SB 15 CIVIL ARBITRATION AND PUNITIVE DAMAGES  SENATOR MILLER moved to adopt CSSB 15(JUD) (version O-LSO169\B, dated 3/11/97). There being no objection, the motion carried. MIKE FORD , an attorney with Legislative Legal and Research Services, gave the following sectional analysis of CSSB 15(JUD). Section 1 is the purpose section. CHAIRMAN TAYLOR asked whether Section 1 was from SB 15 or the Task Force Report. MR. FORD replied Section 1 was in the Governor's bill which was rolled into SB 15. CHAIRMAN TAYLOR clarified that was the Task Force version. MR. FORD continued. Section 2 is a housekeeping provision that was added to avoid a single subject problem and fixes the interest rate at the same rate under existing law. Section 3 deals with the statute of limitations for certain property actions and provides a six year time limit for bringing an action for waste or trespass to real property. Section 4 is a new section of law dealing with contract actions. It was originally a part of AS 09.10.050 but the Task Force recommended it be pulled out. The new section provides a three- year time period to file an action on a contract or liability except as otherwise provided by AS 09.10.040. CHAIRMAN TAYLOR asked for clarification of the exceptions. MR. FORD believed AS 09.10.040 pertains to judgments and sealed instruments. 067 CHAIRMAN TAYLOR questioned whether Section 4 applies to the statute of limitations on architects and engineers. MR. FORD replied if the action is characterized as a contract action, it would be covered by the three-year time period, assuming no other provision of law provides a different time period. CHAIRMAN TAYLOR asked if Section 4 reduces the time period for contract actions from six to three years. MR. FORD said that is correct. MR. FORD explained Section 5 applies the statute of limitations for personal injury to personal property and specific recovery of that property and reduces the current six-year period to file actions to a two-year period. Section 6 raises the standard for recovery of non-economic damages for personal injury by requiring that severe disfigurement or severe physical impairment be shown, rather than disfigurement or severe physical impairment, to be excepted from the limit under AS 09.17.010. Section 7 repeals and re-enacts the punitive damages provision and limits recovery in a number of ways. Existing law requires clear and convincing evidence to support an award of punitive damages. Section 7 requires clear and convincing evidence of outrageous conduct, conduct resulting from malicious or hostile feelings toward the plaintiff, or reckless indifference to the rights or safety of others be shown. It also creates a two-tiered system and separates the process of determining whether one is entitled to punitive damages from the amount of punitive damages to be awarded. Number 141 CHAIRMAN TAYLOR asked Mr. Ford whether each provision incorporated into CSSB 15(JUD) was specifically found in the Task Force report, or whether the Governor or his drafters added other provisions. MR. FORD could not answer. MR. FORD emphasized Section 7 is a major rewrite that contains limitations on the amount of punitive damage awards and changes the process of awarding punitive damages. CHAIRMAN TAYLOR stated he included, in SB 15, a provision creating a specific cap on punitive damages in wrongful discharge cases that reflects what is provided under federal law. He noted the amounts in CSSB 15(JUD) are higher. He asked whether the wrongful discharge provision was incorporated into CSSB 15(JUD), or whether the bill needs to be amended. MR. FORD said an amendment will be necessary. MR. FORD continued. Section 8 adds the word "intentional" to clarify that fault includes negligent, reckless, or intentional acts. CHAIRMAN TAYLOR explained some defenses, argued on behalf of defendants being sued for negligence or recklessness under existing statute, are based on intentional actions because those actions are not illegal. MR. FORD explained Section 9 amends the offer of judgment statute to encourage settlements by adjusting the interest rate, depending on when an offer is made, and who offers it. Number 201 CHAIRMAN TAYLOR advised Section 9 will not act as a significant incentive for either side to settle if the amount in question is $50,000, because the interest penalty is small relative to the additional discovery and attorney fees required to carry a case through to trial. He would prefer to require the party who fails to accept an offer of judgment, after a certain date, to pay actual attorney fees from that day forward. MR. FORD advised Section 10 changes the rate of interest on judgments and decrees from a fixed 10.5 percent per year to a floating rate comprised of the five-year constant maturity United States treasury note rate, plus 1.5 percent. By amending this provision of law, several other provisions of existing law, based on this same rate, were affected, so language was added to clarify existing law continues to apply to all other provisions. CHAIRMAN TAYLOR asked if Section 10 affects Section 2. MR. FORD noted Section 2 was added because of the changes made in Sections 10 and 11 and maintains existing law for this type of interest rate. CHAIRMAN TAYLOR questioned why banks should be allowed to charge an interest rate of 10.5 percent, when litigants cannot get more than the floating rate. MR. FORD commented the problem lies in the fact that if the provision is left alone, things other than civil actions will be affected, such as interest rates for banking. That will cause trouble under the single subject rule. This route was taken to maintain that provision as is, rather than try to match the change in AS 09.30.070. The problem was: does one violate the single subject rule of the Constitution, or does one add provisions that maintain