SB 202 - MOTOR VEHICLE INSURANCE CHAIRMAN LEMAN called the Senate Labor and Commerce Committee meeting to order at 1:33 p.m. and announced SB 202 to be up for consideration. SENATOR DAVE DONLEY said SB 202 has as its goal to correct some of the unfairness that is going on in the current settlement practices of the insurance industry in Alaska in the form of reduced claim payments. Section #3 prohibits insurers from terminating contracts with an insurance producer, agent, broker, or independent adjuster without good cause. It also requires the Director of Insurance to adopt regulations to implement and enforce this section. He said he had talked to agents over the summer who told him of feeling threatened by some insurers when they stuck up for their clients. They wanted security that they wouldn't be fired unless it was for a legitimate reason. SENATOR DONLEY said the insurance industry is the only industry that is exempt from the anti-trust law, so it should be regulated differently. Section #4 makes it clear that insurance companies cannot limit communications between agents and insureds and also people who repair property that is damaged. There is no good public policy reason for a company to tell an agent what it should or should not communicate to the insured. Repair people should be able to give estimates, if it's legitimate information, to insureds whether or not the repair is covered. There is no reason a repair person should be intimated into not giving estimates because insurance doesn't cover it. Section #5 was requested by the Division of Insurance and the Division of Motor Vehicles. It prohibits an insurance company from canceling a policy if an individual in the household has a driver's license suspended or revoked for minor consuming or minor in possession of drugs or alcohol. This section relates to section the "Use It, Lost It" bill required high-risk (SR22) insurance when a driver's license is administratively revoked for a non-driving violation. The insurance industry has been refusing to insure, or in some cases, cancel policies for families unless they purchase the high-risk insurance. Section #6 prohibits limitations or reductions of prejudgment interest legally due to an insured party, as a result of a claim covered under an insurance policy. This provision would apply even if the amount of prejudgment interest exceeded applicable policy limits. Unless prejudgment interest is covered, because insurance companies write into the contract that they control the defense of the insured, the insurance company can negotiate policy in the settlement and if they subsequently refuse to pay the prejudgement interest on that, the person who bought the insurance policy is left hanging with the obligation and they didn't get to participate in their own defense. SENATOR DONLEY said that people don't think they will have a problem like this until it happens to them. Section #7 is the most important part of the legislation. It changes the way claim practice is conducted in Alaska. Currently, if an agreement cannot be reached between the insured and the insurance company on appropriate compensation, the negotiations can go on for months until someone files a lawsuit. All this time the injured party probably receives no compensation at all. The insurance company wants them to agree to their dollar amount before they will pay them anything. He said he didn't think that was right. The way it ought to work is that the parties get together, have a discussion, and if they disagree, the insurance company ought to be able to ascertain what they think is appropriate compensation at the very least and proceed to pay that. The dispute should be on the difference, so the fight now becomes over a much smaller dollar amount and there is no longer the economic black mail hanging over the burned-out family or the person in the hospital who needs help with medical bills. Number 271 SENATOR DONLEY said the next section deals with arbitration and in some instances, an insurer may require a policy holder to pay the costs of arbitration or mediation before the process even begins. This type of activity discourages claimants from pursuing a fair settlement, especially when the amount at issue is less than the cost of arbitration. This section prohibits this practice and affords insured motorists a fair opportunity to pursue equitable claims. Section #9 intends to set out premium limits for what insurance companies can charge for premiums. He said that some insurance companies have been violating existing law for some time by not offering the mandatory seven-day policies. The fact that a law exists on this issue shows that it is problematic. This section establishes a policy amount so that when insurance companies start to follow the law, they will have a reasonable policy amount. The medical claims section is the same as the property claims section saying the insurance company should go ahead and pay what they can agree on right away and then negotiate the rest. There is also a requirement for the insurance company to have a local or toll-free telephone number, if the insurer sells automobile insurance in this State. SENATOR LEMAN said that three agents of State Farm oppose this legislation because they don't