SL&C - 2/28/95 SB 95 INSURANCE AGAINST UNINSURED DRIVERS  The committee took up SB 95 as the next order of business. SHERMAN ERNOUF, committee aide, gave the following testimony. He stated SB 95 is identical to HB 403 from the 18th Legislature. It seeks to remove the mandatory offer of uninsured and underinsured motorist coverage in excess of coverage voluntarily purchased by an insured. Uninsured coverage protects the vehicle owner against being injured in a collision with an at-fault motorist with no bodily liability insurance. Uninsured motorist coverage applies only if the uninsured motorist is legally liable for the resulting injury. This coverage puts the injured insured in the same position as if he/she had been in an accident with a motorist who was covered. If the injured driver cannot be compensated for an injury by a negligent party who has no insurance, then the injured party can turn to his/her own insurance company for compensation. MR. ERNOUF continued. Over three years ago, the Legislature passed legislation which required Alaskan insurance companies to offer uninsured and underinsured coverage of between $1-$2 million, one of the highest amounts in the nation. This mandatory coverage has increased the cost of liability insurance for all policy holders due to the high level of coverage insurance companies are mandated to provide. SB 95 seeks to assure the Alaskan consumer of competitive premiums in the auto insurance arena by requiring insurance companies to provide only the requested amount of uninsured/underinsured coverage with a statutory limitation. By statute, there would still be a mandatory minimum, but buyers could choose the level of protection they desire. Alaska is the only state that requires such a high level of coverage. MR. ERNOUF stated SB 95 will encourage a competitive market for premiums as well as provide the consumer with an individual option to purchase coverage in excess of the statutory minimum. The consumer would still be protected by the statute, but would not be forced to pay for liability coverage in excess of $1 million. Number 401 SENATOR KELLY referred to the underinsured motorist limits chart and noted Alaska already has the highest level of mandated liability insurance. MR. ERNOUF agreed. SENATOR KELLY stated in addition, insurers are required to offer excess coverage of $1-$2 million, which limits the number of insurers that can operate in Alaska and increases rates. MR. ERNOUF replied affirmatively and explained the premiums would also be artificially high because the insurance company impacts, into the cost of all premiums, this high level of liability for uninsured/underinsured motorist coverage. Therefore with a $1-$2 million ceiling, across-the-board hikes in premiums occur. SENATOR SALO commented in some states, vehicle registration is contingent upon keeping and maintaining liability insurance coverage. She asked whether the premium rates for insurance in Alaska are affected by the fact that we don't do this. She also asked what the rate of participation is. MR. ERNOUF was unable to provide that information. LINDA HALL, President of the Alaskan Independent Insurance Agents (AIIA), testified in support of SB 95. She described a major discrepancy between the amounts of liability insurance motorists are required to carry on themselves and the amount they can purchase for uninsured motorists, under Alaska law. She stated there should be a relationship between the amount of protection purchased by an individual for his/her acts against others and the amount of protection he/she purchases for his/her own protection. If an individual is interested in providing extra protection, there are numerous methods available, such as medical, life, and disability insurance, that offer broad protection for many circumstances. No other statute governing other types of insurance protection mandates the maximum amount of coverage to be provided; only minimum amounts are addressed. Many other states have experienced crises in automobile insurance coverage. The AIIA wishes to continue to protect Alaskan consumers by working to create an atmosphere that encourages insurance competition. She urged the committee to support SB 95. Number 441 SENATOR KELLY asked what the effective result of the $2 million requirement is. MS. HALL stated insurance companies, after looking at that requirement, are concerned about committing their financial resources. Small companies operate with strict regulatory guidelines for their financial reserves. DON KOCH, Division of Insurance, commented the legislative intent of the existing law was to allow purchasers of automobile liability insurance, which covers injured third parties, to consider purchase of insurance providing personal protection for themselves and their families. It allows for limits that exceed the coverage that is required to be purchased, or is voluntarily purchased, as third party bodily injury liability. A number of states (17) have adopted no-fault statutes to allow the purchasers of insurance to provide for personal protection first, and then for third party