the existing rate in those sections of law. Number 247 CHAIRMAN TAYLOR inquired whether a bank will get 10.5 percent when it forecloses while the other litigants are stuck with the floating rate. MR. FORD answered Section 10 applies to a rate of interest on a judgment or decree. MR. FORD explained Section 12 establishes a pilot project intended to determine the effectiveness of an alternative dispute resolution system. Beginning in January of 1998, certain kinds of cases filed in Superior Court in the Third Judicial District will be funneled through the alternative dispute system. The project will operate for at least five years. Section 12 requires the Supreme Court to determine criteria to screen cases and to establish minimum qualifications for individuals who conduct the dispute resolution procedure. Section 12 also requires mutual agreement on the choice of a mediator; that fees and costs be equally shared among the parties; and project evaluation methods. Number 296 CHAIRMAN TAYLOR asked how Section 12 meshes with the mandatory arbitration provision (Section 15) in the bill. MR. FORD thought the concepts were similar but that Section 12 is narrower in scope because it only applies to the Third Judicial District and will operate for a minimum of five years. He commented the committee might want to choose either one or the other provision. CHAIRMAN TAYLOR asked whether Section 12 has the same penalty and fee aspects as the arbitration provision. MR. FORD answered Section 12 replaces existing law which allows arbitration but does not require it. Both Sections 12 and 15 require arbitration in certain instances but Section 12 contains a number of ways to avoid alternative dispute resolution. CHAIRMAN TAYLOR asked if a person can opt in or out of alternative dispute resolution. MR. FORD advised Section 12 includes a screening structure for cases but he was unsure whether a party has the right to choose not to use that system. CHAIRMAN TAYLOR noted Section 12 allows the Court to decide who will use it, while Section 15 requires mandatory arbitration. CHAIRMAN TAYLOR thought the very selective alternative dispute resolution program sets up a dual system because it only applies to certain cases in Anchorage, while cases under $100,000 elsewhere will be required to use binding arbitration. MR. FORD repeated the alternative dispute resolution system is a pilot project, and although the sections do set up a dual system, they do not conflict with each other. He repeated it might be to the committee's benefit to review both sections and choose one. Number 344 MR. FORD described Section 13 as a provision that tags the interest rate to the floating rate in AS 09.30.070 and is consistent with Sections 10 and 11. If judgment is due from the State, it would include the floating interest rate. CHAIRMAN TAYLOR commented Section 13 only changes the interest rate, not punitive damage awards. MR. FORD explained Section 14 fixes the interest rate at 10.5 percent per year, whereas it was previously by reference to the fixed rate in AS 09.30.070(a). Section 14 was added to maintain the status quo without amending the rate to be a floating rate. CHAIRMAN TAYLOR remarked the section provides an incentive hammer on condemnation awards. MR. FORD noted this section will avoid a single subject problem. MR. FORD explained Section 15 is a mandatory arbitration provision that applies statewide. Subsection (b) contains exclusions. To prevent any overlap, an action can be excluded if it falls under the alternative dispute resolution procedure. CHAIRMAN TAYLOR asked if Section 15 provides for costs and penalties if one fails to accept the arbitrator's award. MR. FORD said Section 15 provides that actual attorneys' fees and costs are awarded if one rejects an arbitrator's decision, litigates, and loses (page 11, lines 5-7). He pointed out the pilot project does not contain a similar provision. CHAIRMAN TAYLOR noted parties could go through alternative dispute resolution then start over in Superior Court; but that will merely add another layer of litigation to the system, rather than slow it down. MR. FORD indicated Section 16 prohibits recovery of personal injury damages if one was engaged in conduct that constitutes a felony. This language is narrower than previous provisions in that if one is engaged in the commission of a felony and convicted, and the felony substantially contributed to the personal injury or death, no damages can be recovered. In addition, if one has not been convicted, but the conduct constitutes either an unclassified class A or class B felony, one could also be barred from recovery if substantial contribution to the injury or death is shown by clear and convincing evidence. The same applies if one is fleeing after the commission of an unclassified A or B felony. CHAIRMAN TAYLOR questioned how that would apply to a bankrobber who, two days after the robbery, is in a car accident while en route to a bank to deposit the stolen cash. MR. FORD said the court would have to decide whether the definition of "fleeing" would apply. MR. FORD continued. Section 17 requires the Alaska Judicial Council to collect and evaluate specific information and contains an exception for certain kinds of cases. The information is considered confidential but disclosure of summaries and statistics is allowable. Number 420 CHAIRMAN TAYLOR asked why this information will not be sent directly to the Division of Insurance. MR. FORD replied the Division of Insurance is not equipped to handle this kind of process; the Alaska Judicial Council has some experience in this area. CHAIRMAN TAYLOR asked if the information, once compiled, will be provided to the Division of Insurance. MR. FORD said the bill does not contain a specific requirement to do so. CHAIRMAN TAYLOR questioned whether the Division