want the State interfering with their contractual relationship with the company. He asked what Senator Donley thought about that. SENATOR DONLEY responded that he thought there are a lot of different feelings among independent insurance agents and agents who work for specific companies. He thought there was tremendous pressure from the companies on agents to toe the line. However, he thought that some agents are happy with their relationships. He didn't see why a company would be unhappy with a due cause provision. He didn't see how it would interfere with a private contract other than that this industry is exempt from anti-trust laws and traditionally they get regulated differently than other private industries. Number 372 SENATOR MACKIE said he feels reluctant to have government interfere with private enterprise. He asked if there were circumstances where an independent agent agreed to pay legitimate claims, and had been intimidated by an insurance company. SENATOR DONLEY said they certainly shouldn't be afraid and this bill is intended to make sure they are not afraid. Agents should legitimately be representing their clients. He informed the committee that the State of Alaska already interferes with this industry's private contracts in that they are the only people in Alaska who are forbidden by statute to discount their services. If they were allowed to discount contracts, the public would be hurt because agents wouldn't be able to provide the level of service they do under the current scheme. He, personally, would be happy to trade their statutory protection from fee discounting for this provision any day. He would like to see a free market. He said the agents are given a guaranteed rate of return and the public needs some protection. Number 400 MS. SARAH MCNAIR-GROVE, Insurance Analyst, Division of Insurance, said the Division's first concern is in section #3. It's been the historical position of the Division that it doesn't interfere with the contract between the agents and the insurer and this is viewed as interference in contracting. The Division requires that there is a contract, but not the provisions it must contain. When the insurer cancels a contract with an agent, it has to give the agent a reason for that termination. If it's for cause, the Division investigates to make sure it is in compliance with statutes. SENATOR MACKIE asked if they are required to investigate terminations for cause. MS. GROVE answered that is correct. They write regulations that determine what good cause is and their role is to see that insurers comply with the statute. CHAIRMAN LEMAN asked what they do. MS. GROVE answered that if there is a termination which is against current statutes, the Division does an investigation. If it's an illegal action, they take appropriate action. If it's not illegal, there's nothing they can do about it. She said it seems that the scope of this legislation is a little broad and she didn't think that was the intent. It does include another person representing an insurer and insured which could be someone like an attorney. CHAIRMAN LEMAN asked her to submit language that would clarify that. MS. GROVE said section #6 on prejudgement interest is placed in chapter 42 which in the insurance title deals with policy provisions and only with admitted insurers. A more appropriate place is to put this in chapter 36 which deals with trade practices, because it would apply to non-admitted insurers as well. For personal autos it's not too big of a problem, but there is no limitation here so there may be more of a problem with commercial policies. They assume the intent is to have the prejudgement paid in addition to the policy, but that's not clear as it is written. They are not sure how the prejudgement interest would be calculated. Would it be calculated on the total amount of the judgement or only on the policy? Regarding section #7 they already have regulations in place that provide time frames for insurers to respond and pay fines, and so some of this is redundant. It also seems like there are conflicts between section (b) and (c). (b) says if you can't reasonably determine what a loss is, when that point in time comes that you can determine the value, you have 15 days to pay it, but (c) says within 30 days after you receive notice of a claim, you have to pay it. So the 30 days could be before you know what the value of the loss is and it's hard to get someone to pay something if they don't know what the value is specifically. They have the same question with section (d) when there are legitimate coverage disputes with the penalties that would be required. Number 485 SENATOR HOFFMAN said he had a constituent who had a fire in 1996 and they have been fighting with the insurance company ever since. He asked what he could do to expedite the process under current law. MS. GROVE answered that the regulation requires undisputed amounts to be paid within 30 days. If he thinks something is wrong, he can contact her Division and they will help in any way they can to get things moving. SENATOR HOFFMAN said he hired a private adjuster as well, and even with him the claim hasn't been finalized. MS. GROVE explained that the regulation also specifies that once a claim has gone into another forum, you