coverage second. Alaska was the first state under a tort system to provide for substantial offer of personal protection via the uninsured/underinsured motorist bill. MR. KOCH agreed with Ms. Hall that the same coverage can be provided through other types of policies (i.e., medical) but this method may be the most convenient. He described the policy issue as whether the state wants to limit the coverage for a person buying automobile insurance for their own protection to the amount that a person voluntarily purchases for the protection of a third party. The focus of financial responsibility laws is for protecting third parties since the protection of personal assets is covered by other measures. He noted the Division of Insurance is not convinced that the high limits of coverage act as a deterrent to new markets coming into Alaska, as new markets have come in. Insurance companies can purchase reinsurance coverage. Referring to the chart, MR. KOCH noted 17 states have a no-fault, add-on feature, seven of them are modified no-fault states, and five states are under the tort system that have offers of higher limits. North Carolina has a mandatory offer of up to $1 million. He suggested retaining the statute but removing the $2 million limit as the top offer. A recent U.S. District Court decision in the case of Colonial Company of California vs. Derrick Tumbleson overturned the uninsured motorist provisions of our statute by saying that the only trigger for underinsured motorist coverage is if you have an uninsured motorist to begin with. He suggested an additional amendment be considered to restore the intent of the 1990 law to allow the use of underinsured coverage whether the other party is insured or not. Number 518 SENATOR TORGERSON asked for clarification. He described a situation brought to his attention by a constituent who tried to collect the difference between his $300,000 underinsured motorist coverage, and the other party's $100,000 coverage, after an accident. He was denied by the insurance company on the grounds that the other party had the minimum amount of coverage. MR.KOCH explained that the case he referred to was a U.S. District Court case which is under appeal. But, insurers are denying claims based upon that decision which the Division of Insurance thinks is an inappropriate result. When a consumer buys underinsured motorist coverage on their policy, they expect that coverage to pick up the difference. He added that typically automobile insurers offer a maximum of $3-$500,000 coverage. Beyond that they will offer an excess policy. The original policy covers an offer of a like amount of uninsured/underinsured motorist coverage, which the excess policies do not. Four other states use the same system as Alaska: three of those states do not have a maximum limit; North Carolina has a limit of $1 million. He suggested reducing the $2 million maximum to $1 million. JOHN GEORGE, representing the National Association of Independent Insurers (NAII), testified. The NAII provides a large proportion of the automobile insurance sold in the State of Alaska. Although he was unfamiliar with the U.S. District Court case, he agreed the "trigger," referred to by Mr. Koch, should be reinstated, so that consumers get the coverage they are paying for. He responded to Senator Salo's concern about uninsured motorists. Some states remove license plates from uninsured vehicles after the Division of Motor Vehicles has been notified by an insurance company that insurance has lapsed. Locating those vehicles is a time consuming process, however, and a low priority for many state troopers. Other states require motorists to carry a "proof of insurance" card but if insurance is cancelled, it is difficult to retrieve the card. In Alaska, motorists are required to sign a sworn statement, under penalty of perjury, that they have insurance. It is relatively effective, as the cost is low. If that motorist is responsible for damages, he/she is liable for perjury as well. TAPE 95-8, SIDE B In response to Senator Torgerson's question about his constituent, MR. GEORGE stated the limit of liability is not necessarily what is received as proof of damage is required; that is where the problem may lie. Regarding the issue of reinsurance being available to insurers, MR. GEORGE noted the cost of reinsurance for the $1 million coverage to small insurance companies is costly, especially when very few customers may chose to buy it. SENATOR KELLY questioned why an individual would want to buy $1 million in coverage. MR. GEORGE replied it is conceivable an individual could have injuries and property damage to that amount. SENATOR KELLY asked if people who buy this coverage are mainly concerned about protecting assets. MR. GEORGE explained the difference in protection provided in both uninsured and underinsured policies. Number 523 SENATOR KELLY asked what the cost of a typical $1 million policy would be. LINDA HALL replied the cost would be approximately $150 to $200 per year on a non-commercial vehicle. She noted the statute also applies to commercial vehicles. SENATOR