HOUSE LABOR AND COMMERCE STANDING COMMITTEE April 10, 2000 3:27 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Andrew Halcro, Vice Chairman Representative John Harris Representative Tom Brice Representative Sharon Cissna MEMBERS ABSENT Representative Lisa Murkowski Representative Jerry Sanders COMMITTEE CALENDAR CS FOR SENATE BILL NO. 177(L&C) "An Act relating to insurance trade practices; and providing for an effective date." - HEARD AND HELD PREVIOUS ACTION 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 WITNESS REGISTER SENATOR DAVE DONLEY Alaska State Legislature Capitol Building, Room 508 Juneau, Alaska 99801 POSITION STATEMENT: Testified as the sponsor of CSSB 177(L&C). MICHAEL LESSMEIER, Attorney for State Farm Insurance Company Lessmeier and Winters 431 North Franklin Street Juneau, Alaska 99801 POSITION STATEMENT: Testified on CSSB 177(L&C). BOB LOHR, Director Division of Insurance Department of Community and Economic Development P.O. Box 110805 Juneau, Alaska 99811-0805 POSITION STATEMENT: Testified on CSSB 177(L&C). JOHN GEORGE, Lobbyist, National Association of Independent Insurers 2328 Fritz Cove Road, Juneau, Alaska 99801 POSITION STATEMENT: Testified on CSSB 177(L&C). ACTION NARRATIVE TAPE 00-46, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:27 p.m. Members present at the call to order were Representatives Rokeberg, Halcro, Harris and Cissna. Representative Brice arrived as the meeting was in progress. SB 177-INSURANCE TRADE PRACTICES & ACTS CHAIRMAN ROKEBERG announced the first order of business is CS FOR SENATE BILL NO. 177(L&C), "An Act relating to insurance trade practices; and providing for an effective date." Number 0070 SENATOR DAVE DONLEY said CSSB 177(L&C) is an attempt to improve consumer protection in Alaska in insurance matters. Alaska is in the minority of states that do not allow the state's Division of Insurance to take enforcement actions for individual abuses and violations of the state's Unfair Claims Practices Act. Under Alaska statutes, there has to be a pattern of behavior on the part of an insurer before the Division of Insurance can take any corrective action. In most of the states that were surveyed, the divisions of insurance do have that authority to protect individual consumers. CSSB 177(L&C) would give Alaska's Division of Insurance the power to protect and to take corrective action for individual violations of the Unfair Claims Practices Act, thus better protecting Alaska insurance consumers. Due process safeguards would apply. There are extensive due process safeguards in any administrative enforcement action, and ultimately the option to appeal to judicial review. Number 0181 SENATOR DONLEY said another aspect of CSSB 177(L&C) is that it expands the protections in the existing Unfair Claims Practices Act. There is a series of protections listed in Section 5 of the bill. That is the list that appears now in law, with some modifications. There are only two sections of the Unfair Claims Practices Act that do not apply to third party claimants. To refresh the committee's memory, first party claimants are those who have claims against their own insurance companies. A third party claimant has a claim against somebody else who is insured. In other words, if you are the injured party, you are not claiming against your insurance company, you are claiming against the party that injured you and that person's insurance company. SENATOR DONLEY said all the protections of the existing act apply to both first and third party claimants except items 7 and 11. What the bill does is expand those protections to third party claimants in items 7 and 11. It does not create any new level of protection. Those protections in Section 7 would be that insurance companies should not (indisc.) for substantially less than the amount that somebody ultimately recovered. Obviously, the merit of that is to try to prevent litigation. People shouldn't have to sue to collect what is rightfully owed to them under an insurance policy. Item 11 says an insurance company shouldn't force people to go to arbitration, to try to force them to settle for less under the threat of arbitration and is going to cost the people so much that they are going to lose money anyhow. "That's an existing violation if it's a first party involved," Senator Donley said. "This bill would expand that protection to a third party claimant, too." Number 0348 SENATOR DONLEY clarified that CSSB 177(L&C) is not attempting to create a third party right of action in what is called a "good faith" lawsuit. That has been controversial in other states. In Section 6, drafters have specified that the provisions of this section do not create a private cause of action for a violation of this section. "This statement just re-announces the status quo to make it clear to anybody that these changes are not intended to create any kind of third party "good faith" cause of action, or any kind of cause of action based on these other than private cause of action," he said. CSSB 177(L&C) is talking about enforcement by the Division of Insurance, how the Division of Insurance enforces the Unfair Claims Practices Act. SENATOR DONLEY noted that there is a suggested amendment from Mr. [Michael] Lessmeier to change the proposed language for Section 6. He does not oppose that amendment. "I think it is within the spirit of what we are trying to get at in Section 6 already," he said. Number 0452 SENATOR DONLEY said all of the changes are significant, but what may be the most important change is the last one. It was requested by the Division of Insurance that a new definition of "proximate cause" be included in the statutes. Number 0548 SENATOR DONLEY referred to Section 7 of the bill, on page 3, the definition of "prohibited denial of claim for causation." Essentially what that is, he said, is a new definition of "proximate cause." A problem has developed because the status quo has been recently changed by a Supreme Court case saying that insurance companies can now exclude risks even if they are not the "dominant cause" of the loss. Number 0548 SENATOR DONLEY gave an example: Let's say that you have a homeowner's policy and it doesn't include earthquake insurance. There is an earthquake, and a power line half a mile away from your house falls down and there's a spark that creates a fire in the neighborhood, and there is a catastrophic chain