HOUSE JUDICIARY STANDING COMMITTEE April 15, 2000 4:43 p.m. MEMBERS PRESENT Representative Pete Kott, Chairman Representative Joe Green Representative Norman Rokeberg Representative Jeannette James Representative Lisa Murkowski Representative Eric Croft Representative Beth Kerttula MEMBERS ABSENT All members present COMMITTEE CALENDAR HOUSE BILL NO. 375 "An Act relating to abuse of inhalants." - MOVED CSHB 375(JUD) OUT OF COMMITTEE WITH A ZERO FISCAL NOTE HOUSE BILL NO. 413 "An Act relating to intensive family preservation services; and providing for an effective date." - MOVED HB 413 OUT OF COMMITTEE CS FOR SENATE BILL NO. 177(L&C) "An Act relating to insurance trade practices; and providing for an effective date." - MOVED HCS CSSB 177(JUD) OUT OF COMMITTEE CS FOR SENATE BILL NO. 26(FIN) "An Act relating to hindering prosecution and to providing false information or reports to a peace officer." - MOVED CSSB 26(FIN) OUT OF COMMITTEE CS FOR SENATE BILL NO. 286(JUD) "An Act relating to the duties and powers of the attorney general." - SCHEDULED BUT NOT HEARD HOUSE BILL NO. 300 "An Act relating to the establishment and enforcement of medical support orders for children; and providing for an effective date." - SCHEDULED BUT NOT HEARD PREVIOUS ACTION BILL: HB 375 SHORT TITLE: INHALANT ABUSE Jrn-Date Jrn-Page Action 2/16/00 2209 (H) READ THE FIRST TIME - REFERRALS 2/16/00 2209 (H) HES, JUD, FIN 4/11/00 (H) HES AT 3:00 PM CAPITOL 106 4/11/00 (H) Bill Postponed 4/13/00 (H) HES AT 3:00 PM CAPITOL 106 4/13/00 (H) Moved CSHB 375(HES) Out of Committee 4/13/00 (H) MINUTE(HES) 4/15/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HB 413 SHORT TITLE: INTENSIVE FAMILY PRESERVATION SERVICES Jrn-Date Jrn-Page Action 2/16/00 2221 (H) READ THE FIRST TIME - REFERRALS 2/16/00 2222 (H) HES, JUD, FIN 4/06/00 (H) HES AT 3:00 PM CAPITOL 106 4/06/00 (H) Scheduled But Not Heard 4/13/00 (H) HES AT 3:00 PM CAPITOL 106 4/13/00 (H) Heard & Held 4/13/00 (H) MINUTE(HES) 4/14/00 (H) HES AT 3:00 PM CAPITOL 106 4/14/00 (H) Moved Out of Committee 4/14/00 (H) MINUTE(HES) 4/15/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: SB 177 SHORT TITLE: INSURANCE TRADE PRACTICES & ACTS Jrn-Date Jrn-Page Action 5/16/99 1517 (S) READ THE FIRST TIME - REFERRAL(S) 5/16/99 1517 (S) L&C 1/18/00 (S) L&C AT 1:30 PM BELTZ 211 1/18/00 (S) Heard & Held 1/18/00 (S) MINUTE(L&C) 2/29/00 (S) L&C AT 1:30 PM BELTZ 211 2/29/00 (S) Moved CS(L&C) Out of Committee 2/29/00 (S) MINUTE(L&C) 3/01/00 (S) RLS AT 11:30 AM FAHRENKAMP 203 3/01/00 (S) MINUTE(RLS) 3/01/00 2476 (S) L&C RPT CS 1DP 3NR 1AM SAME TITLE 3/01/00 2476 (S) NR: MACKIE, TIM KELLY, HOFFMAN; 3/01/00 2476 (S) DP: DONLEY; AM: LEMAN 3/01/00 2476 (S) ZERO FISCAL NOTE (DCED) 3/22/00 2692 (S) RLS TO CALENDAR AND 1 AM 03/22/00 3/22/00 2693 (S) READ THE SECOND TIME 3/22/00 2693 (S) L&C CS ADOPTED UNAN CONSENT 3/22/00 2693 (S) ADVANCED TO THIRD READING UNAN CONSENT 3/22/00 2693 (S) READ THE THIRD TIME CSSB 177(L&C) 3/22/00 2693 (S) PASSED Y19 N1 3/22/00 2694 (S) EFFECTIVE DATE(S) SAME AS PASSAGE 3/22/00 2697 (S) TRANSMITTED TO (H) 3/23/00 2661 (H) READ THE FIRST TIME - REFERRALS 3/23/00 2662 (H) L&C, JUD, FIN 4/10/00 (H) L&C AT 3:15 PM CAPITOL 17 4/10/00 (H) Heard & Held 4/10/00 (H) MINUTE(L&C) 4/12/00 (H) L&C AT 3:15 PM CAPITOL 17 4/12/00 (H) Moved HCS CSSB 177(L&C) Out of Committee 4/12/00 (H) MINUTE(L&C) 4/14/00 (H) JUD AT 1:00 PM CAPITOL 120 4/14/00 (H) Heard & Held 4/14/00 (H) MINUTE(JUD) 4/14/00 3133 (H) L&C RPT HCS(L&C) 2DP 1DNP 3NR 4/14/00 3134 (H) DP: BRICE, SANDERS; DNP: HALCRO; 4/14/00 3134 (H) NR: HARRIS, CISSNA, ROKEBERG 4/14/00 3134 (H) SENATE ZERO FISCAL NOTE (DCED) 3/1/00 4/14/00 3134 (H) REFERRED TO JUDICIARY 4/15/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: SB 26 SHORT TITLE: FALSE REPORT TO POLICE/HINDER PROSECUTION Jrn-Date Jrn-Page Action 1/15/99 20 (S) PREFILED 1/15/99 1/19/99 20 (S) READ THE FIRST TIME - REFERRAL(S) 1/19/99 20 (S) JUD, FIN 3/08/99 (S) JUD AT 1:30 PM 3/08/99 (S) HEARD AND HELD 3/08/99 (S) MINUTE(JUD) 3/15/99 546 (S) COSPONSOR(S): DONLEY 3/27/00 (S) JUD AT 1:30 PM BELTZ 211 3/27/00 (S) Moved CS(Jud) Out of Committee 3/30/00 2794 (S) JUD RPT CS 3DP NEW TITLE 3/30/00 2794 (S) DP: TAYLOR, TORGERSON, HALFORD 3/30/00 2794 (S) INDETERMINATE FISCAL NOTE (COURT) 3/31/00 2811 (S) ZERO FISCAL NOTE (DPS) 4/04/00 (S) FIN AT 9:00 AM SENATE FINANCE 532 4/04/00 (S) Heard & Held 4/04/00 (S) MINUTE(FIN) 4/04/00 2853 (S) FISCAL NOTE (LAW) 4/04/00 2853 (S) INDETERMINATE FISCAL NOTE (COR) 4/11/00 (S) FIN AT 9:00 AM SENATE FINANCE 532 4/11/00 (S) Moved CS(Fin) Out of Committee 4/04/00 (S) MINUTE(FIN) 4/11/00 (S) RLS AT 12:15 PM FAHRENKAMP 203 4/11/00 (S) MINUTE(RLS) 4/11/00 2975 (S) FIN RPT CS 6DP 3NR NEW TITLE 4/11/00 2975 (S) DP: TORGERSON, PARNELL, PHILLIPS, 4/11/00 2975 (S) GREEN, LEMAN, WILKEN; NR: PETE KELLY, 4/11/00 2975 (S) DONLEY, ADAMS 4/11/00 2975 (S) ZERO FISCAL NOTE (LAW) 4/12/00 3025 (S) FISCAL NOTE (ADM) 4/12/00 3025 (S) ZERO FISCAL NOTE (DPS) 4/12/00 3025 (S) PREVIOUS INDETERMINATE FN (COURT) 4/12/00 3025 (S) INDETERMINATE FISCAL NOTE (COR) 4/13/00 3058 (S) RLS TO CALENDAR AND 1 OR 04/13/00 4/13/00 3060 (S) READ THE SECOND TIME 4/13/00 3060 (S) FIN CS ADOPTED UNAN CONSENT 4/13/00 3061 (S) ADVANCED TO THIRD READING UNAN CONSENT 4/13/00 3061 (S) READ THE THIRD TIME CSSB 26(FIN) 4/13/00 3061 (S) PASSED Y20 N- 4/13/00 3069 (S) TRANSMITTED TO (H) 4/14/00 3127 (H) READ THE FIRST TIME - REFERRALS 4/14/00 3127 (H) JUD, FIN 4/15/00 (H) JUD AT 1:00 PM CAPITOL 120 WITNESS REGISTER REPRESENTATIVE MARY KAPSNER Alaska State Legislature Capitol Building, Room 424 Juneau, Alaska 99801 POSITION STATEMENT: Sponsor of HB 375. ROBERT BUTTCANE, Juvenile Probation Officer Youth Corrections Division of Family and Youth Services Department of Health and Social Services P.O. Box 110630 Juneau, Alaska 99811 POSITION STATEMENT: Testified on HB 375; expressed appreciation for the bill, but conveyed concerns about Section 1 and criminalizing addictive behavior. BLAIR McCUNE, Deputy Director Public Defender Agency Department of Administration 900 West 5th Avenue, Suite 200 Anchorage, Alaska 99501-2090 POSITION STATEMENT: Testified on HB 375; indicated Amendments 1 and 2 took care of his concerns, but said the intent of causing intoxication seems sufficient without including inebriation, excitement, stupefaction and dulling of the nervous system. REPRESENTATIVE SHARON CISSNA Alaska State Legislature Capitol Building, Room 420 Juneau, Alaska 99801 POSITION STATEMENT: Sponsor of HB 413. MICHAEL LESSMEIER, Attorney at Law Lessmeier & Winters, and Lobbyist for State Farm Insurance Company 431 North Franklin Street, Number 400 Juneau, Alaska 99801 POSITION STATEMENT: On behalf of State Farm Insurance Company, testified in opposition to SB 177; provided proposed amendment. BOB LOHR, Director Division of Insurance Department of Community & Economic Development P.O. Box 110805 Juneau, Alaska 99811-0805 POSITION STATEMENT: Answered questions with regard to SB 177. SENATOR DAVE DONLEY Alaska State Legislature Capitol Building, Room 508 Juneau, Alaska 99801 POSITION STATEMENT: Testified as the sponsor of SB 177. MICHAEL PAULEY, Staff to Senator Loren Leman Alaska State Legislature Capitol Building, Room 115 Juneau, Alaska 99801 POSITION STATEMENT: Presented SB 26 on behalf of the sponsor. ACTION NARRATIVE TAPE 00-63, SIDE A Number 0001 CHAIRMAN PETE KOTT called the House Judiciary Standing Committee meeting to order at 4:43 p.m. Members present at the call to order were Representatives Kott and Croft. Representatives Green, Rokeberg, James, Murkowski and Kerttula arrived shortly thereafter. HB 375 - INHALANT ABUSE CHAIRMAN KOTT announced that the first order of business would be HOUSE BILL NO. 375, "An Act relating to abuse of inhalants." [Officially before the committee was CSHB 375(HES), Version I (1- LS1323\I). Furthermore, written amendments were to Version I. However, members' packets contained not that version but a work draft, Version H (1-LS1323\H, Luckhaupt, 3/28/00), provided by the sponsor, which had been moved out, unamended, by the House Health, Education & Social Services Committee on 4/13/00. The two versions, therefore, should have been identical in content.] Number 0025 REPRESENTATIVE MARY KAPSNER, Alaska State Legislature, sponsor of HB 375, explained that this legislation gives people across the state a tool to "leverage" abusers of inhalants into treatment. She pointed out that [abuse of inhalants] is a class B misdemeanor in this version of the bill. She informed members that the bill has broad-based support from providers across the state. CHAIRMAN KOTT asked whether federal funding had been received for a facility. REPRESENTATIVE KAPSNER affirmed that. Only two facilities exist in the nation, she noted, and this will be the third. The facility is scheduled to be built in Bethel, it should be ready to open in 2001. Number 0097 CHAIRMAN KOTT called an at-ease at 4:45 p.m. [End of this tape because of technical difficulties] TAPE 00-64, SIDE A CHAIRMAN KOTT called