HOUSE FINANCE COMMITTEE March 14, 1997 1:45 P.M. TAPE HFC 97-60, Side 1, #000 - end. TAPE HFC 97-60, Side 2, #000 - end. TAPE HFC 97-61, Side 1, #000 - end. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:45 p.m. PRESENT Co-Chair Therriault Representative Kohring Representative Davies Representative Martin Representative Davis Representative Moses Representative Foster Representative Mulder Representative Grussendorf Representative Kelly Co-Chair Hanley was absent from the meeting. ALSO PRESENT Representative Brian Porter; Paul Dillon, Attorney, Juneau; Bob Engelbrecht, Alaska Visitor's Association; Michael Lessmeier, Attorney, State Farm Insurance. SUMMARY 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." CSHB 58 (FIN) was reported out of Committee with an "amend" recommendation; and with three zero fiscal notes; and with two fiscal impact notes. HOUSE BILL NO. 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." PAUL DILLON, ATTORNEY, JUNEAU testified against HB 58. He began his presentation with a hypothetical case involving a 1 family of three. The father works for ARCO, the mother is a homemaker, and they have a small child. He theorized that the mother, "Becky", was seriously injured by a commercial vehicle while stopped at a red light. Becky's injuries are serious, resulting in the loss of limbs, back pain and hip injuries, and the inability to have more children. He observed that her past medical costs are $200 thousand dollars; future medical expenses are estimated at $700 thousand dollars; and the commercial vehicle is clearly at fault. Mr. Dillon continue discussion of "Becky's" hypothetical case. He noted that under HB 58 the jury would be instructed that there is a $300 thousand dollar cap on non- economic damages. He theorized that the jury awarded Becky a $1 million dollar judgement. He maintained that under HB 58 there could be an immediate reduction of 50 percent of the judgement because the commercial driver, at the trial, blamed the repair shop for faulty breaks. Due to this testimony, the jury determined that there is a 50 percent award of fault to the break repair shop. He pointed out that the owner of the brake repair shop is not present at trial. The award is further reduced by future medical costs, since the father's insurance covers future medical benefits. Mr. Dillon observed that in "Becky's" hypothetical case the remaining determination of $300 thousand dollars would be further reduced by the tax percentage that would have been assessed against future wages. He indicated that interpretation of this provision is unclear. He questioned if the taxes would be assessed on the original $1 million dollar judgment, or if only non-economic damages would be taxed. He observed that neither the state or federal government have taxed non-economic damages. If the full judgement was taxed by 28 percent Becky would be left with $140 thousand dollars. He observed that Becky would not have enough money to pay her lawyers, court costs or medical experts. He observed that lawyer fees could be greater than $100 thousand dollars and medical experts could cost "tens of thousands of dollars". In addition, the judgement could be paid in periodic payments. Mr. Dillon maintained that the legislation affects Alaskans' right to a jury trial and the right of a jury to make a determination on awards. Current statute does not allow someone to try the "phantom chair". He pointed out that if a phantom defendant is brought into the trial there is no one to contest allegations of fault. Mr. Dillon urged members to not include section 11. Section 11 requires that "the amount of damages awarded shall be 2 reduced by the amount of federal and state income tax that would have been paid..." BOB ENGELBRECHT, ALASKA VISITOR'S ASSOCIATION spoke in support of the legislation. He asked that recreational liability be added to the bill. He observed that HB 300 was merged with the tort reform bill during the last legislation session. The provisions of HB 300 were not included in HB 58. He observed that they would like to see an amendment to establish the responsibilities of people who operate commercial recreational activities and the responsibilities of people who participate in those activities. Representative Martin MOVED to adopt Amendment 1 (copy on file). Representative J. Davies OBJECTED. Representative Porter explained that the amendment clarifies language regarding delivery, or sale of electricity. He noted that an electrical service is a service not a product, including the entry into a consumer's home and its application in the home. He observed that there was concern that the language would be interpreted to mean that delivery or production to a neighborhood transfer would be a service and that from the transformer to the home would be considered a product. There being NO OBJECTION, Amendment 