HOUSE FINANCE COMMITTEE MARCH 13, 1997 1:40 P.M. TAPE HFC 97 - 58, Side 1, #000 - end. TAPE HFC 97 - 58, Side 2, #000 - end. TAPE HFC 97 - 59, Side 1, #000 - end. TAPE HFC 97 - 59, Side 2, #000 - #020. CALL TO ORDER Co-Chair Gene Therriault called the House Finance Committee meeting to order at 1:40 P.M. PRESENT Co-Chair Hanley Representative Kelly Co-Chair Therriault Representative Kohring Representative Davies Representative Martin Representative Davis Representative Moses Representative Foster Representative Mulder Representative Grussendorf ALSO PRESENT Representative Brian Porter; Jeff Bush, Attorney, Deputy Commissioner, Department of Commerce and Economic Development; Pam LaBolle, President, Alaska State Chamber of Commerce; Michael Lessmeier, Attorney, State Farm Insurance Company, Juneau; Ross Mullins, (Testified via teleconference), Cordova; Jack Hopkins, (Testified via teleconference), Cordova; David McGuire, (Testified via teleconference), Anchorage; Dick Cattanach, (Testified via teleconference), Anchorage; Mike Schneider, (Testified via teleconference), Attorney, Anchorage; Daryl Nelson, (Testified via teleconference), Anchorage; Frank Dillon, (Testified via teleconference), Executive Director, Alaska Trucking Association, Anchorage; Paul Cossman, (Testified via teleconference), Lawyer, Anchorage; Tim Dooley, (Testified via teleconference), Attorney, Anchorage; Mauri Long, (Testified via teleconference), Attorney, President, Trial Lawyer Association, Anchorage; Karen Cowart, (Testified via teleconference), The Alliance, Anchorage; Orin Seybert, (Testified via teleconference), Alaska Air Carriers Association, Anchorage; Leonard Efta, (Testified via teleconference), Kenai; Susan Ross, (Testified via teleconference), Kenai; Paul Sweet, (Testified via teleconference), Matsu. SUMMARY 1 HB 58 An Act relating to civil actions; amending Rules 49 and 68, Alaska Rules of Civil Procedure; amending Rule 702, Alaska Rules of Evidence; and providing for an effective date. HB 58 was HELD in Committee for further consideration. HOUSE BILL 58 "An Act relating to civil actions; amending Rules 49 and 68, Alaska Rules of Civil Procedure; amending Rule 702, Alaska Rules of Evidence; and providing for an effective date." REPRESENTATIVE BRIAN PORTER stated that many individuals and business have already experienced the nightmares of litigation that drag on for years and the high legal costs associated with them. Lawsuits in this country have proliferated. Litigation has become an industry. Contingent fee contracts give up to 40% of injured victims' damage recoveries to trial lawyers. The incentives to create the most litigious society on earth are firmly in place. He stressed that as a consequence, the cost of liability insurance has become unaffordable to many. In some areas of the State, there are no domestic insurance companies which will write a liability insurance policy for any price. Across the country, and throughout Alaska, there is an outcry for reforming our civil justice system. Ordinary people and business of all sizes seek relief from a flawed system. A more efficient and fair method of compensating wrongly injured victims must be crafted and maintained. The consulting actuarial firm, Tillinghast, reported in 1992 that about 50% of damage awards of some $132 billion dollars spent nationwide went to the injured party. The remaining 50% went to the cost of litigation and attorney fees. From that information, it is apparent that if current tort system is judged as a method of compensating accident victims for their losses, it is both inefficient and unfair. He continued, inefficient because only about half of the cost goes toward any form of compensation for victims and unfair because many injured victims receive insufficient compensation to no compensation at all. He continued, in contrast with the foregoing deficiencies, the workers' compensation system returns about 70% of the workers' compensation insurance premium dollars to the injured party. The efficiencies enjoyed in the health insurance industry are even higher, with about 85% of health insurance premium dollars being returned to the beneficiary. 2 The most efficient is Social Security, with 99% of the social security taxes collected being returned to the beneficiaries of that system. The relative certainty of recovery, and the certainty in the amount of recovery under that system, stands in stark contrast to the uncertainties inherent in the litigation of claims and defenses. The absence of uncertainty and high costs of litigation in these alternative systems makes clear that there is a compelling need for substantial reforms in the civil justice system. Representative Porter explained that the legislation was comprised of three sections, one of which passed the House Floor last year. It also incorporates several portions that the Governor's Task Force recommended during the summer tort reform discussions. Representative Porter