the meeting back to order at 4:48 p.m., noting that there was now a quorum present. Number 0005 ROBERT BUTTCANE, Juvenile Probation Officer, Youth Corrections, Division of Family and Youth Services (DFYS), Department of Health and Social Services, came forward to testify. He expressed appreciation to the sponsor for putting this issue forward. Inhalant abuse in one of the most damaging and costly substance abuse issues facing the state. However, the department has concerns about the bill, relating specifically to Section 1 and criminalizing addictive behavior. Although a motivator to get people involved in treatment, criminalizing this act within the delinquency system could lead to placing young people who are abusing inhalants into detention facilities. MR. BUTTCANE pointed out that detention facilities are overcrowded. Bethel, for example, has an eight-bed facility; however, the capacity has averaged, over the last year and a half, anywhere from 14 to 17 or 18 youths. Even one additional person, especially someone with issues relating to inhalant abuse, would be extremely problematic for the department. Noting that the other sections of the bill would amend the involuntary commitment provisions of Title 47, Mr. Buttcane concluded: We think that it is appropriate ... to amend that section, as indicated in the bill, by adding inhalants because there are some instances where it's been confusing whether or not the courts were able to make an involuntary commitment when an inhalant abuse has occurred. So those amendments would be appropriate to that involuntary commitment statute. Number 0174 REPRESENTATIVE JAMES made a motion to adopt Version H [1- LS1323\H, Luckhaupt, 3/28/00] as a work draft. There being no objection, it was so ordered. REPRESENTATIVE JAMES stated her understanding that Mr. Buttcane's concern about Section 1 is that abuse of inhalants is a class B misdemeanor. However, Section 1 goes on to say that a court shall suspend the imposition of sentence, place the defendant on probation, and require the defendant to successfully complete an inhalant abuse treatment program. "So it doesn't seem to me like they're going to have to go into these places," she commented. MR. BUTTCANE said that provision would apply to the criminal system. The delinquency system would not have that provision in front of it. Under the delinquency system, a juvenile who is a danger to himself/herself or others may be detained; given that inhalant abuse could, indeed, be the premise upon which the court finds that a youth is dangerous to himself/herself or others, that would be the justification for detention. Although written so that it is directed toward the criminal system, the bill would have an impact on the delinquency system. "We are concerned that that would increase the pressures on our detention populations," he concluded. Number 0199 REPRESENTATIVE JAMES replied that she understands the concern when there is a problem with a place to put these children. However, if children are a danger to themselves, what is Mr. Buttcane's suggestion? MR. BUTTCANE answered that the other provision of the bill, which would amend the involuntary commitment statute to include inhalants, would be an answer; that would provide the court system with opportunities to identify young people who are a danger to themselves because of the use of inhalants, and to compel them into a treatment program. "That, to us, makes more sense than to criminalize an issue which is essentially a substance issue," he explained. "We do not now criminalize alcohol abuse. And criminalizing inhalant abuse would be problematic for our delinquency system." Number 0367 REPRESENTATIVE ROKEBERG mentioned possession of alcohol for a minor. He asked whether that is a violation now. MR. BUTTCANE specified that possession of alcohol by a minor is a violation subject to a $100 fine. It is a matter handled by the district court, not the delinquency system. REPRESENTATIVE ROKEBERG said he is looking at a middle ground here because he is concerned. Even with the suspended imposition of sentence, there would have to be at least an indeterminate fiscal note and, therefore, a referral to the House Finance Committee. MR. BUTTCANE pointed out that the Department of Corrections had submitted an indeterminate fiscal note [dated 4/10/00]. Furthermore, the Department of Health & Social Services was waiting to submit a fiscal note, depending on whether or not the House Judiciary Standing Committee retains the criminalization piece relating to inhalants; if that stays in the bill and the bill moves forward, that department will have to place a fiscal note on this bill. Number 0465 REPRESENTATIVE KAPSNER informed members that a violation is something that "treatment people" throughout the state are very much in favor of, for the same reasons indicated by Mr. Buttcane. She then stated: That alternative is fine with me. Under the version that left the House [Health & Social Services Committee], the chairman of that committee was most comfortable ... with the infraction being a misdemeanor, because he thought the heavier the "hammer," the more inclined the young person or a person would be to go to treatment. REPRESENTATIVE ROKEBERG asked whether there is "an inhalant factor in contributing," or if that is stretching. Number 0530 REPRESENTATIVE CROFT asked Mr. Buttcane whether there would be a zero fiscal note from his department if this were made a violation like [offenses regarding] alcohol. MR. BUTTCANE affirmed that. Number 0554 REPRESENTATIVE CROFT made a motion to adopt conceptual Amendment 1: In Section 1 [subsection (d)], to substitute "violation" where it is a misdemeanor, with the same structure with regard to the fine as that relating to alcohol. REPRESENTATIVE ROKEBERG asked whether it is okay with the bill sponsor. [An affirmation is audible on tape.] REPRESENTATIVE JAMES asked whether the rest of the sentence is necessary [page 1, line 15, through page 2, line 2]. CHAIRMAN KOTT said there is no need to place the defendant on probation, but suggested the committee would want to require the defendant to successfully complete the abuse treatment program. REPRESENTATIVE JAMES agreed, saying it would be up to the "and" on the next page [page 2, line 2]. Number 0609 MR. BUTTCANE [providing the reasoning behind what would become Amendment 2] informed members that when this bill was in the House Health, Education & Social Services Committee, the Public Defender Agency had pointed out a worthy consideration. Section 1, page 1, line 6, says, "if the person smells or inhales any substance". However, that phrase could include espresso coffee, perfume or tobacco, for example. The language on page 5, line 3, "hazardous volatile material or substance", might be more appropriately placed on page 1, line 6, in order to better limit inhalant abuse to relate specifically to those things that are hazardous, volatile materials or substances, rather than things like perfume that give some excitation. REPRESENTATIVE KAPSNER informed members that a written copy of the amendment [Amendment 2] was forthcoming. Number 0693 CHAIRMAN KOTT returned attention to conceptual Amendment 1. He indicated it would begin on page 1, line 15, which would read, "Abuse of inhalants is a violation." The imposition of sentence provision would be replaced to conform the violation to the same category relating to a violation for alcohol abuse, with a $100 fine, to his belief. It would still require the defendant to complete the abuse program. There being no objection, Chairman Kott announced that Amendment 1 was adopted. Number 0775 CHAIRMAN KOTT turned attention to Amendment 2, a written amendment labeled 1-LS1323\I.1, Luckhaupt, 4/15/00, which read: Page 1, line 6: Delete "substance" Insert "inhalant" Page 1, line 13, following "section,": Insert "(1)" Page 1, line 14, following "AS 04.21.080": Insert "; (2) "inhalant" has the meaning given in AS 47.37.270(10)." CHAIRMAN KOTT said he believes that Amendment 2, in its entirety, is appropriate. He asked whether Gerald Luckhaupt, the legislative drafter, had any comments; none were offered. Number 0952 REPRESENTATIVE ROKEBERG made a motion to adopt Amendment 2. There being no objection, it was so ordered. [REPRESENTATIVE ROKEBERG made and withdrew a motion to move the bill from committee.] Number 0990 BLAIR McCUNE, Deputy Director, Public Defender Agency, Department of Administration, testified via teleconference from Anchorage, noting that he didn't know what amendments had just been adopted. He said his main concerns related to page 1, line 6. CHAIRMAN KOTT reported that the amendments had taken care of that. MR. McCUNE said he believes that the intent of causing intoxication seems to be sufficient without including inebriation, excitement, stupefaction and dulling of the nervous system. He added that the agency is still concerned about criminalizing behavior. CHAIRMAN KOTT responded to the latter concern, indicating the amendments