of Insurance currently receives information about confidential settlements. MR. FORD did not believe it does. CHAIRMAN TAYLOR asked whether the Division of Insurance is notified by the insurance company of claims filed against the company during a specific year for tax deduction purposes, and of the actual settlement amount that may occur several years later. MR. FORD thought the insurance company might have to report allocated amounts that need to be reserved for particular claims, but did not know whether the insurance company informs the Division of the actual settlement amount. CHAIRMAN TAYLOR expressed concern that if information is compiled, it be distributed to those agencies that need it. MR. FORD noted Section 18 requires the director of the Division of Insurance to compile and report information on the effects of CSSB 15(JUD) on the availability and costs of insurance, and the financial health and profitability of insurance carriers. The information is supposed to be compiled in a way that protects the identity of individual insureds, and then distributed to all insurers. Section 18 also requires an annual report be provided to the Governor and the Legislature, and allows the Division of Insurance to consult with the Alaska Judicial Council as necessary. Mr. Ford said Section 19 remained in the committee substitute inadvertently and is unnecessary because AS 18.80.220 was deleted. Section 20 raises the District Court jurisdiction level from $50,000 to $100,000. Section 21 amends Civil Rule 16.1, which establishes procedures for motions to set trials and requires a meeting of the parties before the scheduling order has been issued. Section 22 requires that parties, after initial exchange of disclosure, meet to discuss the nature and basis of their claims in an effort to settle. There is a proposed discovery plan, indicating the parties' views and proposals. Section 23 amends Civil Rule 41 and adds a new paragraph regarding settlement information consistent with other provisions about collection of information by the Alaska Judicial Council. It requires the parties to provide information required under AS 09.68.130. Section 24 amends Civil Rule 68 and requires adjustments to the rate of interest to be consistent with the change to the statutory offer of judgment. Section 25 changes the discovery rule that currently prohibits discovery from the date the report of the panel has been filed or 80 days have lapsed from the date the case is at issue to 60 days after selection of the mediation panel. CHAIRMAN TAYLOR asked if this section applies to medical malpractice cases. MR. FORD said it does. Section 26 amends Rule 95(b) and raises the fine amount the court may impose against an attorney for contempt from $1,000 to $10,000. Section 27 amends District Court Rules and requires, unless agreed by the parties or permitted by the court, discovery be limited to disclosures required under Civil Rule 26(a). Section 28 adds a new subsection to District Court Rule 4, and requires that all parties file a joint memorandum to set the case for trial no later than 180 days after service of the complaint. It also requires the court to set the trial to commence within certain time periods. The intent of this section is to reduce time delays in proceedings in District Court. Section 29 is an effort to supply settlement information at the appellate level. This section is consistent with prior sections of the bill that pertain to collection of information by the Alaska Judicial Council. Section 30 contains repealers. A number of the repeals deal with the change from voluntary to mandatory arbitration. The Title 8 provisions apply to the loss of one's occupational license for using arbitration as a threat. The provisions under AS 09.55. pertain to voluntary arbitration and are no longer necessary. Section 31 repeals conflicting provisions of the Alaska Rules of Civil Procedure. Sections 32 through 36 are required sections setting out the amendment of Civil Rules. The first subsection relates to punitive damages, the remainder inform the court system that the Legislature intends to change the rules and how that will be done. Section 37 is the applicability section which allows for a smooth transition for the incorporation of new provisions. Section 38 is the severability provision. Section 39 is a revisor's instruction to make corresponding changes necessary by the addition of the new provisions in Section 12. Section 40 requires that the Civil Rule changes be adopted by a two-thirds majority vote of the Legislature for enactment. Section 41 delays the effective date for Sections 17, 23, and 29 to allow some lead time. Section 42 contains the generic effective date for all other provisions. Number 519 CHAIRMAN TAYLOR asked Mr. Ford to elaborate on the amendment being prepared that originated in his bill. MR. FORD explained Section 2 of SB 15 is being prepared as an amendment to CSSB 15(JUD), and limits the amount of punitive damages that can be recovered in an unlawful employment practice case. The amendment creates a tiered system for the amount of punitive damages that can be awarded depending on the number of employees working for the employer. That provision is in contrast to Section 7(h) of CSSB 15(JUD), which is the Task Force's idea of how to limit punitive damages in an employment-related civil action. TAPE 97-20, SIDE B CHAIRMAN TAYLOR clarified Section 7(h) of CSSB 15(JUD) provides a limitation of three times the amount of compensatory damages or the sum of $500,000, whichever is greater. His proposed amendment contains a scale from $50,000 to $300,000 maximum. CHAIRMAN TAYLOR moved to adopt his proposed amendment (#1) to delete Section 7(h) of CSSB 15(JUD) and insert Section 2 from SB 15. There being no objection, Amendment 1 was adopted. Number 566 PHILLIP