highlighted the points from the Governor's Task Force which had been incorporated into the proposed legislation. Section 19. Definition; intentional torts. This section is taken verbatim from the report of the Governor's Task Force. The section amends AS 09.17.900 to clarify its application to intentional acts. Section 23. Interest on judgments; prejudgment interest. This section would provide for a floating or variable interest rate on judgments and prejudgment interest by making it three hundred basic points above the discount rate at the 12th Federal Reserve District, as of January 2, of the year in which the judgement or decree is entered. Once set by this section, the interest rate does not change until satisfaction of the judgment or decree. Using the discount rate of the 12th Federal Reserve District would be consistent with the way interest rates are determined under the usury statute, AS 45.45.010(b). The Governor's Task Force report recommended a floating interest rate on judgments and prejudgment interest. This section should satisfy those concerns. Section 28 Medical advisory panels. Section 29 Expert advisory panel; panel questions. Section 30 Expert advisory panel; discovery. Section 31 Expert advisory panel; public sector provider. Section 37. Damages resulting from commission of a felony, or while under the influence of alcohol or drugs. The Governor's Task Force report recommended that a person who sustains personal injuries or death during the commission, or attempted commission of a 3 felony, should be barred from recovering damages for those injuries. Section 46. Settlement information. This section is taken verbatim from the report of the Governor's Task Force. It is intended to improve upon existing Superior Court, fast track procedures by providing for a meeting of the parties and a pretrial conference. Section 48. Sanctions for rule violations. This section modifies Civil Rule 95 by imposing increased sanctions against attorneys and their clients for any infraction of the rules, including Civil Rule 11. It permits fines of up to $10 thousand dollars against attorneys, which was increased from $1 thousand dollars under existing rule. Representative Porter addressed the new sections of the bill. Section 35. Civil liability of electric utility. This section would provide immunity from strict liability for publicly regulated electric utility companies for the generation, distribution, and sale of electricity. The section would make it clear that the provision of electricity, from the time it is generated until the consumer utilized it, would be a provision of service, and would not change its character from a service to a product. Section 40. Appointment of independent counsel; conflicts of interest. This section makes an insurer responsible only for the costs and attorney fees incurred by the independent counsel defending against claims for which the insurer has either accepted coverage or reserved their right to deny coverage. Section 41. Appointment of independent counsel; conflicts of interest. In the context of an insured, represented by independent counsel, the section allows an insurer to settle directly with a plaintiff as to claims for which the insurer has either accepted coverage or reserved their right to deny coverage. Section 42. Workers' compensation lien. This section would be a consistency change to the workers' compensation statutes required by the change in Section 18 of the Act. (Tape Change HFC 97-58, Side 2). ROSS MULLINS, (TESTIFIED VIA TELECONFERENCE), CORDOVA, 4 testified in opposition to HB 58. He ascertained that the punitive damage section of the bill would be detrimental to maintaining a safe environment when addressing oil transportation measures. The proposed caps are too low to be efficient when dealing with the oil industry. He reiterated that the levels proposed for punitive damages are not sufficient. Mr. Mullins pointed out that the recommendations made in the Governor's proposal would be more satisfactory for people living in coastal Alaska and could address the magnitude of the "wrong-doer". JACK HOPKINS, (TESTIFIED VIA TELECONFERENCE), CORDOVA, testified in opposition to the legislation. He stated that the only people who will benefit from the legislation will be the insurance companies and "other" big business. DAVID MCGUIRE, M.D., (TESTIFIED VIA TELECONFERENCE), ANCHORAGE, voiced support for the proposed legislation. He commented that in 1976, malpractice insurance became unavailable for many doctors. As a result of that action, the legislature formed an organization called Medical Indemnity Corporation of Alaska (MICA) which was designed to provide doctors with malpractice insurance. Dr. McGuire provided written testimony. (Copy on file). He urged Committee members to support the legislation. DICK CATTANACH, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE, testified in support of the legislation. Written testimony was submitted