TORGERSON asked if death benefits are covered under the underinsured policy. MR. GEORGE answered affirmatively. SENATOR TORGERSON explained there was a death in the accident he mentioned earlier, yet the additional monies were denied to the insured. MR. GEORGE suggested the court decision may have been applied in that case. SENATOR DONLEY stated the present status of the law serves an important purpose: it allows all Alaskans to exercise self responsibility to protect themselves and their passengers from other irresponsible drivers who may be uninsured or underinsured. Self protection insurance is first party insurance; liability insurance is considered third party insurance. Without regulation, the opportunity for people to buy limits to protect themselves and their families of up to $1-2 million, would not exist. SENATOR KELLY clarified that $1 million is the limit for an individual and $2 million is the limit for the driver and passengers. SENATOR DONLEY continued. He noted this insurance is voluntarily purchased by the motorist, however if insurance companies are not mandated to provide it, they will not offer it because whichever company provides the excess coverage in a multiple claim case will get stuck paying the bill. If all companies are required to sell it, one company will not get stuck paying the entire cost. He stated without this coverage, the State of Alaska, through the catastrophic medical program, ends up paying the bill when serious accidents occur. People who take the opportunity to buy excess insurance are acting responsibly and are potentially saving the state money. He stated the present law is not causing problems and that no proof exists as to the assertion that competition is limited by this law. He supported the position of the Division of Insurance: to establish a $1 million dollar limit and to reinstate the "trigger." He confirmed Mr. Koch's statement that there has been no across the board cost increase as a result of this law. Number 431 In response to Ms. Hall's statement that there should be no distinction between the limit on the amount of liability insurance and the limit on the amount of excess insurance, SENATOR DONLEY disagreed. He stated third party insurance protects other people and one's assets, but first party insurance protects oneself and family, and is optional. He clarified that the law does not mandate the maximum amount an insurance company can offer, rather it mandates the minimum amount. Regarding the Colonial case, which was decided January 20, the court interpreted what the Legislature did do, rather than what they did not do. They completely misinterpreted the legislative intent. The case should have been decided in state court rather than federal court. SENATOR DONLEY commented if the appeal is unsuccessful, the solution rests with the proposal put forward by the Division of Insurance. The appeal is centered around the fact that the case should have been decided by a state court. SENATOR KELLY asked if the misinterpretation in the court's decision can be fixed in SB 95. SENATOR DONLEY replied affirmatively. SENATOR SALO questioned how Senator Torgerson's constituent could be better served. SENATOR DONLEY answered the solution is to get the Ninth Circuit Court to certify this question back to the state courts for an appropriate decision on state law. SENATOR TORGERSON expressed concern that insurance companies are charging premiums but not paying off on them. SENATOR DONLEY agreed. SENATOR TORGERSON asked if the premiums would be reimbursed. SENATOR DONLEY stated it is within the authority of the Division of Insurance to make that order, since many people are being denied coverage they already paid for. Regarding reinsurance, SENATOR DONLEY explained there are two kinds. Treaty reinsurance allows a company to reinsure for all risks; a second type allows a company to buy coverage for a single risk. He commented that it is slightly more difficult and expensive to get the single-risk type of insurance, but that is built into the rate base. He added more umbrella policies are now structured to include uninsured/underinsured coverage which he believes is a result of the mandated offer. This presents an additional option to the consumer. He urged the committee to leave the law the way it is but to make some minor adjustments including the resolution of the Colonial case. SENATOR KELLY asked about the court decision. SENATOR DONLEY stated the court decided, that since the Legislature did not amend a definition statute when they passed the law (which is what Mr. Koch referred to as the "trigger"), the law was basically meaningless. He added the legislative drafters are completely perplexed by the decision because definition statutes are not substantive sections of the law and are not used to reinterpret substantive sections of the law. SENATOR DONLEY reiterated that he supports the changes proposed by the Division of Insurance. SENATOR KELLY announced SB 95 would not be passed out of committee at this time, and that a meeting would be held on Thursday at 1:30 to hear the Insurance Code Revision.