VOLLAND , a private attorney in Anchorage, testified in general support of CSSB 15(JUD). He clarified he does not agree with everything in the bill, and does not believe everything will work, but supports it because he believes it is the obligation of the Legislature to pass legislation that promotes and protects the welfare of common citizens in Alaska, not legislation that hurts them. He believes the best legislation is based on fact, not rhetoric, perception, or fear, and that if something is not broken, it does not need to be fixed. He also noted successes in life are built on compromise and compromise is needed on tort reform. Many years ago he worked on the sentencing commission. The group represented individuals from opposite sides of the courtroom with divergent opinions and was asked to deliberate on a problem and make recommendations. Those recommendations reflected compromise based on fact. The Legislature did not adopt those recommendations but sits at the same crossroad with tort reform. The individuals who sat on the Governor's Task Force on Civil Justice Reform often litigated against each other and took radically different views as to the necessity of tort reform. That group studied the problem, and based on facts, understood no explosion in tort cases with out- of-control juries and outrageous punitive damage awards has taken place in Alaska. The Task Force's recommendations are moderate and, in large part, tinker with the system in an effort to improve it. Those recommendations are embodied in CSSB 15(JUD). In response to Chair Taylor's question about whether CSSB 15(JUD) contains only the Task Force's recommendations, MR. VOLLAND said it does with the exceptions of Sections 12 and 15, and the changes to Section 12 are not conceptual. He repeated that although he does not agree with all of the Task Force recommendations, those recommendations are moderate, thoughtful, based on fact and hurt no one. Number 519 CHAIRMAN TAYLOR asked Mr. Volland if he served on the Task Force. MR. VOLLAND said he did not. DOUG WOOLIVER , administrative attorney to the Alaska Court System, commented on the Court System's fiscal note which is based on SB 15. Last year when a similar provision was added to HB 158, the Court System asked for a specific exception for small claims cases so that those cases are not sent to mandatory arbitration. The Court System's fiscal note reflects the fact that those small claims cases are not intended to be covered under SB 15, now Section 15 of CSSB 15(JUD). There were approximately 10,000 small claims cases filed last year, and although a lot of those are not tort cases, many of them are. CHAIRMAN TAYLOR stated he did not intend to put small claims under mandatory arbitration, and asked Mr. Wooliver to submit further clarifying language to be deliberated by the Finance Committee. MR. FORD noted he prepared an amendment on that subject last session that he could incorporate into the bill. CHAIRMAN TAYLOR asked if any committee member objected to adopting the conceptual amendment (#2), the substance being to make certain that those cases classed as small claims, whatever that jurisdiction is now or in the future, will not be required to go through mandatory arbitration. There being no objection to Amendment 2, it was adopted. Number 483 MR. WOOLIVER requested the committee delete the immediate effective date in CSSB 15(JUD) on all the court rule changes, because the court system will need additional time to implement those changes. He asked for either no effective date, giving the court 90 days after signed by the Governor, or a later effective date. CHAIRMAN TAYLOR asked if there was any objection to delete the effective dates for the court rules (Amendment 3). There being no objection, Amendment 3 was adopted. CHAIRMAN TAYLOR asked Mr. Wooliver why the Court System submitted a fiscal note with additional costs for services it currently provides. MR. WOOLIVER stated the Court System does not provide arbitration services. CHAIRMAN TAYLOR countered the Court System provides courtroom services, and the Legislature funds district attorneys, public defenders, and other personnel for civil cases. MR. WOOLIVER replied about 95 percent of civil cases are settled. If CSSB 15(JUD) is enacted, all cases will have to go to arbitration, regardless of whether they would have been settled. CHAIRMAN TAYLOR disagreed because those parties could settle before they are forced to go into the arbitration hearing and believed there is no reason to assume that a higher number will be forced to go into a full arbitration hearing. This bill will only force settlement to occur faster. MR. WOOLIVER said the court will have to pay the cost for indigents to go to arbitration, and the fiscal note analysis points out there are over 1,000 cases per year that would fall under the mandatory arbitration provision. CHAIRMAN TAYLOR reiterated 95 percent of those cases will settle, according to court statistics. MR. WOOLIVER remarked most cases do not settle within the first month of filing. CHAIRMAN TAYLOR commented that is because the Court System provides no incentive to settle during that period of time. Under CSSB 15(JUD) the hammer falls within a short period of time, and the parties' attention will be focussed on an earlier date for settlement. He noted the Court System is assuming every case will go to trial. MR. WOOLIVER clarified the Court System is assuming every case will go to arbitration, but not to trial. CHAIRMAN TAYLOR asked what costs are associated with arbitration. MR. WOOLIVER said the cost of arbitration services is $150 to $175 per hour. CHAIRMAN TAYLOR asked what services would be required if the parties settle, other than the court services now required. MR. WOOLIVER replied if a party settles, the court has no expenses. CHAIRMAN TAYLOR