had taken care of that, as well. It is now a violation with language similar to the statute dealing with alcohol abuse. MR. McCUNE said that takes care of his concerns. Number 1038 REPRESENTATIVE ROKEBERG made a motion to move CSHB 375, as amended, from committee with individual recommendations and the attached indeterminate fiscal notes. REPRESENTATIVE CROFT proposed having a zero fiscal note for the Department of Corrections because [inhalant abuse] is now a violation and DFYS' problem has been solved. CHAIRMAN KOTT concurred. REPRESENTATIVE ROKEBERG amended his motion to include a zero fiscal note from the committee. There being no objection, CSHB 375(JUD) was moved from the House Judiciary Standing Committee. HB 413 - INTENSIVE FAMILY PRESERVATION SERVICES CHAIRMAN KOTT announced that the next order of business would be HOUSE BILL NO. 413, "An Act relating to intensive family preservation services; and providing for an effective date." Number 1115 REPRESENTATIVE SHARON CISSNA, Alaska State Legislature, sponsor, explained the bill as follows: This bill provides for a program that gives intensive intervention. And perhaps a family whose child is about to be removed has been offered intervention in previous stages. However, in this model, the family ... is about to lose their child to state custody. And that is the point at which this program intervenes. ... It is imminent that the child will leave. ... This program was developed in 1974 by the Washington program called "Homebuilders." ... In that state, they have been intervening at this point. ... When the family is in crisis, ... about 80 percent of the ... children and families who've been served have been able to stay in their homes. And in that time, there has never been one death of a child who has remained in their home as a result of this program. The family is offered the intensive service. The intensive service must be of a very high quality. It has features such as 24-hour-a-day availability of the same caseworker, for up to six weeks. It's intensive, and it's short. ... The program must attain - and that's one of the high qualities of this - ... at least a 70 percent success rate with the families that are served, and actually that winds up being ... lower than the rates of approximately 15 of the states that I've been able to study; they've all been closer to the 80 percent success rate. So 70 percent is on the low side that we write into the statutes here, but the rate should be higher than that. There are approximately 30 states that have adopted this model. And in the HES [House Health, Education and Social Services] Committee, ... there were people who testified from both the State of Washington, who had worked in that program, and from the ... intensive family preservation program in Michigan. Michigan has approximately an 85 percent success rate. They've been able to dramatically lower ... their costs ... in the children in out-of-home placement. ... That's really the long-term goal of this program, is to bring the rolls down. This bill itself sets up a study that will then propose a pilot project, and ... they will also look for funding, federal and private. ... Actually, one of the people who spoke in the HES Committee suggested that they may be able to identify some funding sources, as well. ... So the funding part of it is what we're trying to do, so that it will not be [general funds], and the pilot project will probably be in one location, to achieve what's called saturation. You want to make sure that the service delivery is up to the need in that given area, so that ... you have success, and you can actually ... demonstrate that you can bring the out-of-home placements down. Number 1338 REPRESENTATIVE CROFT said he had looked this over for judicial or other policy choices, and he believes it is a wonderful program, from what he knows about it in other states. The main problem will be getting money to start it up. He wished Representative Cissna luck in the House Finance Committee. CHAIRMAN KOTT said he had looked it over, as well, and the only section that deals with the courts is Section 2, briefly. He asked whether anyone wished to testify, then closed public testimony. Number 1395 REPRESENTATIVE ROKEBERG made a motion to move HB 413 out of committee with individual recommendations and the attached fiscal note(s). There being no objection, HB 413 was moved from the House Judiciary Standing Committee. SB 177 - INSURANCE TRADE PRACTICES & ACTS Number 1418 CHAIRMAN KOTT announced that the next order of business would be CS FOR SENATE BILL NO. 177(L&C), "An Act relating to insurance trade practices; and providing for an effective date." He reminded members that Senator Donley, sponsor, had presented the opening statement at the previous day's hearing but that no further testimony was taken. [Before the committee was HCS CSSB 177(L&C).] Number 1442 MICHAEL LESSMEIER, Attorney at Law, Lessmeier & Winters, and Lobbyist for State Farm Insurance Company ("State Farm"), came forward to testify in opposition to this bill on behalf of State Farm. Noting that he had listened to the testimony when this bill was presented the previous day, he said the impression given was that this is fairly noncontroversial legislation. However, he respectfully disagrees and would characterize this as anti- consumer legislation. Any legislation that interferes with the ability of an insurer to address claims of fraud, claims of exaggeration or false claims is ultimately bad for policy holders, which is one of the primary concerns with this legislation. MR. LESSMEIER emphasized that passing legislation that increases costs to insurance companies results in increased costs to policy holders; he therefore requested careful review of this bill. Furthermore, he believes that much of the information advanced about this legislation is inaccurate. With regard to yesterday's testimony that the majority of states allow a finding of a trade violation for a single act, he doesn't believe that to be the case. He directed attention to the Division of Insurance's attachment, submitted to the House Labor & Commerce Committee, which illustrates that some states allow a director to find a violation of a single act if it is willful or flagrant. However, this legislation just says there needs to be a single act. By his count, only four or five states [submitted on that attachment] allow a director to find a violation based on a single act that is not willful or flagrant; he believes that is important, and there is a reason for that. One reason is that the National Association of Insurance Commissioners (NAIC) model Act would allow the finding of a violation only if it is a willful single violation. Number 1620 MR. LESSMEIER informed members of another important concern. He referred to the mention [at an earlier hearing] of the Bongen case [State Farm Fire and Casualty Company v. Bongen], an Alaska Supreme Court case that relates to the proximate cause section of HCS CSSB 177(L&C). The reference to the Bongen case had indicated it somehow took away something in existing Alaska law. Again, Mr. Lessmeier said, that is not so. He encouraged members to review that case. He stated: What our supreme court said in the Bongen case is, first of all, that most courts addressing the validity of exclusionary language actually or functionally identical to that found in the policy they were interpreting have held that the exclusion is enforceable. The court went on to say, "We favor the majority rule," and said, quote, "We can discern no sound policy reason for preventing the enforcement of the earth movement exclusion to which the parties in this case agreed," unquote. And, finally, the court said, "The only precedent from other jurisdictions which would find coverage in spite of the exclusionary language is from California and Washington." And the California rule was derived from a statute; the Washington rule just adopted the California rule. So the impression that we are ... correcting something that the supreme court changed is just not an accurate impression. What the supreme court did, in the Bongen case, is it followed the majority rule, and it followed the Alaska law that says that we're [going to] apply contract language in an insurance policy if it is clear and unambiguous. And that rule has been with us in this state forever. And this bill would change that. MR. LESSMEIER informed members that [State Farm's] real concern with HCS CSSB 177(L&C) is that it changes the process: the Director of [the Division of] Insurance, who may be a political appointee with no knowledge of insurance or the legal system, is given authority, on the basis of a single act, to address situations such as the settlement process that occurs between an insured and an insurer. If this director is able to assess fines and penalties on the basis of a single act, the present balance that exists in the law is changed. MR. LESSMEIER said he interprets that to mean that if the