to the Committee. (Copy on file). He noted that the bill was complex and deals with many issues which are important to Alaska's economy. The recommendations from the Governor's task force were also considered and many were included as they addressed issues that had not been previously considered. Mr. Cattanach urged the Committee's support of the legislation. MIKE SCHNEIDER, (TESTIFIED VIA TELECONFERENCE), ATTORNEY, ANCHORAGE, voiced opposition to HB 58. He stated that the Governor's task force proved the public's misperception that the "wheels were off the justice cart". Mr. Schneider summarized that many provisions in the bill do a disservice to each legislator's constituents. DARYL NELSON, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE, voiced opposition to the legislation. He noted concern with the statute of repose, stipulating that many parents with new babies born with disabilities do not realize that the child has a problem until later as the child develops. He believed that section of the bill would be detrimental to all people with disabilities. FRANK DILLON, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE 5 DIRECTOR, ALASKA TRUCKING ASSOCIATION, ANCHORAGE, testified in support of the proposed legislation. He emphasized that America was "drowning" in a sea of judicial abuse. HB 58 is a small but much needed step toward complete reconstruction of the legal system. He urged the Committee's support of the legislation. LEONARD EFTA, (TESTIFIED VIA TELECONFERENCE), KENAI, testified in opposition to HB 58. Mr. Efta referenced Section 1 of the bill, stating that such measures would not be "beneficial" to any "ordinary" people. SUSAN ROSS, (TESTIFIED VIA TELECONFERENCE), KENAI, spoke against the proposed legislation. She suggested that the bill was being driven by "material representation". Ms. Ross spoke about being recruited for lobbying on tort reform. After an in-depth study, she realized that tort reform had "nothing" to do with a judicial or legal reform. She elaborated that insurance benefits will not decrease with passage of the legislation. She strongly urged members to pay attention to the voice of their constituents and not pass the bill from Committee. PAUL SWEET, (TESTIFIED VIA TELECONFERENCE), MATSU, voiced opposition to the proposed legislation. He spoke to the punitive damages as addressed in the legislation. Mr. Sweet added that 95% of campaign financing contributions came from large corporations. He questioned if legislators loyalties originated "out of pocket" or for the constituents which they represent. Co-Chair Therriault replied, last year Campaign Reform legislation had been passed, which would cut off contributions received from corporations. PAUL COSSMAN, (TESTIFIED VIA TELECONFERENCE), LAWYER, ANCHORAGE, testified against HB 58. He realized that a tort reform bill would be forthcoming and proposed that the bill be "worked" on cooperatively so it become acceptable to all people. He agreed with Section 1 of the bill, decreasing the cost and complexity of litigation. Mr. Cossman advised that Section 16 would be contrary to the goal of having the jury determine fault. (Tape Change HFC 97-59, Side 1). Mr. Cossman advised under Section 16, the jury determination of the fault premise would change, as the defendant would no longer have the right to bring in the third party defendant, allocating the fault to them. He suggested that this action 6 would cause the plaintiff's to instigate more law suits, and otherwise, insurance rates would rise. He advised that to decrease the costs and complexity of litigation, the system should be left the way it is. TIM DOOLEY, (TESTIFIED VIA TELECONFERENCE), LAWYER, ANCHORAGE, spoke in opposition to the proposed legislation. He pointed out that dispute resolution systems in other third world countries use burning huts and machetes; our system does not yet. He pointed out that our system is not "tragic" or "evil" as suggested in previous testimony and that many countries throughout the world would prefer the system we have. Mr. Dooley stressed that someone will have to pay for the cost of the injury. The legislation will relieve the person at fault from paying. He asked why should the person at fault be relieved of the obligation, then have our individual tax rate and insurance and health care rates raised. MAURI LONG, (TESTIFIED VIA TELECONFERENCE), LAWYER, PRESIDENT, TRIAL LAWYER ASSOCIATION, ANCHORAGE, noted strong opposition to HB 58. Ms. Long focused attention on Section 42, the Worker's compensation lien, which would cause significant problems. This section would take the collateral benefits Section 17 and the allocation of fault, Section 16, and create a collision of those two concepts by removing the benefit of the worker's compensation system. She discussed that the proposed language would allow for "an empty chair" defense. That language would increase the scope of litigation and would clearly stipulate that a