stated someone had to file the complaint and the case had to be calendared and monitored. MR. WOOLIVER admitted the court has some costs but the majority of the costs associated with civil litigation is the litigation. CHAIRMAN TAYLOR asked why the fiscal note does not reflect a reduction in costs. MR. WOOLIVER replied the Court System does not foresee a significant reduction in costs. CHAIRMAN TAYLOR noted the mandatory arbitration requirement in the State of Washington eliminated 50 percent of the civil litigation. He asked why the Court System will not see any savings if 50 percent of its civil calendar is eliminated. MR. WOOLIVER said the bill will not eliminate 50 percent of the cases that go to trial, which is only five percent anyway. The trials are where the bulk of the Court System's expenses come from. CHAIRMAN TAYLOR commented Mr. Wooliver cited filings, not cases. MR. WOOLIVER replied that is because all filings will be required to go to arbitration. Number 424 PAM LABOLLE , President of the Alaska State Chamber of Commerce, stated she cannot speak to the committee substitute or amendments, but would like to address the provisions the business community in Alaska believes will create tort reform. Some of those provisions are contained in CSSB 15(JUD); the following are not. The business community wants an eight year statute of repose. CHAIRMAN TAYLOR noted that provision pertains to architects and engineers and was unanimously rejected by the Task Force. MS. LABOLLE asserted the Alaska State Chamber has not accepted the Task Force Report as its position. CHAIRMAN TAYLOR said he was not suggesting it had, rather that the State Chamber had specific members, including Representative Porter, sitting on that committee, who found no objection to removing that provision. MS. LABOLLE replied to her knowledge, Representative Porter is not a member of the Alaska State Chamber of Commerce. CHAIRMAN TAYLOR asked if anyone on the Task Force represented the Chamber's views. MS. LABOLLE said in some cases, apparently not. MS. LABOLLE continued discussing the State Chamber's position. Regarding the limitation of actions against health care providers, the claim should occur before the age of six unless the action is commenced before the person's eighth birthday. A cap on non- economic damages should be set at $300,000 or three times the amount of compensatory damages. MS. LABOLLE announced all of the provisions supported by the State Chamber of Commerce are contained in the initiative on tort reform it is filing. CHAIRMAN TAYLOR questioned why the Legislature is wasting its time, since every issue can be decided via initiative. MS. LABOLLE said the Chamber would prefer legislation. CHAIRMAN TAYLOR said legislation requires compromise. MS. LABOLLE explained the initiative establishes that 75 percent of punitive damages would revert to the State. CHAIRMAN TAYLOR asked if that was discussed by the Task Force. SENATOR ELLIS replied it was discussed extensively and rejected unanimously. He explained that although some members of the Task Force are members of the State Chamber of Commerce, they were not appointed as official representatives of that organization. MS. LABOLLE stated the Chamber also supports the inclusion of collateral benefits, allocation of damages, civil liability of hospitals for non-employees, and damages resulting from the commission of a felony or while under the influence of alcohol or drugs. Regarding the latter, CHAIRMAN TAYLOR said that would permit one to run over any and all drunks and not be liable. MS. LABOLLE noted the Chamber's intent is to prevent a person who is drunk and hurts him/herself from suing another party. SENATOR ELLIS advised that idea was rejected by the Task Force on an 8 to 5 vote. Number 309 MS. LABOLLE asked if, among the Task Force votes on the provisions, the worst case scenario was two dissenting opinions in one instance. CHAIRMAN TAYLOR said it was 8-5-1, and that vote was on the alcohol and drug impairment provision. MIKE LESSMEIER , representing State Farm Insurance, addressed SB 15, because he was unfamiliar with the committee substitute. He noted although he and Chair Taylor take different positions on tort reform, there are some areas they agree upon. One of those things is a meaningful offer of judgment provision about loser pay. He believes the offer of judgment provision in the committee substitute is no better than what currently exists. He expressed the following concerns about the arbitration provision. The first concern is who will pay for the arbitrator. Arbitration can be more expensive than a court proceeding because the parties have to hire an attorney and a half. Also, there is no offer of judgment provision in the arbitration language. The third concern is the admissibility of the arbitrator's report in court. In the event a party is dissatisfied with an arbitrator's decision, and the sanction is actual costs and attorneys' fees if one loses at the jury trial, the deck ends up being stacked. There is no reason to further stack the deck with the admissibility of an arbitrator's report. A jury is more capable than a single individual of crafting a quality decision. The arbitration provision does not contain a method for challenging the arbitrator's decision, or does not require that the arbitrator have no connection to either party. Number 221 CHAIRMAN TAYLOR asked Mr. Lessmeier if he ever tried a case on behalf of State Farm before a judge. MR. LESSMEIER said he had. CHAIRMAN TAYLOR stated it is probably rare to not utilize a jury. MR. LESSMEIER felt the challenge is to create an efficient alternative to a system that is heavily dependent upon discovery, takes too long, and is too expensive. He believed the problem with arbitration thus far is its lack of structure. He spent a lot of time last