insurer is wrong, the insurer has committed a trade practice violation and it doesn't matter what the reasons are; it doesn't matter if there was a reasonable basis in fact in the first-party situation or in law. That sends a message to insurers that cases involving fraud or exaggeration should not be fought because if such a case is fought and lost, the insurer has violated the Act and the director may sanction the insurer for that. That is bad for the policy holders. Furthermore, it is unnecessary. Number 1806 MR. LESSMEIER noted that his letter to Senator Mackie dated February 29, 2000, should be in the bill packet. The letter illustrates the nature of the problem. For example, State Farm handled 45,000 claims in Alaska in 1998. According to the [Division of Insurance's] statistics for State Farm, the division received 52 complaints for 1997 and 43 complaints for 1998. He pointed out that it is not known how many of those complaints are valid. He suggested that such statistics do not indicate a problem. The number of complaints received by the division don't indicate a serious problem with oversight by the division of the trade practices of insurers. Furthermore, remedies already exist in law to address such situations, and those remedies have proven quite effective. MR. LESSMEIER acknowledged that Senator Donley has made changes in this legislation and has worked with [State Farm] in order to try to meet some of the concerns; however, there are some important concerns that he hasn't been willing to address in this bill. The first is found in Section 5, paragraph (7). He pointed out that in HCS CSSB 177(L&C) there are subparagraphs (A) and (B); subparagraph (B) deals with third-party claimants and says there is a basis for an insurer to defend if an insurer offers an amount that has a reasonable basis in law and fact. Although the third-party claimant recovers substantially more, there would not be a trade practice violation, which makes sense. MR. LESSMEIER told members that if there is a good faith exercise of judgment based on law and fact, that shouldn't be second- guessed. He noted that Senator Donley didn't agree to that provision with regard to first-party insurers. Therefore, if this passes and is enacted into law, there would be a situation in which the insurer would automatically violate this Act if the insurer loses. It wouldn't matter that there is a legitimate basis in law and fact for not making a payment. MR. LESSMEIER suggested that the committee review a proposed amendment that Representative Rokeberg had drafted, which would allow a director of insurance to "fine and insure on the basis of a single act, if the act caused loss or harm or was willful." Mr. Lessmeier recommended that the "or willful" be changed to "and willful" because someone can always argue that there is loss or harm. Mr. Lessmeier also recommended deletion of the change to the existing law contained in the new provision in Section 7, dealing with denial of causation. He said the supreme court has addressed that issue, and there is no reason to change that. MR. LESSMEIER noted that with insurance it is always easy to look at an individual case. He informed the committee that the director of [the Division of] Insurance was asked for examples of what he cannot do under the existing law. The only examples provided were three or four health insurance cases. Mr. Lessmeier emphasized that there is a collective effect when action is taken based on individual instances. Insurance is great if one can afford it, but if an insurer's ability to fight fraud or claims that are questionable is taken away, then a disincentive to look closely at such claims is created. Whenever a fraudulent or questionable claim is paid, everyone pays. The challenge for the industry is to keep products affordable and available. Number 2085 REPRESENTATIVE ROKEBERG noted that he had two amendments, labeled M.1 and M.2. Amendment M.1 [1-LS0902\M.1, Ford, 4/14/00] read: Page 4, line 7, following "loss": Insert "or harm" Page 4, lines 9 - 10: Delete "whether the violation was a single act or  a trade practice" Insert "the promptness and completeness of remedial action" Page 4, following line 10: Insert a new bill section to read: "* Sec. 9. AS 21.36.320 is amended by adding a new subsection to read: (h) If the violation of this chapter is a single act, the director may not impose a penalty unless the violation results in loss or harm or is intentional." Renumber the following bill section accordingly. Amendment M.2 [1-LS0902\M.2, Ford, 4/14/00] read: Page 2, line 29, through page 3, line 6: Delete all material and insert: "(7) compel an insured or third-party  claimant regarding a claim in which liability  is not at issue to litigate for recovery of  an amount due under an insurance policy by  offering an amount that does not have a  reasonable basis in law and fact [INSUREDS TO LITIGATE FOR RECOVERY OF AMOUNTS DUE UNDER INSURANCE POLICIES BY OFFERING SUBSTANTIALLY LESS THAN THE AMOUNTS ULTIMATELY RECOVERED IN ACTIONS BROUGHT BY THOSE INSUREDS];" MR. LESSMEIER referred to amendment M.2. He said with the amendment to Section 5, paragraph (7), he was proposing, regarding an insured or third-party claimant, that as long as there is a reasonable basis in fact and law for the position taken by the insurer, the insurer shouldn't be found guilty of a trade practice violation. REPRESENTATIVE ROKEBERG asked if Mr. Lessmeier had seen amendment M.1. Number 2168 MR. LESSMEIER said he believes he saw it in a different version. He encouraged the committee, in Section 7, to [insert the following language on page 4, following line 10]: "if the violation is a single act, the director may not impose a fine unless the violation causes loss or harm and is willful." He said this language would follow the NAIC model Act. He believes that far more states have adopted that as a standard than what has been represented, as a single violation that may be based in law and fact. REPRESENTATIVE ROKEBERG asked if that was included in amendment M.1. REPRESENTATIVE MURKOWSKI indicated that Mr. Lessmeier is referring to [subsection (h)] of amendment M.1. She understood Mr. Lessmeier to suggest that the second "or" in subsection (h) of amendment M.2 be changed to "and". REPRESENTATIVE ROKEBERG referred to amendment M.2 and commented that he is not sure he has a clear understanding. He understood Senator Donley to have an objection to amendment M.2 because he believes it to be key to the entire bill. He asked if [amendment M.2 addresses] when there is a settlement offer in a case and there is an accusation on the part of the insured, that the insurance company has low-balled the settlement offer. Number 2260 MR. LESSMEIER clarified that it could happen in any situation - if, for example, the insurer believes there is no coverage and has a reasonable basis in law or fact for that, and therefore doesn't offer any money for a claim, and later it is determined that there is coverage. Under this bill, as written, there would be a violation of the trade practices Act no matter the legitimacy of the basis in law or fact for the insurers position. He recognized that perhaps in hindsight one could say an interpretation is incorrect. However, the feeling is that with a reasonable basis in law or fact, it shouldn't be a trade practice violation. MR. LESSMEIER, in further response to Representative Rokeberg, affirmed that [such a case] would always go to court for resolution regardless of what is done here, because the division is not set up to get involved in factual disputes. One suggestion made to the sponsor was to change the language so that the insurer had to have an objectively reasonable basis in law and fact that is documented in the insurer's file. Therefore, if the director felt that the insurer was acting unreasonably, the director could review what was in the file and make that determination, and there would be something to document that decision-making process. Mr. Lessmeier said it shouldn't be strict liability such that if the insurer is wrong but acting in good faith and having a reasonable basis in law and fact, the insurer would automatically be subject to a fine and penalty. Number 2354 REPRESENTATIVE ROKEBERG said, "The major change here with this legislation is that in existing statute if there's a pattern of violations, that constitutes the grounds on which the Director of [the Division of] Insurance could make an investigation and find that there's the elite trade practices." He said he understood, then, that this would essentially create the same rights in the instance of a single incident rather than a pattern. Therefore, the director's power is expanded. MR. LESSMEIER agreed. REPRESENTATIVE ROKEBERG referred to amendment M.2, which he understood Senator Donley to believe is a step back. He said he further understood that Mr. Lessmeier didn't like the language on page 2, line 29, because it changes it from a pattern to one incident. MR. LESSMEIER