1 was adopted. Representative Martin MOVED to adopt Amendment 2 (copy on file). Representative J. Davies OBJECTED. Representative Porter explained that the amendment does not change the legislation's intent. The amendment could clarify that the statute of repose is eight years. (The statute of limitation is two years. Amendment 2 clarifies that the statute of limitations does not apply to minors from birth to sixs-of-age.) Within the statute of repose there would be an exception as it applies to children from birth to six years old. This would cover concerns regarding birth injuries. A six year old would have two more years to introduce an action. Amendment 2 also clarifies that a school district may extend the statute of repose on new school construction when agreed to by contract. In addition, Amendment 2 clarifies that one case adds "another person's rights." This is consistent with current case law. Co-Chair Therriault observed that the mere consumption of alcohol does not imply that a person's acts were not conscious. Representative Porter observed that consumption of alcohol can mitigate a sentence but not be used as a defense. 3 Representative Porter noted that the Alaska Court System has requested that section 65, the effective date clause, be deleted. Co-Chair Therriault MOVED to AMEND Amendment 2, delete "section 65" and reflect the change in the title. There being NO OBJECTION, it was so ordered. There being NO OBJECTION, Amendment 2 as amended was adopted. In response to a question by Representative J. Davies, Representative Porter explained that Amendment 2 clarifies that the statute of limitation is extended to eight years for children under six. Co-Chair Therriault summarized that the statute of repose will supercede the statute of limitations in regards to the exception for children under six. Representative Porter responded to comments by Mr. Dillon. He stated that homemaker duties can be quantified in dollars and fall under economic damages, which is not capped. He stressed that the defense of faulty brakes would have come out during discovery. Representative J. Davies questioned why the defendant is not required to bring the other party at fault into the trial. Representative Porter responded that "people who are responsible, should only be responsible to the extent of their own responsibility." In response to a question by Representative Grussendorf, Representative Porter discussed section 11, reduction of taxes. He emphasized that victims should not be paid for wages that they would not have received. He noted that the judgment is not taxed by the federal government. He stressed that the same wages would have been taxed. The provision does not apply to judgments that are taxed. Representative J. Davies asked why it is not left to juries to decide the impact of taxes. Representative Porter maintained that it would be unusual for a jury to make a deduction of taxes when the IRS would tax the judgement. Representative Kelly suggested that juries would assume some level of taxation and add to the judgement. Representative Porter clarified that collateral benefit provisions exist in current statute. He explained that, under current statutes, the Court deducts collateral benefits from the judgement. Under the legislation, the jury would make the deduction. 4 In response to a question by Co-Chair Therriault, Representative Porter could not estimate the economic value of a homemaker. Representative G. Davis MOVED to adopt Amendment 3 (copy on file). Co-Chair Therriault OBJECTED for purposes of discussion. Representative J. Davies noted that the amendment would change the statue of repose from 8 to 10 years. He stated that at ten years 98 percent of claims would be discovered within the allowed period. Representative Porter noted that Representative J. Davies was referring to construction claims. Representative Porter responded that 96.8 percent of all claims would be discovered within 8 years. He stressed that a ten year statute of repose would mandate two additional years of insurance coverage. He observed that the change would also affect the provision for children. He emphasized the difficulty to defend against cases involving time-lapse. He observed that the Alaska Supreme Court ruled: "A five-year statue of limitations governs the filing of attorney grievances. Alaska Bar R. 18. This reflects a judgment that five years is the outer limit of time in which responding attorneys are able to fairly defend themselves against charges, given the loss of memory, evidence, and witnesses that occurs over time." Representative J. Davies argued that, in the case of a construction project, there are circumstances where the problem would not be discovered for more than many years. He pointed out that a statute of repose accrues based on a fixed period of time. A statute of limitation accrues from the time one would reasonably know about the problem. He spoke in support of a ten year statute of repose. He stressed that there would not be a huge additional expense to keep documents another two years in order to catch the majority of cases. He observed that Representative Porter's concerns are attached to non-construction issues. He suggested that there could be two different statutes of repose. A roll call vote was taken on the MOTION to adopt Amendment 3. IN FAVOR: J. Davies, Grussendorf, Moses OPPOSED: G. Davis, Foster, Kelly, Kohring, Martin, Therriault, Representatives Mulder and Hanley were absent from the vote. The MOTION FAILED (3-6). 