session drafting an arbitration provision that was modelled on the Washington provision that addresses these concerns. In regard to the current medical malpractice law, he said one can conduct discovery, regardless of whether one receives a panel report, within 80 days of the filing of an answer. The Supreme Court determined the stay on discovery only lasts 80 days from the filing of an answer. CHAIRMAN TAYLOR asked Mr. Lessmeier if he is opposed to the 60 day time limit in the bill. MR. LESSMEIER said it does not matter, since the Supreme Court has ruled, as a matter of constitutional law, that the parties may conduct discovery regardless of when that report is issued. MR. LESSMEIER discussed the issue of punitive damages. He sees punitive damage claims awarded in a substantial portion of the cases he handles in Southeast Alaska. A research study, named The Role of the Punitive Damages in Civil Litigation; New Evidence from Lawsuit Filings, determined that anyone who focusses solely on the actual awards is missing the boat. Each claim is expensive to defend, takes on average one-third longer, and gives the party making the claim significant leverage in the settlement process. He supports efforts to place a reasonable limit on punitive damages and asked that the limit be meaningful. CHAIRMAN TAYLOR asked Mr. Lessmeier if he supports Ms. LaBolle's proposal. MR. LESSMEIER responded he would support a proposal that limits punitive damages to three times economic damages or $300,000. CSSB 15(JUD) contains a cap that is not a cap: the reason being the exception could be said to swallow the rule. CHAIRMAN TAYLOR explained the amendment narrowly applies to punitive damages for cases involving people suing for wrongful termination and an unlawful employment practice. MR. LESSMEIER commented State Farm supports a cap of $300,000 for all cases. MR. FORD clarified CSSB 15(JUD) contains a cap of three times compensatory damages or $500,000, whichever is greater, however there are exceptions. Subsection (g) provides an exception for conduct motivated by financial gain. Number 103 CHAIRMAN TAYLOR asked Mr. Lessmeier if he believes the jury should not be allowed to take into consideration that a person was engaged in criminal conduct with the intent to make a profit and did so. MR. LESSMEIER replied a persons' conduct does not have to be criminal for punitive damages to be awarded and the language in the bill is much broader than that. Every business is in business to make a profit so one could make the argument that every business activity is designed to make a profit. This bill could create endless litigation over whether this exception should apply. In his view, the exception will swallow the rule, resulting in a cap that is not a cap. CHAIRMAN TAYLOR questioned how one could come up with a cap that encompasses the most outrageous conduct that could be contemplated. MR. LESSMEIER said with any tort rule, one can find a situation that does not fit. He believes society is better off in general, if some outer limits are applied. The State of Washington's arbitration provision is very effective. That state does not have punitive damages. He repeated the cap must be meaningful. MR. LESSMEIER'S final comment was in regard to the fact that insurance rates will change as a result of legislation that is passed because State Farm determines statewide rates by its loss experience in Alaska. CHAIRMAN TAYLOR asked Mr. Lessmeier if he disagrees with the definition of what constitutes punitive conduct on page 3. MR. LESSMEIER replied he thinks that was an intent, on the part of the drafter, to codify existing law, and he does not disagree with it. CHAIRMAN TAYLOR said he agrees with Mr. Lessmeier that more complaints contain punitive damage claims and that the punitive damage claim is used to leverage other aspects of the case for discovery purposes. He noted Mr. Lessmeier has not informed the committee of any cases he has had in which punitive damages were awarded against State Farm. TAPE 97-21, SIDE A Number 000 JEFF BUSH , Deputy Commissioner of the Department of Commerce and Economic Development, and a member of the Governor's Task Force on Civil Justice Reform, testified on behalf of the Administration. He expressed support for the committee substitute since much of it incorporates sections from the Task Force's recommendations. He commented the procedures committee of the Task Force spent a great deal of time on the issue of collection of information by the Alaska Judicial Council. The language in the bill was crafted after a great deal of work, mostly by the Judicial Council in consultation with the Division of Insurance. He assured the committee the Task Force recommendations were discussed thoroughly. Mr. Bush stated the Administration's basic premise on the issue of tort reform, is that the problem lies in the fact that for every dollar paid by an insurance company into the system for claims, about 40 cents ends up in the victim's pocket. The goal was not how to reduce the amount the insurance company pays, but how to reduce the 60 percent siphoned off by the system and place it back into either the insurance company's pocket or the victim's pocket. CSSB 15(JUD) addresses the issues of how to speed up the settlement process and make it less expensive to the parties. MR. BUSH discussed specific provisions in CSSB 15(JUD). The Administration disagrees with the Chamber of Commerce on the statute of repose, because the victim, who is at no fault, would lose his or her right to recover for injuries simply because of the passage of time. If a house collapsed after the eight year statute of repose was up, the victim would have no remedy to recover for injuries. The caps on punitive damages provision in the committee substitute is a compromise among almost everyone who has worked