agreed. REPRESENTATIVE ROKEBERG related his understanding that Mr. Lessmeier is disputing the handling of that single violation. MR. LESSMEIER agreed and explained that changing that specific provision from a trade practice to a single incident results in the insurer violating this Act, regardless of whether the insurer was acting in good faith. REPRESENTATIVE ROKEBERG surmised that this [provision] speaks to a pattern of low-balling in the offer of a settlement. MR. LESSMEIER affirmed that it is one [situation] to which this speaks. This led to the suggestion to require the insurer to document objective evidence in the file, which the director then could review. REPRESENTATIVE ROKEBERG suggested that the [insurer] could "cook" the file. MR. LESSMEIER replied that he felt it would be difficult to do that after the fact. He added, "Presently, while there [are] some requirements that you have an adequate file, that specific element is not required in all instances." Number 2480 REPRESENTATIVE ROKEBERG surmised, then, that those documents would be dated. MR. LESSMEIER replied, "Certainly." REPRESENTATIVE ROKEBERG also surmised that those documents could prove the basis of fact for [the insurer] regarding the lower amount. MR. LESSMEIER said it would either prove or disprove it. TAPE 00-64, SIDE B Number 0001 REPRESENTATIVE ROKEBERG asked Mr. Lessmeier about the issue of proximate cause and wondered if that is the Section 7 language. MR. LESSMEIER affirmed that. REPRESENTATIVE ROKEBERG indicated that in the House Labor & Commerce Standing Committee [which he chairs] he was under the impression that they could begrudgingly accept it. He asked whether Mr. Lessmeier's testimony has changed. MR. LESSMEIER explained that it is a part of the bill that they do not like; he noted that Representative Rokeberg had characterized it accurately. Number 0122 BOB LOHR, Director, Division of Insurance, Department of Community & Economic Development, emphasized that the bill is not aimed at an innocent mistake by an insurance company. If a mistake rises to the level of devastating an insurance policy holder or his/her family through a single action by an insurance company, that is something that the Division of Insurance believes should be subject to investigation and administrative action by them. This is especially the case because SB 177 would clarify that no private cause of action is allowed under the state's unfair claims settlement practice statute, AS 21.36.125. If the Division of Insurance does not have the authority to enforce, then no one does. MR. LOHR referred to amendment M.1 [text provided above], indicating his belief that it will effectively gut the single-act authority. It is difficult to draw a profile of a typical single-act violation, he told members, because it is a rare occurrence; therefore, it is not the kind of thing that the Division of Insurance is going to run out and try to elicit. He noted that they [single-act violations] do not occur that often, but when they do occur, the harm to the family can be substantial. A profile of a single-act violator would probably be a company located outside of the state that does little business or is only occasionally doing business in Alaska. It may refuse to solve a serious claims handling problem, for instance, because there may be an economic incentive to do the wrong thing. MR. LOHR said the single-act enforcement authority provided to the division could solve this problem, or at least nip it in the bud. He doesn't believe that there is a risk of excessive enforcement. Although the Division of Insurance has political appointees, they may lack extensive experience in the insurance industry. Typically, it works to the benefit of the industry because those political appointees may be approachable on issues. MR. LOHR emphasized that the division cannot afford to pursue single acts unless those are very serious, certainly in this budget climate. In any case, a hearing officer would overturn any overzealous enforcement effort during the due process hearing. Anyone accused of a violation that carries a penalty - including, if enacted, this single-act authority - would have the right to a due process hearing. As a fail-safe measure, of course, superior court is available to review the division's decisions and overturn any that are unfair. MR. LOHR assured the committee that if the Division of Insurance were foolish enough to try to act on a single innocent mistake, it would be overturned by the courts if it got that far. A more typical pattern would be, in the case of a serious violation, that first the division would look to restitution by the consumer. Second, it would require a plan for avoiding a similar occurrence by the insurance company in the future. If the company were unwilling to come under compliance or failed to follow through on implementing its plan to avoid future serious mistakes, then a fine may be appropriate, which is what this authority would provide. He believes that the bill will improve the quality of claims handling by insurance companies in Alaska. It will benefit policy holders, insurance companies and the public. Number 0294 REPRESENTATIVE MURKOWSKI indicated she has heard concern that SB 177 gives the director of the Division of Insurance a fair amount of discretion. She wondered how much authority the director currently has in looking at these things and saying, "Well, there truly was a reasonable basis in fact for this offer; it was not just a low-ball offer just to make a low-ball offer and try to get away with it." Representative Murkowski said she does not know enough about what the statutes say at this point, but she was just wondering if they need to put some parameters around the director's authority to give some people satisfaction. MR. LOHR conveyed his understanding that the division's latitude with respect to enforcement is currently quite broad, and SB 177 would add a new category but would not broaden that discretion. He does believe that currently the requirement to trigger the unfair claims statute is a general business practice, and the division's regulations have defined that to mean "1 percent or more of claims mishandled within a year by a company." He said that Mr. Lessmeier had indicated State Farm is nowhere near that [level], nor is any company. In fact, if all of the violations received by the division were assumed to be valid - which they certainly are not - that would not amount to 1 percent of the claims handling of the largest companies such as State Farm; therefore, that 1 percent standard is effectively moot and inapplicable to any real situation in Alaska. MR. LOHR continued. He said the second standard in regulation is multiple violations - at least two - of the same standard without an adequate explanation; he indicated that the Division of Insurance had proposed that regulations say there would be a minimum of three [violations]. As to whether to pursue a case or not, the Division of Insurance has wide discretion and has used that discretion to not pursue cases in any sort of frivolous or cavalier manner. They are not getting turned down within the hearing process by the Division of Insurance, and they are not getting turned down, to his knowledge, by the superior court. He would expect that to be the pattern if SB 177 were enacted. Number 0426 REPRESENTATIVE ROKEBERG asked what power the director of the Division of Insurance has currently if there is a single incident. He also asked Mr. Lohr whether his hands are tied entirely. MR. LOHR indicated that, effectively, that is the case under this statute, but elsewhere in Title 21 there is single-act authority. If an agent or broker were tapping a trust fund, for example, the division would not need to wait for that to become a general pattern, thankfully, and they do have a very effective enforcement arm within the division. REPRESENTATIVE ROKEBERG requested confirmation that if [the division] gets a complaint from a consumer under the terms of the policy, [the division] cannot pursue it other than make inquiries. MR. LOHR clarified that they have consumer protection specialists who work with that customer, to try to ensure that the company has applied the law, the regulations, and [the company's] own policy language in a proper fashion. If the division detects a mistake, often they can assist that customer in getting it remedied. But in terms of administrative action toward that company for a single act, no matter how serious, they have no authority to act. Number 0507 REPRESENTATIVE ROKEBERG requested confirmation that [the division] can look after the consumer complaint, but cannot bring any heat on the company for an single act. MR. LOHR said that is correct. Recently they have had a couple of cases where the Employee Retirement and Income Security Act (ERISA) preempted them from having any authority at all, but, because of consumer questions, they have gotten involved and used informal cooperation with the company to