5 Representative J. Davies WITHDREW Amendments 4 and 5. Representative J. Davies MOVED to adopt Amendment 6 (copy on file). Representative Kelly OBJECTED. Representative J. Davies explained that Amendment 6 would allow the caps on non-economic damages to be tied to the Consumer Price Index (CPI). Representative Porter spoke against Amendment 6. He stressed that the Court would be required to make constant CPI adjustments. He pointed out that statutes can be revised. Representative J. Davies responded that CPI calculations are simple and can be calculated quickly. He stressed the impact of inflation. He emphasized the difficulty of passing legislation to revise statutes. Representative Porter observed that the legislation contains an accelerator. He stressed that the value of the CPI is in national dispute. A roll call vote was taken on the MOTION to adopt Amendment 6. IN FAVOR: J. Davies, Grussendorf, Moses OPPOSED: G. Davis, Foster, Kelly, Kohring, Martin, Therriault, Representatives Mulder and Hanley were absent from the vote. The MOTION FAILED (3-6). Representative J. Davies MOVED to adopt Amendment 7 (copy on file). Co-Chair Therriault OBJECTED. In response to a question by Representative Porter explained that each claim is limited by $300 thousand dollars. The amendment would reduce the amount of money that children could get over loss of consortium. Representative J. Davies indicated that the amendment was not correctly drafted. Representative J. Davies expressed concern that subsection (b) on page 5 could be interpreted that the cap applies in aggravate. He suggested adding "of a person" on page 5 line 16. Representative J. Davies WITHDREW Amendment 7. He MOVED to insert after "claims", "of a person" on page 5 line 16. There being NO OBJECTION, it was so ordered. Representative J. Davies WITHDREW Amendment 8 (copy on file). He MOVED to adopt Amendment 9 (copy on file). Co- Chair Therriault OBJECTED for purposes of discussion. 6 Representative J. Davies noted that Amendment 9 addresses the limit on punitive damages. The amendment would delete "four times the amount of compensatory damages awarded or $600 thousand dollars, whichever is greater"; and add "three times the annual net profit reasonably attributable to the commercial activity." He spoke in support of the amendment. He noted that the amendment would address the situation where a large corporation makes a business decision that they are willing to risk the cost of injuries or death against the cost of instituting a change to the product. He referred to the Exxon Valdez case. He maintained that $600 thousand dollars is not "a hammer big enough to get the attention of a large corporation." He stated that the cap should be appropriate to the size of the corporation. Representative Kelly pointed out that the in the Exxon case they would have been required to pay four times the compensatory damages since the legislation requires that the greater amount be paid. Representative Porter noted that the Exxon Valdez case would not be tried under state law. He stated that, if it were decided under HB 58, that Exxon would have been required to pay $3.5 billion dollars in punitive damages at three times the compensatory damages. He questioned which corporation would be held responsible under Representative J. Davies' amendment, the Alaskan corporation or the parent corporation. He pointed out that there are several definitions of "net profit". Representative Foster suggested that the amendment would be detrimental to small businesses. He cited a hypothetical case in which a company has contaminated soil. The company has insurance, but only made a small profit. The amount of damages that would be recoverable would be minimal. Representative J. Davies argued that $600 thousand dollars would be too much for a small company. He reiterated that the award needs to relate to the economic ability of the company. A roll call vote was taken on the MOTION to adopt Amendment 9. IN FAVOR: J. Davies, Grussendorf OPPOSED: G. Davis, Foster, Kelly, Kohring, Martin, Therriault Representatives Hanley, Mulder and Moses were absent for the vote. The MOTION FAILED (2-6). 