on this issue. Caps on non-economic damages are more problematic because they hurt people with severe injuries because if one does not have over $300,000 in non-economic damages or pain and suffering, the cap will not apply anyway. That approach does not deal with inefficiencies in the system, and merely takes money out of the pocket of an injured party and puts it back in the pocket of an insurance company. Regarding the mandatory arbitration section, MR. BUSH said he raised the same questions with the Court System regarding the cost of implementing alternative dispute resolution. He stated he does not understand why the Court System recognizes the cost of such a program but refuses to recognize the savings. Every empirical study available says that court costs almost break even using alternative dispute resolution. He suggested the problem with the section, as written, is that it creates some potential inconsistencies when meshed with the rest of the bill. The Task Force essentially rejected mandatory arbitration, and in exchange, adopted the proposed alternative dispute resolutions (early neutral evaluation and mediation), and for the $100,000 or less cases, an expedited District Court case process which requires District Court cases to go to trial within 270 days. Instead of setting up a mandatory arbitration system for $100,000 cases, the Task Force decided to create a quick, expedited process run through the District Court. The committee substitute now has a District Court provision with a 270 day process that will apply to the identical cases subject to mandatory arbitration. He was unsure how those two provisions will interplay. CHAIRMAN TAYLOR said his fear is that nobody will go to District Court because parties can get an automatic appeal to Supreme Court. MR. BUSH replied that is why no one goes to District Court today, but the incentive to use it, provided in alternative dispute resolution, is that one will get a decision within 270 days, rather than four or five years, and the amount of discovery is restricted which will lower costs. This new approach was an attempt to create a process that would fit between small claims and a full-blown Superior Court trial by making the District Court a useful civil court. He thought the mandatory arbitration is a reasonable approach, and believed providing multiple processes in the bill could be advantageous, because there will be more places to fit cases, and a comparison of the different approaches can be made to determine which works best. Number 238 CHAIRMAN TAYLOR asked Mr. Bush to comment on the Task Force's deliberation of the statute of repose for architects/engineers. MR. BUSH replied the current statute of repose only applies to architects, the proposal in HB 58 applies to everyone and limits the time period for bringing an action to eight years. HB 58 does contain minor exceptions, for example, for long-term exposure to hazardous waste, or leaving a sponge in a body during surgery. CHAIRMAN TAYLOR stated some cases still fall under the two year limit; the eight year statute of repose will now apply to those cases that had no previous limit. MR. BUSH disagreed, and said the two year limit still applies but Alaska has a discovery rule, so the two year time clock starts ticking when one becomes aware of an injury. The time frame is two years that can be extended up to eight. The Task Force changed the proposal to a ten year statute of repose that would not apply to children, so it tolled during minority. It also tolled for incapacitated people. The Task Force vote on that provision was 10-7 in favor, but a total of 14 votes was required to pass anything out of the Task Force, so it did not go forward. Other than the "under the influence of alcohol or drugs" provision discussed earlier, it was the only vote that ended up with a majority vote but not the required two-thirds. Number 238 CHAIRMAN TAYLOR asked about the Jackson v. Powers provision. MR. BUSH said that was withdrawn from consideration by unanimous consent, after debate. CHAIRMAN TAYLOR asked about the provision allowing children to sue doctors until age eight. MR. BUSH replied the first time he saw that provision was in HB 58, last fall. It has been viewed as a statute of limitations change; it is not, it is a statute of repose for children that is more restrictive than the eight years. He advised if a child is injured by a doctor at age five but the injury does not become apparent for several years, the child loses his/her cause of action at age eight. If the same thing happened to a 25 year old adult, that adult could bring a cause of action until age 33. CHAIRMAN TAYLOR asked about the Task Force's deliberation of the non-economic damage cap of $300,000 as opposed to $500,000. MR. BUSH answered that provision never came to the Task Force; the committee that considered it recommended the change incorporated into CSSB 15(JUD), which changes it to apply only to severe disfigurement, and that provision passed. CHAIRMAN TAYLOR inquired about collateral benefits. MR. BUSH said that was debated during several of the meetings but did not come to a vote because it was not a recommendation that made it out of committee. CHAIRMAN TAYLOR asked about allocation of damages. MR. BUSH replied allocation of fault was rejected on an 8-9 vote (the provisions as proposed in the initiative). CHAIRMAN TAYLOR questioned the provision for damages resulting during the commission of a felony, or while under the influence of alcohol or drugs. MR. BUSH explained the felony provisions are contained in the committee substitute, that provision was adopted by the Task Force. Number 269 SENATOR PEARCE asked whether a recommendation that did not come from a subcommittee was allowed to go before the entire Task Force for a vote. MR. BUSH explained the following rules