resolve those in a manner favorable to the customer. REPRESENTATIVE CROFT inquired whether it is mainly in the area of claim settlement practices that [the division] does not have the single-act authority. MR. LOHR affirmed that. REPRESENTATIVE CROFT referred to paragraph (9) on page 3 [HCS CSSB 177(L&C)], where it read, "attempt to settle a claim on the basis of an application that has been altered without the consent of the insured." He asked, "A single act of that and you don't have authority to discipline the insurer?" MR. LOHR replied that it is current statute, and it currently requires multiple acts without a valid explanation or 1 percent of total claims handled under the regulations adopted under the current statute. REPRESENTATIVE CROFT referred to Mr. Lessmeier's testimony with regard to paragraph (7), page 2, [HCS CSSB 177(L&C)]. He pointed out that the current standard is a pattern or practice that is substantially low. A single instance of low-balling would not be appropriate for punishment, but a pattern or practice might. He recommended changing paragraph (7), subparagraph (a), by putting the pattern or practice back in "for the primary insured low- balling part, and then the (B) would still remain 'a reasonable basis in law and fact'." He asked whether changing paragraph (7), subparagraph (a), would bring it back to the current standard. MR. LOHR said he believes that is correct and recommends an approach like that, because he would hate to see the current standard for pattern or practice weakened. He added that he believes Mr. Lessmeier's amendment would weaken the standard for a pattern or practice. REPRESENTATIVE ROKEBERG indicated that the whole issue has him a little troubled, because they are going to create a single-act violation, but what about the multiple-act violation? It would seem that it would be raised to a higher level. He wondered whether the loss of distinction is good or bad. Number 0662 SENATOR DAVE DONLEY, Alaska State Legislature, sponsor of SB 177, suggested it might be a way out of the "box." He agreed with Mr. Lohr about maintaining the status quo for multiple acts when there is a pattern of a company offering less than what it later loses in court; he mentioned isolating that and saying that, for those types of incidents, there needs to be a pattern, but then going with Mr. Lessmeier's suggestion for the language that currently appears on page 3, line 3 [HCS CSSB 177(L&C)], to be changed to apply to both a first party and a third party, which would be okay as long as they could maintain the existing standard for multiple acts. Senator Donley emphasized that he does not want his bill used to weaken existing standards. MR. LOHR said he thinks that approach is a sound one. REPRESENTATIVE ROKEBERG indicated that it is the only thing that has been troubling him. Number 0803 MR. LESSMEIER asserted that [the legislators] are unnecessarily complicating this. He strongly believes that if there is a reasonable basis in law and fact, particularly if it is documented in the insurer's file, there should not be a second- guessing of that judgment. If it is treated one way in the individual sense and another way in the multiple sense, the question, then, is what standard to apply in the multiple sense. And why apply a different standard? He wondered why they cannot come up with a single objective standard that allows the exercise of good-faith judgment in both senses. Mr. Lessmeier said he thinks they all want to address the situation of low-balling, or the situation where someone is not making a good-faith settlement effort, but if they do not create an objective standard to implement that, they are in never-never land. The objective standard for them is a defense and should be something that benefits the director of the Division of Insurance in terms of administering evenhanded enforcement, which ultimately would benefit the consumer. REPRESENTATIVE JAMES indicated her understanding that it is needed in a singular case when it is egregious. She wondered if that is what they are getting to. MR. LESSMEIER said no, he thinks they are proposing that the language "reasonable basis in law and fact" be used in the single instance. REPRESENTATIVE ROKEBERG added, "And then leave the existing language as status quo." MR. LESSMEIER suggested it would be better to adopt "reasonable basis in law and fact" for both standards. He referred to Representative James' comment, saying that if they are getting to an egregious situation, he thinks they have the authority to deal with that if there is no basis in law or fact. Number 0969 REPRESENTATIVE ROKEBERG asked if Mr. Lessmeier had any recommendations with regard to Section 7, the term "dominant cause," that would help him feel better about the language. MR. LESSMEIER informed the committee that the supreme court has only recently issued another opinion in this area; it was a case in which his law firm was involved. The supreme court made it very clear that the only way an insurer can use the Bongen exclusion is if there is very clear language that if a loss is caused by a combination of an excluded risk and a covered risk, there is no coverage; that is the only time they can use that exclusion. He restated that this tinkering with a complicated area of the law is truly unnecessary and will create new complexities and lots of additional litigation. Number 1082 REPRESENTATIVE ROKEBERG wondered if [Section 7] would preclude the ability to draft a clear Bongen exclusion in a contract. MR. LESSMEIER indicated it would change the law in that regard, because they would have to redraft an exclusion that has already been before the supreme court, to change it in light of this statutory revision. They will be litigating complex factual patterns as to what is dominant and what is not. There is a history of litigation that goes for years and years until there is reasonable predictability. He said [State Farm] can live with the language, but it is not a wise thing to do. REPRESENTATIVE ROKEBERG asked whether adding language so that an insurer could provide for an exclusion, if it is clearly set forth in the contract, would help any. MR. LESSMEIER said he does not believe so, because it is already the law. What adopting a contract like that, they would be saying, "You can write a contract, it can be crystal clear, but we've taken your ability away to contract in this area." He pointed out that the statute will always govern, and the law already says that if an exclusion is going to be given effect, it has to be crystal clear. In fact, Mr. Bongen had testified that he read the exclusion, and once he read it, he realized that there was no coverage; it was crystal clear to him. Mr. Lessmeier said he is not sure what can be done to change it [Section 7] other than delete it, because right now, if it is an exclusion, it essentially has to be a substantial factor of the loss in order for it to be applied. Now they are going to "dominant cause," changing that standard injects a whole new complexity into that area; again, it is not a healthy thing. Number 1227 REPRESENTATIVE GREEN asked Mr. Lessmeier whether, in his association with State Farm, has found this to be a major problem. He further asked whether there has been litigation in his company with regard to low-balling. MR. LESSMEIER replied that he does not see that. Particularly in the first-party context, there is tremendous incentive for an insurer not to engage in that kind of conduct. He gave an example of a denial of claims for first-party cases; it involved about a $17 million punitive damage award against Aetna for that sort of conduct. Mr. Lessmeier said it is important that the committee understand that in the first-party context, the insurer has to be very careful not to pay a claim, and the reason is that there are special duties owed to the insurer as a result of a contract. They can set aside these statutes; there is a duty of good faith, and an insurance company can be sued for bad faith. Therefore, there is tremendous incentive not to fight claims unless there is a reasonable and objective basis to fight them. Insurers that deny first-party claims have to do it very carefully, and had better have a good basis for doing it. MR. LESSMEIER noted that the bad-faith cases involve huge expenses of time and money to defend, even if they are successfully defended. The question is why this is really necessary. He pointed out that there are many existing remedies under the law. He understood Senator Donley when his initial concern was that the $500 case is not economically justifiable to be taken to court, he said, and the insurance company knows that, and they offer $400 so that they will save $100. The company which does that is doing it at its own peril under existing law because of the potential for punitive damages. If it is a question of judgment, the law should not penalize the insurer. Number 1436 REPRESENTATIVE CROFT said he was confused by that last example. He