jury could not determine a fair cost to pay. A plaintiff may not recover. She urged the Committee to consider these issues and strike the inappropriate language. Representative Grussendorf asked Ms. Long's opinion of Section 21, Offers of Judgement. Ms. Long believed that Offers of Judgement statute, currently in place is not very effective, and believed that changes could make it more useful. Ms. Long provided Committee members a copy of a Sectional Analysis of House Bill 58. (Copy on file). KAREN COWART, (TESTIFIED VIA TELECONFERENCE), ALASKA GENERAL INDUSTRY SUPPORT ALLIANCE, ANCHORAGE, spoke in support of HB 58. She presented her organization's 1997 legislative priorities: * Continue to close Alaska's fiscal gap; * Support legislation that promotes sound development of oil and gas; and * Support the passage of comprehensive tort reform. 7 Ms. Coward provided Committee members a copy of her testimony. (Copy on file). ORIN SEYBERT, (TESTIFIED VIA TELECONFERENCE), ALASKA AIR CARRIERS ASSOCIATION, ANCHORAGE, spoke in support of the legislation. He noted that air carriers are presently being impaired by a lack of insurance underwriting capacity. Alaska has a potential for the highest punitive damage awards in the nation. Mr. Seybert urged the Committee's support of the legislation. (Copy of testimony on file). JEFFREY W. BUSH, DEPUTY COMMISSIONER, DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT, submitted a copy of a letter dated March 7, 1997, and sent to Representative Porter discussing HB 58. (Copy on file). He identified fourteen points of concern to the Knowles Administration. He advised that three of those concerns would be addressed through amendments provided by Representative Porter. He noted that he had served on the Governor's task force for Civil Justice reform. The bill which the Governor has introduced is the product resulting from that task force. He advised that the Administration has a "problem" with some of the sections in HB 58, which are substantially different from those presented through the Governor's legislation. The technical issues are: * Section 5: Statute of Repose. In previous versions of the tort legislation, the statute of repose proposal has included a provision permitting a contractual override of the time limit, an exemption that the State relies upon. * Section 6: Special Statute of Response for Minors. The intention of that change was to impact the statute of limitations for minors, not the statute of repose. As drafted, it is a limiting statute of repose, more restrictive than the general one for adults contained in Section 5. The Department of Law suggested that language is likely unconstitutional. * Section 9: Standard for Punitive Damages. The phrase being inserted should say "deliberated disregard of another person's rights" instead of "deliberate disregard of another person". He stressed that the language should be consistent with State law. * Section 11. Taxes on Award. This section would 8 allow a defendant a deduction for taxes that would otherwise be payable were the award taxable, and should only apply to damages for traditionally taxable compensatory damage. It should not apply to compensation for medical costs incurred. As written, a verdict for medical reimbursement only could have a deduction applied, leaving the victim without full compensation for medical expenses. * Section 15. Collateral Benefits. Mr. Bush suggested that the last sentence in proposed AS 09.17.070(b) which allows a plaintiff to submit evidence of payments made for the purchase of the collateral source should be removed. * Section 20. Expert Witness Qualifications. He pointed out that this section is unclear and needs substantial work. He continued, the section is also "troubling" in its application. When the Task Force reviewed this concept, Dr. Wilson spoke to the problems associated with it's implementation in a state as small as Alaska. The solution would be to remove proposed AS 09.20.185(a)(1) and (3), but leave in (2), thereby requiring that the expert be trained and experienced in the relevant discipline, but not necessarily "licensed" or "board certified". Mr. Bush continued, the Administration also had significant policy concerns with the following sections. * Sections 5 & 6: Statutes of Repose. * Section 8: New Cap on Non-economic Damages. * Section 10: Punitive Damages. * Section 15: Collateral Benefits. * Section 16 - 18: Apportionment of Fault. * Section 21: Offers of Judgement. * Section 36: ER Doctors. * Section 62: ADR. He urged the Committee to consider the approach recommended by the Governor. MICHAEL LESSMEIER, LAWYER, STATE FARM INSURANCE COMPANY, JUNEAU, testified in support of the proposed legislation. He disagreed with testimony that insurance rates in Alaska are set on a national level and that nothing done in Alaska will affect the price of insurance. He added that State Farm strongly disagrees with that proposition, as established, and that