deal with the time frames in that forum. She said they have no objection to section #8, arbitration fees, although it is unclear what would happen if the arbitrator asked the insured to pay some of the fees and the insured was unable to do so. She explained in section #9, putting in a specific number like the 200 percent limit tends to become the only figure people use, and she suggested using another way to accomplish it. CHAIRMAN LEMAN said he thought this meant that we would no longer have the 0 - 7 day policy. It could be for any number of days. SENATOR DONLEY explained that the seven days hasn't worked, because insurance companies just aren't offering it. He hoped to give them an option to go from seven to 30 days. Finally, she mentioned section #12, medical payments, and suggested it be structured more along the line of the uninsured/underinsured motorist coverage, because now it's in Title 28 which is the Division of Motor Vehicles and insurers are regulated under Title 21. Number 533 SENATOR MACKIE asked if these sections were clarified, would the Division support the bill. MS. GROVE answered that they have no position except for section SENATOR MACKIE said it would help him to know where the Department is coming from on some of these issues rather than not having a position. MR. JOHN GEORGE, National Association of Independent Insurers, opposed SB 202. He said it is absolutely true that the insurance industry is exempted from anti-trust laws, but for the limited purpose of collecting data. Insurance rates are based on large numbers, he explained, and rate making is the only reason they are exempted from anti-trust laws. He said that all rates are subject to approval by the regulator. The agent's contract with an insurance company is a different kind of product and it would be the same as the State interfering with any other employee/employer relationship. TAPE 98-7, SIDE B He said some companies will quote a policy to an agent at three different commission levels. They do have problems with the requirement that the claimant has to be paid within 30 days, because a lot of them just aren't ready to be paid then. Some claims may involve fraud, and so they may need more time to investigate. They have an obligation to their other policy holders to not be too quick to pay for things they think are too questionable. MR. GEORGE said that there is some question whether the toll free phone numbers applies only to insurance companies or to agents, brokers, or possibly, adjusters. He added that he isn't aware of any other industry that's required to have an 800 number. A hotel has one, because it's to their competitive advantage to have it. MR. MICHAEL LESSMEIER, State Farm Insurance, said one of the biggest challenges in his industry is affordability. Liability insurance is a fact of life in Alaska and it has to be affordable. You have to look at the problem and see if it's so widespread that it justifies legislative action on one hand and then find out the cost and benefit of the solution being proposed on the other. State Farm just finished returning to Alaska policy holders $6.6 million. Legislation like this would change that figure. State Farm doesn't think this legislation is necessary and it would also be expensive and intrusive. He said that State Farm has a relationship with 32 agents in Alaska and for more than 50 years their relationship has been set by contracts which provide for termination for due cause. The relationships are built on trust and sustained by trust. These have been good relationships. Fourteen of those have been State Farm agents for more than 20 years, 21 of them have been State Farm agents for more than 15 years, and 27 of the 32 have been State Farm agents for more than 10 years. There have been only three terminations in the last nine years. He said they are not aware of a problem in the relationship between agents and insurers in Alaska. To say someone else will be the arbiter of their trust destroys the basis for the relationship. State Farm strongly opposes that provision. He asked who it is supposed to protect and what is it supposed to protect them from. Another concern he raised is that this legislation creates a new private cause of action in Alaska that presently doesn't exist. It will occur on a regular basis and he referred to the requirement to pay a claim that is reasonably determinable within seven days. In almost every case where that is going to be an issue, there will be a secondary lawsuit for the kinds of increased penalties and damages that this legislation creates. This bill also creates a bad faith cause of action and in those states that have had that, the cost of insurance has gone up dramatically. This bill also creates mandatory offers of medical payment coverage and he again asked what the need was since these coverages are widely available today. He hadn't heard any justification for yet another mailing and he asked what the limits were supposed to be. These are the kinds of things that lead to litigation. Number 448 SENATOR MACKIE asked him to expand on why this would cost the consumer more money. MR. LESSMEIER explained that it creates a new cause of action that would be largely common cause of action. There will be great pressure