noted that the example is taking $500 claims - knowing that there is no incentive to litigate - and taking half of them across thousands of claims. He asked: If he is one of those affected people [mentioned in the example], is he going to sue for $500 and get a substantial punitive damage award? He added that the punitive damage is capped at some multiple of the damage. MR. LESSMEIER said that is not correct. REPRESENTATIVE CROFT disagreed. MR. LESSMEIER explained that there are alternatives for conduct like that which [bring] the maximum cap to much higher than a multiple of compensatory damages. REPRESENTATIVE CROFT commented that the committee [regarding another bill] had sat there and written it, and it is just a different multiple. MR. LESSMEIER answered that the formula in that instance has to do with the economic benefit to be gained, and it applies across the board. He suggested that the dispute can be resolved very easily by reviewing the statutes, and the cap goes up to a maximum of $7 million, he believes. Number 1473 REPRESENTATIVE CROFT acknowledged that it is a multiple of those and an economic benefit. However, he posed a scenario in which he is going to litigate a $500 claim because he wants to prove something to the rest of the world. He asked whether it really makes more sense to rely on people who have been bilked $100 - and then to multiply that 1,000 times - and to litigate that, all the way through, against a big insurance company; or does it make more sense to have Mr. Lohr, as director of the Division of Insurance, find those and stop them. Representative Croft asked which is a more efficient and rational system for stopping that conduct. MR. LESSMEIER suggested it is probably a combination of both, so long as they are reasonable. First, attorneys are standing in line to take class action cases exactly as Representative Croft has described. Second, that balance must be created but not changed all the way; and SB 177 as written changes the balance all the way because it says that if an insurer loses, the Act has been violated. He suggested that isn't what Representative Croft wants to say. Number 1599 SENATOR DONLEY noted that a statement was made that there is no need to deal with the proximate cause issue; however, he believes there is a big need to deal with that. He commented that the wish to discuss the need is not his idea but came from the Division of Insurance even before Mr. Lohr was appointed director; the previous director felt the issue was important too. Therefore, he observed, this issue has gone through two levels of leadership, and both directors thought it was very important for Alaskan consumers. He said it is interesting that this very issue has been recently re-litigated by the West Virginia Supreme Court, pointing out in the Murray case that there is a split in jurisdictions on this subject. He indicated that the California case, Mr. Lessmeier's cited case identified as occurring in a Pacific Coast state, a Georgia case, and a West Virginia case all go along with the type of definition proposed by SB 177. He noted that four or five other jurisdictions use a different proposal. Number 1706 SENATOR DONLEY said what Mr. Lessmeier was talking about was that although the consumer knows what he/she is getting, because insurance companies write it specifically, the consumer has no negotiating power whatsoever because these are contracts of adhesion. The insurance company writes its contract and says, "Now, you buy it or don't buy it." He recognized that there is an anticipated danger here of rewriting contracts to take advantage of this case in order to make sure that, if there are multiple causes, they can be excluded. However, the much- superior public policy is to say that if something is excluded and it is a dominant cause, not just one of several causes, that should be excluded. SENATOR DONLEY said he thinks that should be the law in Alaska, and even the Alaska Supreme Court had pointed out that there is a lack of statutory guidance on this subject. People buy fire or flood insurance thinking that if there is a flood or a fire, then they have coverage; yet, perhaps because there is another, unexpected cause in there, all of a sudden they do not have coverage. He thinks that is the better public policy, and that is what the court is asking the legislature to tell the insurance companies. That is what SB 177 does, to his belief. Number 1785 REPRESENTATIVE KERTTULA mentioned the memorandum dated March 9, 2000, written to Mr. Lohr from Dale Whitney. She said it caught her eye because it says that in a major earthquake, a majority of homeowners in the state would have no coverage. This would be true even for an insured who had suffered an earthquake loss in which a covered peril contributed, when the earthquake was the real cause of the loss. Surmising that what isn't covered is earthquake loss, she asked whether that is the way it works. MR. LOHR said that would be the case. However, the memorandum is in error with respect to the specific example chosen because the insurance services office that writes typical policy language - "boilerplate, if you will" - does not exclude fire coverage if an earthquake is involved. Therefore, the earthquake example is a bad one. REPRESENTATIVE KERTTULA said that had not sounded right to her either. Number 1865 REPRESENTATIVE CROFT commented that he lives in the Chester Creek Valley where, because it will occasionally flood, he cannot get flood insurance; however, he can get earthquake insurance because the valley is fairly stable. Chester Creek could flood his house or basement, which is not covered, and he is also fairly near the water. If there were an earthquake, it could cause a tidal wave or flood up the creek. He asked what his insurance situation would be since he has earthquake insurance but has an exclusion for a flood. MR. LOHR replied that he had learned his lesson, frankly, in terms of hypotheticals; he will only use hypotheticals from court cases where the facts are set out as the basis for discussion. Number 1930 REPRESENTATIVE CROFT asked Senator Donley whether that type of thing is what the committee is worried about here. SENATOR DONLEY replied in the affirmative. He indicated it is a situation where Representative Croft, as a consumer, buys a certain class of insurance, for example, but does not buy another class of insurance or cannot get it. Senator Donley posed a situation where something happens, caused by both [earthquake and fire, for example]. He remarked that under new case law in Alaska, the consumer has no coverage. However, the better public policy call here is that the nonexcluded risk - the dominant cause rather than a cause - should be covered, and if the causes are equal, he thinks that the consumer should be covered. He added that if the cause is dominant and the consumer did not pay for it, then no, the consumer should not get coverage. He suggested it is easy to write a policy to say that if a cause is dominant, the consumer does not get coverage. REPRESENTATIVE CROFT surmised, then, that he would be able to argue that the dominant cause in his own case was the earthquake, which caused the [flood] that was secondary to the earthquake. Number 1980 SENATOR DONLEY said that is right if the West Virginia standard is used. REPRESENTATIVE ROKEBERG noted that one suggestion from Mr. Lessmeier was the reasonable basis in fact, documented in the insurer's file. He asked whether Mr. Lohr had an opinion on that. MR. LOHR said he had not seen that language but has had it described to him over the telephone. He had considered it carefully with the Office of the Attorney General and, frankly, had a bit of difficulty understanding it. He explained that the same question had arisen as to how reliable the document filed in the company's possession would be, and whether that is best public policy. If the notion is that the director shall consider the documents, that would be a very good suggestion; he mentioned that a mandatory factor for consideration in deciding whether to bring an action would be to look at all of the documents. MR. LOHR indicated that he is not sure a nudge is needed to do that because the division would do it anyway, and the division quite routinely has full authority to get at the documents. However, if the legislature wants to make sure that the division considers the documents, that is reasonable in terms of having the entire decision turn on that basis. It creates an incentive in terms of the file contents. Number 2128 SENATOR DONLEY reminded the committee that Representative Rokeberg had a draft amendment [M.1], part of which he and the director believe is fine. He said he didn't have an actual copy of the draft amendment but the middle section is fine. However, he doesn't like the bottom or top portions. REPRESENTATIVE ROKEBERG explained that Senator Donley did not like the part on the bottom of amendment M.1 that says, "If the violation of this chapter is a