State Farm's rates in Alaska are determined primarily by the loss experienced. The fact that 9 State Farm has returned significant amounts of money to policy holders is evidence of their intent. He added, other mutual companies have also returned money to Alaska policy holders. Ms. Lessmeier believed that the legislation would improve losses in Alaska. Improvement in that loss experience will be reflected in the premiums insurance companies charge for their products. He spoke to several additional provisions within the legislation. State Farm feels strongly that Section 10 and the language on punitive damages, suggesting that claims are frequent. Without exception, these claims are time consuming and expensive to defend and they impose a tremendous burden in confronting. The limitation proposed in the bill would lessen the burden. The second important issue to State Farm is the liability provision contained in Sections 16-18. He reminded members that in 1988, voters in Alaska adopted several liability provision through the initiative process. The ballot told the voters that the "initiative would make each party liable for only the damages equal to his or her share of fault". Five years later, the Supreme Court ruled that fault could be apportioned only to those who were formally named as parties to the action. Thus, instead of the party being liable only for damages, they could then be held liable for damages caused by the fault of another. (Copy of testimony on file). Mr. Lessmeier spoke to Section 21, which would dramatically change the law on offers of judgement, a significant incentive to evaluate the position early and in a responsible way. The section simply provides that if a party betters by more than 5% of an offer of judgement entered within 60 days of initial disclosures, that party may recover reasonable actual attorney fees. Mr. Lessmeier addressed Section 48, which would provide a certain deterrent for those that come to court and intentionally make false statements of material fact. He stressed that this provision was not controversial. Mr. Lessmeier stressed that every person who drives a car, buys an insurance policy, every Alaskan that has a homeowners policy on their home, or who flies to a bush community and every small business owner would be benefited by passage of HB 58. He urged the Committee's support of the bill. Representative J. Davies asked how each of those persons 10 would be benefited through passage of the bill. Mr. Lessmeier replied, to the extend that the bill will effect "loss experience", insurance companies will then be able to offer an affordable insurance policy. Representative J. Davies asked if "affordable" meant "cheaper". Mr. Lessmeier affirmed that it would be cheaper than it would be without the bill. Representative J. Davies pointed out that insurance companies continue to say that the legislation will save money, although, they are not willing to state that consumers will be able to purchase less expensive policies. Mr. Lessmeier agreed, but pointed out that insurance companies do not know what the Court System will do with the legislation. He referenced the process that accompanied the initiative passed in 1978. Mr. Lessmeier distributed a handout: THE ROLE OF PUNITIVE DAMAGES IN CIVIL LITIGATION: NEW EVIDENCE FROM LAWSUIT FILINGS. (Copy on file). PAM LABOLLE, PRESIDENT, ALASKA STATE CHAMBER OF COMMERCE (ASCC), JUNEAU, spoke in support of the proposed legislation which would decrease the costs in resolving cases, to discourage frivolous litigation, to promote fair compensation and to promote the predictability of outcomes. (Copy of testimony on file). Ms. LaBolle stated that the greatest benefit would be the change to the punitive damage section. Under today's tort system, punitive damages can be assessed even when there has been no willful act or intentional wrongdoing on anyone's part. In addition, in criminal or administrative law, the level of punishment is pre-established. Punitive damages are known as "litigation lottery", because they can be assessed without intentional wrong-doing on anyone's part; she stressed that the "sky was the limit". Statistics do not show the impact of punitive damages. (Tape Change HFC 97-59, Side 2). Ms. LaBolle noted that the current system is not "fair" and that the number of lawsuits are not accurately reflected in the statistics. She suggested that this is one of the most flagrant abuses of justice existing in Alaska's tort law system today, and one of the most expensive. The Alaska State Chamber wants to see parameters put in place. Punitive damages should only be assessed when there is clear and convincing evidence of malicious intent, outrageous conduct, or reckless indifference. There should be equal justice for all and that small businesses are impacted the most by the current system. She strongly urged support of HB 58. 11 HB 58 was HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 4:00 P.M. 12