7 Representative J. Davies MOVED to adopt Amendment 10 (copy on file). Co-Chair Therriault OBJECTED for purposes of discussion. Representative J. Davies explained that Amendment 10 would delete section 11, reduction of taxes. He argued that the judge and jury should determine the affect of taxes on the award. He expressed concern with the victims' rights. Representative Porter argued against the amendment. He reiterate the intent of the provision is to make someone responsible for what a person lost, not make a profit. Representative Grussendorf spoke in support of the amendment. Mr. Dillon discussed section 11. He noted that the federal government is the taxing authority. He observed that juries are told to take into account taxes for past wages. Juries are not told to take into account taxes for future economic wages. He did not know of other states that makes a deduction for taxes. He stressed that the IRS will take its share of the award. In response to a question by Representative G. Davis, Mr. Dillon maintained that the argument should not be allowed that some form of damages should not be paid on the bases of the federal government taxing or not taxing. He asserted that litigation will result from the provision. MICHAEL LESSMEIER, ATTORNEY, STATE FARM INSURANCE spoke against the amendment. He observed that economists make projections of past wage lost. Past wage lost is reduced by the amount that one would have to pay for federal income tax. The Alaska Supreme Court ruled that juries be instructed not to consider future taxes. He stressed that the intent is to clarified that persons are paid for wages they actually would loose. Net wages would be paid for the future and the past. Representative Grussendorf summarized that future compensation is not taxed. Mr. Lessmeier asserted that the legislation would remove a windfall. Representative J. Davies observed that juries are instructed not to consider future taxes. Mr. Lessmeier observed that the State Court recognized the unpredictability of the federal system. If federal law changes (judgments are assessed a federal tax) the provisions would not apply. He acknowledged that there is a policy issue. Representative J. Davies noted that the verdict shall be itemized. In response to a question by Representative J. Davies, Mr. Lessmeier explained that only punitive damages 8 are subject to tax and past wage loss. Representative J. Davies clarified that if they are subject to taxation they would not be reduced. Representative Porter stated that federal courts deduct taxes that would have been paid on future wages. A roll call vote was taken on the MOTION to adopt Amendment 10. IN FAVOR: J. Davies, Grussendorf, Therriault OPPOSED: G. Davis, Foster, Kelly, Kohring, Martin Representatives Hanley, Mulder and Moses were absent from the vote. The MOTION FAILED (3-5). Representative J. Davies MOVED to adopt Amendment 11 (copy on file). Co-Chair Therriault OBJECTED for purposes of discussion. Representative J. Davies explained that Amendment 11 would apply to the periodic payment. He observed that periodic payments can be made on judgments over $100 thousand dollars with the exception of attorney contingency fees. He expressed concern that periodic payments may not be large enough to allow a person with large medical bills to cover their expenses. Amendment 11 would provide that periodic payments be made if the judgment exceeds $100 thousand dollars, "or the total of medical bills and other costs reasonably expected to be incurred by the injured party form the time of the injury through two years after the date of judgment, whichever is greater." (Tape Change, HFC 97-61, Side 1) Representative Porter maintained that the Court would consider medical bills prior to awarding periodic payments. He stated that medical payments would be part of the lump- sum payment. He observed that the legislation does not limit how much the periodic payment will be or the length of payment. He stressed that periodic payments are usually agreed to by the parties. He noted that future wages would have been periodic. In response to a question by Representative G. Davis, Representative Porter explained that the legislation would allow the plaintiff or defendant to elect periodic payment. Representative J. Davies pointed out that existing law allows the injured party the option to except periodic payment. He maintained that this helps to assure that the payment is a reasonable apportionment. The legislation would require the Court at the request of either party to institute periodic payments. He expressed concern that the 9 injured party could be forced into an injurious periodic payment. Representative Porter observed that studies show that it is more likely that the wealth of a lump-sum payment will be dissipated in an untimely fashion. A roll call vote was taken on the MOTION to adopt Amendment 