single act, the director may not impose a penalty unless the violation results in loss or harm or is intentional." He asked Senator Donley why he found that objectionable. Number 2170 SENATOR DONLEY explained that he wants the director to be able to take action to protect other people. If something is done and it is obviously a violation of the Act - even if there is no harm - the division should be able to issue a directive or seek corrective action so that future people are not harmed. Therefore, he does not think requiring a harm to occur beforehand is necessarily the best public policy if the public is to be protected. REPRESENTATIVE ROKEBERG suggested the harm would have already occurred and resulted in a grievance. Just the act of saying that an insurance coverage contract is not being fulfilled and a consumer is being harmed [should not be enough to trigger a directive]. Number 2240 MR. LOHR said the language, in his opinion, is infinitely better than with "and," which he thinks would gut SB 177. The "or" language does not have the same effect of rendering meaningless the entire single-act authority. REPRESENTATIVE ROKEBERG commented that Mr. Lessmeier had recommended "willful" rather than "intentional." He asked which is the higher standard. Or does it make any difference? REPRESENTATIVE KERTTULA replied that "intentional" is the higher standard. REPRESENTATIVE ROKEBERG asked whether someone had looked at the phrase "results in loss or harm or intentional." MR.LOHR said the division will live with any standard adopted, of course, because that is the job of bureaucrats. REPRESENTATIVE ROKEBERG asked whether Mr. Lohr finds that [language] objectionable. MR. LOHR replied that he prefers the approach that Senator Donley has outlined. The division will still use single-act authority where necessary under that standard, if it is enacted. Number 2357 REPRESENTATIVE ROKEBERG said he would "correct the one thing" and not delete the single-act authority on "the page 4, line 4 one." SENATOR DONLEY restated that he didn't have a copy of the amendment. Number 2383 REPRESENTATIVE KERTTULA requested an example of an instance where there is no harm. She asked whether they are talking about a situation where there has been a violation but the company recognizes it, so that in the long run there is no harm. MR. LOHR answered that he frankly cannot imagine an example where no harm would occur. The examples the division has chosen to focus on regarding enforcement priorities would be those where harm or loss is a central factor to the consumer. He added, "We try to seek restitution first, seek prevention second, and then seek a fine if necessary to compel proper conduct by the company." SENATOR DONLEY said he could think of examples. For instance, there could be a pre-authorized claim but a refusal to pay. Six months could go by without the bill being paid, but then they agree to pay the bill. Perhaps there is no actual harm that occurs to the consumer. He acknowledged that there are stories in which significant harm does occur to families. He returned to the scenario in which there is no harm because the family has enough of its own money to pay the bill. TAPE 00-65, SIDE A Number 0001 SENATOR DONLEY told members he still believes the director ought to be able to step in and say that [waiting] a year was wrong. "You recognized it and correct[ed] it, but we don't want you doing this anymore," he added. REPRESENTATIVE KERTTULA responded that it would boil down to whether that is a harm. She conveyed her understanding that Senator Donley was saying maybe there is no harm there; however, she thinks there probably is one. Number 0037 REPRESENTATIVE MURKOWSKI asked why Senator Donley objects to the first part of Representative Rokeberg's amendment, then, which inserts "or harm". She pointed out that it is not "and harm". SENATOR DONLEY said he guesses that he doesn't have a problem with that, nor a problem with the change on page 4, lines 9 and 10. Number 0070 REPRESENTATIVE ROKEBERG specified that he would not delete line 4 of amendment M.1, however. Line 4 of amendment M.1, relating to page 4, lines 9-10, of the bill, read: Delete "whether the violation was a single act or a trade practice" Line 5 of amendment M.1 read: Insert "the promptness and completeness of remedial action" REPRESENTATIVE ROKEBERG continued, indicating he would have line 5 [of amendment M.1], say the following instead: Insert after "violation" "the prompt[ness] and completeness of remedial action" REPRESENTATIVE CROFT requested confirmation that Representative Rokeberg was keeping "or." REPRESENTATIVE ROKEBERG affirmed that. He restated that on amendment M.1 he wouldn't delete line 4, because that makes a distinction between whether it is a single [incident] or a trade practice. Number 0201 REPRESENTATIVE CROFT made a motion to adopt amendment M.1 [text provided above] as Amendment 1. REPRESENTATIVE ROKEBERG objected for the purpose of amending Amendment 1. He made a motion to delete line 4 of the amendment [set forth previously] and on line 5 [of the amendment], after "Insert", to say "after the word 'violation'". Therefore, line 9 of page 4 of the bill would read, "factors including the seriousness of the violation, the promptness and completeness of remedial action," and it would leave the phrase, "whether the violation was a single act or a trade practice". He indicated the remainder of the amendment would be as written. REPRESENTATIVE CROFT noted that it would leave it as "or". He said that is fine as an amendment to Amendment 1. Number 0277 CHAIRMAN KOTT asked whether there was any objection to the adoption of the amendment to Amendment 1. There being none, it was so ordered. He asked whether there was any objection to Amendment 1 [as amended]. There being no objection, Amendment 1 was adopted. Number 0450 REPRESENTATIVE CROFT offered Amendment 2. He specified that he wasn't using proposed written amendment M.2 [1-LS0902\M.2, Ford, 4/14/00]. He referred members to page 2 of the bill, paragraph (7), as well as to the language offered in writing by Mr. Lessmeier earlier, which read: Proposed language for CSSB 177 Sec. 5(7) (7) compel an insured or third-party claimant in a case where liability is clear to litigate for recovery of an amount due under an insurance policy by offering an amount that does not have an objectively reasonable basis in fact and law that is documented in the insurer's file. REPRESENTATIVE CROFT explained that Amendment 2 would keep, as (7)(A), the current standard but insert the phrase, "a pattern or practice of compelling". He specified that is on page 2, lines 29-30. Right now, paragraph (7) says one cannot compel insureds to litigate for recovery of amounts due under insurance policies by offering substantially less than the amounts ultimately recovered in actions brought by the insured. He suggested keeping that; however, in order to keep that effective, given that the entire bill has been changed to say "an act," it must say there "a pattern or practice of". Therefore, (7)(A) would be "a pattern or practice of compelling" and then the current language of (7), not as amended by the bill but as the current statute reads. REPRESENTATIVE CROFT continued with Amendment 2. He said (7)(B) would be the language provided by Mr. Lessmeier, set forth above. He commented, "So that would be the single-act standard, under the reasonable basis in fact or law, but we would ... not be going backwards, if you will, because we're still keeping the ... pattern or practice." CHAIRMAN KOTT asked whether there was any objection to the adoption of Amendment 2. There being no objection, it was so ordered. Number 0476 REPRESENTATIVE JAMES made a motion to move SB 177 [HCS CSSB 177(L&C)], as amended, out of committee with individual recommendations and the attached fiscal note(s). There being no objection, HCS CSSB 177(JUD) was moved from the House Judiciary Standing Committee. SB 26 - FALSE REPORT TO POLICE/HINDER PROSECUTION CHAIRMAN KOTT announced that the next order of business would be CS FOR SENATE BILL NO. 26(FIN), "An Act relating to hindering prosecution and to providing false information or reports to a peace officer." Number 0561 MICHAEL PAULEY, Staff to Senator Loren Leman, Alaska State Legislature, presented the bill on behalf of the sponsor. Because the sponsor statement was in members' packets and time was short, he asked whether reciting of the sponsor statement could be suspended. CHAIRMAN KOTT granted that request. REPRESENTATIVE ROKEBERG asked what SB 26 does. CHAIRMAN KOTT replied, "You lie, you lose." Number 0603 REPRESENTATIVE JAMES made a motion to move CSSB 26(FIN) out of committee with individual recommendations and the attached zero fiscal note. There being no objection, CSSB 26(FIN) was moved from the House Judiciary Standing Committee. ADJOURNMENT Number 621 There being no further business before the committee, the House Judiciary Standing Committee meeting was adjourned at 6:31 p.m.