HOUSE FINANCE COMMITTEE April 21, 2000 9:20 A.M. TAPE HFC 00 - 132, Side 1 CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 9:20 a.m. PRESENT Co-Chair Mulder Co-Chair Therriault Representative Foster Vice Chair Bunde Representative Grussendorf Representative Austerman Representative Moses Representative J. Davies Representative Phillips Representative G. Davis Representative Williams ALSO PRESENT Senator Dave Donley. TESTIFIED VIA TELECONFERENCE Bob Lohr, Director, Division of Insurance, Department of Community and Economic Development; Virginia Rush, Assistant Attorney General, Department of Law. SUMMARY CSSB 177(L&C) "An Act relating to insurance trade practices; and providing for an effective date." CSSB 177(L&C) was heard and HELD in Committee for further consideration. CSSJR 40(RLS) am Proposing amendments to the Constitution of the State of Alaska providing that the governor and lieutenant governor be elected by a majority vote; and changing the term of office of the governor and lieutenant governor. CSSJR 40(RLS)am was postponed. CS FOR SENATE BILL NO. 177(L&C) "An Act relating to insurance trade practices; and providing for an effective date." Co-Chair Mulder provided members with a proposed committee substitute work draft 1-LS0902\V (copy on file). SENATOR DAVE DONLEY, SPONSOR testified in support of the legislation. He observed that he worked with the Division of Insurance on the legislation. He maintained that Alaska is the only state that doesn't allow its Division of Insurance to take corrective action on individual acts of unfair or deceptive insurance trade practices. He stressed that the director should be empowered to take corrective action when there is a violation of the Unfair Claims Practices Act. He noted that the insurance industry is exempt from the McCarran-Ferguson Act and other antitrust laws and that the industry has unique powers. Senator Donley observed that the legislation was amended to address concerns of industry. Section 9 states that the director may not impose a penalty that includes a fine or require other remedial action, unless the violation results in loss or harm and is intentional. The Division of Insurance is not just a consumer protection agency. The Division is also charged with assuring that insurance is available to Alaskans. Actions by the director would be subject to the Administrative Procedures Act and would have to go through a hearing process and contain due process. Senator Donley referred to the redefinition of "proximate cause". He maintained that in situations were there are multiple causes and one of the causes is covered that the damage should be covered if the cause that is not covered is not the dominant cause. He noted that consumers do not have the opportunity to negotiate insurance contracts. When there is a public policy issue, regulatory action should balance the playing field. The question is should policies in Alaska be able to exclude causes that were not the dominant cause. He noted that the Supreme Court pointed to a lack of guidance from the legislature. Current homeowner policies are based on the understanding that coverage would occur if one of the co-equal causes of the loss were covered. The legislative change would not impact rates, since it maintains the status quo before the court ruling. He did not think that rates would be reduced if coverage were reduced, but emphasized that the potential loss would be significant to Alaskan families. BOB LOHR, DIRECTOR, DIVISION OF INSURANCE, DEPARTMENT OF COMMUNITY AND ECONOMIC DEVELOPMENT testified via teleconference in support of the legislation. He noted that single act authority has been extensively debated. He maintained that single act authority is appropriate and noted that the director has the authority in other areas of statute. It does not take a pattern of practice violations for claimant fraud to be referred to the District Attorney's Office. He stressed that single act authority would not be used very often. A policy owner can be seriously harmed by the unfair action of an insurance company. He gave the example of an individual who was precertified for hospital coverage, yet was delayed payment of their $186 thousand dollar insurance bill for six months. The delay threatened the policy owner's credit rating. Under the legislation, the Division would have been able to force the company to come up with a plan to demonstrate that the violation would not reoccur. He added that the Division has limitations on the use of their authority under section 9. The Division has limited resources and would only pursue single acts if they were severe. Co-Chair Therriault referred to section 9. The proposed committee substitute would change "or is intentional" on line 14 to "and is intentional". Mr. Lohr maintained that the proposed committee substitute would gut the Division's single act authority. He observed that criminal intent would be required. He stressed that the standard is too high and recommended the use of "the violation results in serious loss or was intentional". Regulations adopted by the Division under current statute define "general business practice" as greater than 1 percent of claims that are handled within a year. He noted that the total number of complaints handled by the Division for any large company would not arise to one percent of the claims they handle. The addition of "and" on line 14 would be an inapplicable standard. Senator Donley noted that the section has been amended to place limitations on the authority in order to appease insurance companies. He acknowledged that State Farm Insurance Company has a good record, but emphasize other companies do not. Representative J. Davies pointed out that even if an action was unintentional that there could be serious harm. Representative Grussendorf expressed concern with the use of "and". He pointed out that the state of mind of the company or agent would be difficult to prove. Senator Donley suggested that the Committee could modify the level of loss or harm to "significant loss or harm". He spoke in support of the HJUD version. The goal is prevention. Vice Chair Bunde questioned how cause is decided in order to establish equal cause. VIRGINIA RUSH, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW responded to questions. She explained that the predominate cause would be found in court. If a jury or court found that the excluded cause was the predominate cause it would not be covered. The legislation would eliminate exclusions, which occur if there is an excluded cause anywhere in the chain of causation. Litigation would still occur to determine the dominant cause. Vice Chair Bunde expressed concern that there is little that can be done to protect small consumers against big companies in court. Co-Chair Therriault pointed out that there is no coverage if it is excluded. CSSB 177(L&C) was heard and HELD in Committee for further consideration. ADJOURNMENT The meeting was adjourned at 9:50 a.m.