on insurers to not dispute claims that they should be disputing. There's a cause of action for reasonable actual attorney's fees, interest, and penalties added here; it isn't in the law right now. There is the potential for bad faith claims practices against the insurer which they presently don't have either. They currently have bad faith on the part of a first party, but not a third party. This has been demonstrated in other states, like California and Arkansas, to be expensive. He said in the tort reform that passed last year is an offer of judgement provision that works both ways. It says if you have to come to court and enter a [indisc] judgement within very strict time frames and you lose, you will have to pay a certain percentage of the other side's attorney fees. If you enter it early, you might have to pay as much as 75 percent which provides an incentive for both parties to fairly evaluate their claims. When you create a new cause of action like this that ultimately leads to litigation, that's where the cost will occur. MR. JOE FLOOD, a consumer who suffered a recent loss, said there is also an increased cost factor that the consumer now ends up paying. He explained that last April 25 he suffered a loss here in Juneau and to this date it hasn't been settled and it won't be settled. He has talked to a number of other business people around Alaska with similar circumstances who are afraid to come to people like legislators, because they are afraid the insurance companies won't pay. They have suffered major losses and have been "beat up on" by the adjusters, not the agents, who demand terribly unreasonable things. He explained that he had to supply his insurance company with over 3,500 documents and they still want more. It (insurance company) has gone to his bank, his accountants, and his attorneys and duplicated his efforts. It turns around and gives all the paperwork to an accounting firm in Seattle and charge that to him. He said if it wasn't for the local banks, he would have gone bankrupt. The insurance company asked him if he had gone bankrupt, yet. "They want you up against the ropes so you will end up settling for what they want to offer," he said. "It's unfair to the consumer and something should be done about it, especially section #7 in this bill." CHAIRMAN LEMAN said testimony from insurance people has indicated that some of the time limits are already in place by regulation. However, it's possible some of the time limits don't apply when you get into litigation. MR. FLOOD said HE had a time line of when HE had to come up with his proof of loss. The insurance company doesn't have a time line. He has business interruption insurance, but they don't pay you while you are down. They encourage you to get open as soon as you can and then pay you for the down time and negotiate that down. SENATOR MACKIE said he wasn't interested in the personal details of his case, but he wanted to know if the insurance company he was dealing with ever indicated to him specifically what it was disputing in terms of the coverage he assumed he had. MR. FLOOD answered no. SENATOR MACKIE asked him if he went to the Division of Insurance and ask it for help and what was its response. MR. FLOOD replied that he did go to the Division of Insurance and they are willing to help, but if you hire an attorney, they can't get involved and that's where he is. His fire was first called spontaneous combustion and State Farm sent a claim adjuster specialist down from Anchorage who brought up a fireman from Seattle and they both suggested it was arson. There have been a couple of other arson fires in Juneau and the injured parties have had the same experience of fighting to keep their heads above water while the insurance company is saying they can't pay anything until they finish their investigation. They keep putting things off and he thinks they are attempting to make you settle for something less than what you purchased. SENATOR HOFFMAN related that his constituent had full coverage replacement cost and the insurance company he was with changed its policy January 1, 1997 and insured residences for 125 percent of the original cost of the home. He also hired an independent appraiser and figured what the cost was and the value of his home had doubled. He figured the reason the insurance company is not willing to settle is because he hired an independent appraiser and the insurance company wants to make sure people in the community know he did and has problems because of it. MR. FLOOD said that the independent adjuster he hired out of Seattle does work all over Alaska and they are currently involved with attorneys in California who are filing a class action suit because of that. Number 274 MS. GROVE clarified that when she was talking about regulations that are in place, she was referring to the undisputed amount that has a time limit. SENATOR DONLEY added that what she means is once it's disputed and the insurance company doesn't agree to settle for what the injured party wants, they're, of course, not going to pay anything. MS. GROVE said according to regulation the undisputed amount must be paid. CHAIRMAN LEMAN said he would hold SB 202 until he could get more information and then bring it back before the committee.