1984. MR. KOCH explained it was never made distinct coverage. In 1990, legislation clarified that those coverages were to be offered as excess coverage. During that time period, many states were enacting no-fault laws with the initial focus for responsibility to oneself, and contained thresholds from the tort system. Alaska chose a new departure. In fairness to insurance agents, MR. KOCH stated this concept is difficult to sell because it is a departure. SENATOR TAYLOR commented to prevent insurance agents' E and O exposure from expanding under the two court decisions the Legislature must make a policy decision one way or the other. MR. KOCH agreed, and reiterated the proposed Judiciary committee substitute appears to have a clear expression of intent. SENATOR TAYLOR announced CSSB 95(L&C) would be held over until next Wednesday.