were established at the first meeting: a two-thirds vote (14) was required to adopt anything by the Task Force; to get a proposal recommended by a committee required three or four votes; and any member could propose any provision to the full Task Force even if the provision was rejected by a committee. CHAIRMAN TAYLOR noted a Task Force committee voted unanimously to not report changes to collateral benefits, as proposed by the Alaska Chamber of Commerce. He asked about the provision pertaining to changes to periodic payments. MR. BUSH said that was not taken up by the full Task Force as that provision was unanimously rejected in committee. Number 300 (A COPY OF AMENDMENTS 4 - 10 ARE ATTACHED TO THIS DOCUMENT.) CHAIRMAN TAYLOR discussed Amendment 4, and explained it inserts a new bill section that would apply to bodily injury, sickness, disease, or death of an insured, or damage or destruction of property of an uninsured, even if the limits of liability bonds and policies that apply have not been used up by payments or judgments or settlements. MR. LESSMEIER encourage the committee to not adopt Amendment 4 in the context of tort reform because the issue of uninsured/underinsured motorist coverage is complicated. Two federal district court judges have ruled differently on this issue, and the cases are on appeal to the Ninth Circuit Court of Appeals. The question has been certified to the Alaska Supreme Court. State Farm believes there is a problem that needs to be solved, but the problem needs to be treated in separate legislation. One of the policy calls the legislature will need to make is whether to return to a pure difference in limits coverage, or a coverage which is pure excess. If uninsured/underinsured motorist coverage remains as excess coverage, whenever a person buys that coverage, he/she will not know exactly what coverage he/she has because the amount of coverage owned by the uninsured or underinsured motorist is unknown. The excess coverage will become very costly because the possible payout is unknown. State Farm advocates returning to a pure difference of limits coverage and that language be adopted in statute about the mandate offers, so that State Farm clearly understands what the form of the offer is. CHAIRMAN TAYLOR asked if Amendment 4 will resolve the stacking question. He noted if two motorists are insured, the total of both policies would be used to pay for total damages. MR. LESSMEIER said he has not had time to study this proposal but repeated State Farm would like clarification of what it is supposed to do, since two federal judges have ruled differently on this issue. He cautioned the committee to not act on this amendment in a hasty manner because it may create more litigation. CHAIRMAN TAYLOR said he thinks stacking policies to pay for damages to be good public policy. MR. LESSMEIER said insurance companies can sell more coverage under difference in limits. That coverage, for a $100,000 policy, would be cheaper than pure excess coverage of $50,000. In a difference in limits situation, an insured will always know what their total amount of recovery is going to be. The policyholder will not know the amount of recovery under a pure excess policy. He explained if a person has $50,000 in pure excess coverage, and the other motorist is uninsured, the maximum amount the policyholder can collect is $50,000. CHAIRMAN TAYLOR countered if the other motorist was insured for $100,000, and the policyholder had damages of $200,000, the policyholder would collect $150,000, if the policies were stacked. MR. LESSMEIER responded that pure excess coverage is more expensive, which creates the risk of depriving consumers of choice at a certain level. State Farm believes it is better to give the consumer choice at the low end of coverage. CHAIRMAN TAYLOR said since this bill will receive an extensive review by the Finance Committee, Mr. Lessmeier will have an opportunity to take up the issue at that time. There being no objection to the adoption of Amendment 4, it was so ordered. Number 410 CHAIRMAN TAYLOR proposed Amendment 5 regarding civil action for claim settlement practices. MR. FORD explained Amendment 5 allows a person who claims a violation of the insurance trade practice law to file a civil action and provides qualifications on how to file. CHAIRMAN TAYLOR offered Amendment 5. There being no objection, Amendment 5 was adopted. CHAIRMAN TAYLOR proposed Amendment 6. MR. FORD explained it adds a new provision to the motor vehicle statutes that requires motor vehicle liability policies to pay penalties if the insurer denies coverage for medical treatment, and the claim is later determined to be covered. The penalties are listed in paragraphs 1 and 2, and include actual costs plus interest from the date the claim is received by the insurer, and attorneys' fees, or 50 percent of the claim, whichever is greater. CHAIRMAN TAYLOR said some carriers routinely deny small medical claims and wait for the insured to sue. The State of Oregon has enacted provisions to double the award, in such situations. There being no objection to Amendment 6, it was adopted. CHAIRMAN TAYLOR expressed concern about Amendment 7 because it may reverse a policy set out in the Van Been case and asked committee members to study the amendment further. Regarding the rate rollback requirement in Amendment 8, CHAIRMAN TAYLOR announced that amendment may be offered in the Finance Committee, as well as Amendment 9. CHAIRMAN TAYLOR noted Amendment 10 pertains to punitive damages for unlawful practices and was previously adopted. There being no further amendments, SENATOR MILLER moved CSSB 15(JUD) as amended and accompanying fiscal notes out of committee with individual recommendations. There being no objection, the motion carried. CHAIRMAN TAYLOR adjourned the meeting at 3:55 p.m.