11. IN FAVOR: J. Davies, Grussendorf, Therriault OPPOSED: G. Davis, Foster, Kelly, Kohring, Martin Representatives Hanley, Mulder and Moses were absent from the vote. The MOTION FAILED (3-5). Representative J. Davies MOVED to adopt Amendment 12 (copy on file). Co-Chair Therriault OBJECTED for purposes of discussion. Representative J. Davies explained that Amendment 12 refers to joint severability. He stated that the statue of repose removes certain people from responsibility. He stressed that they could still be apportioned a portion of fault. The intent of Amendment 12 is to clarify that if a person is barred from being brought to the table by the statute of repose that they cannot be apportioned a portion of the fault. He observed that the responsibility of a building owner increases overtime. He acknowledged arguments that a large portion of the problem arises from poor maintenance. He asserted that the responsibility of maintaining the building should be shifted, overtime, to the building owner or his insurance carrier. Once the statute of repose has been reached and the design professionals are no longer liable, then the owner should be fully responsible. He alleged that a victim cannot be made whole under a circumstance where the fault is apportioned to someone who cannot be held responsible. Representative Porter spoke against Amendment 12. He observed that the design portion of the statute of repose is 15 years. He maintained that the amendment would eliminate the design portion of the statute of repose. Representative J. Davies observed that, in the case where a building collapses nine years after it was designed, a case could be made that a jury could apportion 25 percent of the responsibility to the design professional. He argued that 25 percent would not be claimable by the injured party because of the statute of repose. Representative Porter stressed that the amendment would apply to all claims. He stressed that the majority of 10 claims would be made before the statute of repose. He stated if a design problem is gross negligence or fraudulent, or where the building specifications were not followed the designer could still be responsible. He maintained that the jury would not find the designer responsible. He argued that the amendment would take away the discretion of juries. Representative J. Davies reiterated that if by the statute of repose a person is removed from responsibility the jury should not be allowed to apportion a part of the blame to that person. A roll call vote was taken on the MOTION to adopt Amendment 12. IN FAVOR: J. Davies, Grussendorf, Moses OPPOSED: G. Davis, Foster, Kelly, Kohring, Martin, Mulder, Therriault Representative Hanley was absent from the vote. The MOTION FAILED (3-7). Co-Chair Therriault reviewed the fiscal notes. He stated that the fiscal notes appear to be reasonable and justified. Representative Martin MOVED to report CSHB 58 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Representative J. Davies OBJECTED for purposes of amendment. Representative Martin WITHDREW his motion. Representative J. Davies MOVED to delete section 21. Co- Chair Therriault OBJECTED for purposes of discussion. Representative J. Davies noted that section 21 pertains to offers of judgement. He expressed concern that if a plaintiff could be liable for the entire cost of attorney fees if the judgement is within 5 percent of an offer to settle. He acknowledged that the section will reduce litigation. He maintained that no one will be able to take the risk. If a plaintiff is wrong they could be financially wiped out even if they win the suit. Representative Porter stressed that most cases in Alaska are against small businesses that have no ability to face a punitive damage complaint. He explained that the offer of judgment allots actual attorney fees and costs from the time the offer is made to the trial, if the offer is not accepted. He acknowledged that it would not be fair if judgment was missed by 1 percent. He stressed that the 11 intent of the provision is to provide a motivation, for both sides, to make a reasonable offer and to settle. Representative J. Davies emphasized that plaintiffs are not going to run up attorney fees if the settlement is reasonable. He spoke in support of a sliding scale for apportionment of attorney fees. Representative Porter argued that plaintiff's attorney costs would not be a consideration since they are provided by contingency fees. A roll call vote was taken on the MOTION to adopt Amendment 13. IN FAVOR: J. Davies, Grussendorf, Moses OPPOSED: G. Davis, Foster, Kelly, Kohring, Martin, Mulder, Therriault Representative Hanley was absent from the vote. The MOTION FAILED (3-7). Representative Martin MOVED to report CSHB 58 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. ADJOURNMENT The meeting adjourned at 3:50 p.m. 12