of events that leads from house to house to the house next to your house, and your house catches fire and burns down. Your house suffered no damage in the earthquake, and your homeowner's policy does have fire insurance, but you don't have earthquake insurance, and earthquake was a substantial cause of the chain of events that led to your house burning down. Arguably under this new case, the insurance companies can now rewrite your homeowner's policy to exclude that and say that if there is any substantial cause in the chain of events that was not a covered cause, even though the final one was clearly covered by your homeowner's, your homeowner's doesn't work; you're out of luck, you have no coverage for that loss. The way it is now, they can exclude it if it is the dominant cause. To go back to the earthquake example, if you have homeowner's and it doesn't have earthquake insurance and an earthquake occurs and it knocks your house down, you're out of luck, you didn't have earthquake insurance. That [earthquake] is clearly the dominant cause of that damage. SENATOR DONLEY said he thinks this is incredibly important for all consumers in the state of Alaska, "because what's happening now is some insurance companies as we speak are rewriting their homeowner's policies to exclude things that are substantial causes, not just dominant causes. Of course the rates were all based on the old status of the law which was whether or not it was a dominant cause." Number 0679 SENATOR DONLEY explained that what this language recommended by the Division of Insurance seeks to do is to preserve the status quo so that something [that causes a loss] has to be a dominant cause, not just a substantial cause, before it can exclude coverage. Number 0724 SENATOR DONLEY said: I would argue that the better public policy here is that if you have fire insurance, and your house burns down, and the dominant cause of it was something you did have insurance for, i.e., the house next door caught on fire and burned your house down, we should be protecting people. People out there are not very sophisticated insurance consumers. These [policies] are not ordinary contracts where I'm negotiating with you as an individual business person and come up with a meeting of the minds and agreement for what we want to cover. These are contracts of "adhesion." This is a legal term that means, "it's a take it or leave it operation." These are big corporations. They drop their policies. They're not going to negotiate with any individual some change in their policy to include that. They may offer earthquake insurance or they may not. As an individual, you do not have the same bargaining leverage that you have with another individual, or as one company to another company. That is one of the reasons why we regulate insurance the way we do and have so many more laws that control insurance, because the average consumer just isn't on an equal playing field with large insurers, so it is regulated to protect consumers in that way. SENATOR DONLEY thinks the state should protect consumers by making sure that they actually have that type of coverage they think they are buying. "I'm not saying people should get more than they pay for; I just think they ought to get what they pay for," he said Number 0861 SENATOR DONLEY noted that there are two other proposed amendments, both dealing with the same subject. He said he supports the Ford amendment [Ford/LS0902/I.1]. This is a compromise position, he explained. The language was recommended by the industry. It says for third party claimants, the test would not be whether or not the policy holder went to court and recovered more, but the test would be whether or not there was an offering of an amount that had a reasonable basis in law and fact. In other words, if the insurance company had a reasonable reason for offering what it did. He said he would be willing to settle for this compromise. "The industry is requesting that we change it for both the status quo and for the new third party action, to adopt this same standard for both," he said. "My personal preference is to keep the status quo for what we have now, for first parties, and for the new addition to the law, the third parties, I could live with this standard here that they are recommending for both." SENATOR DONLEY reminded the committee that these are all things that are enforced by the Division of Insurance. The Unfair Claims Practices Act cannot be enforced by private parties; it is enforced by the Division, so the Division is going to use its expertise and go through full due process in making a determination whether this standard was violated or not. A consumer would file a complaint, the Division would review the complaint, decide whether or not to pursue it, and then, if there was a legitimate cause of action, the Division would pursue it through the due process of enforcement, and the question becomes what standard do they use. Number 1018 CHAIRMAN ROKEBERG said he had in hand a proposed amendment from the State Farm Insurance Company counsel and also the Ford language, which he assumed would replace the language Senator Donley favors. SENATOR DONLEY said he supports the Lessmeier language for Section 6. CHAIRMAN ROKEBERG asked about Section 7. SENATOR DONLEY said he supports the Ford language for Section 7. He explained that the difference is that the Ford language maintains the status quo for first party claimants, which he believes is a better consumer protection standard, and adopts the recommended standard [of reasonableness in fact and law] from the industry for the new third party claimants. Number 1077 CHAIRMAN ROKEBERG asked Senator Donley if he was saying that in Section 7, it was like a "low ball" offer. Number 1082 SENATOR DONLEY said that is right. What it [the existing law] does is protect first parties, he said, that is: It protects you from your insurance company offering you less than your claim is worth. You go to court and prove you're right, and you win, you get substantially more than what they offered you. Then, arguably, there is a possibility they violated the Unfair Claims Practices Act, and you could file a complaint with the Division, say, look, these guys made me go to court to collect this. They only offered me $10 and I got $20 when I went to court. And then the Division exercising its administrative and executive discretion, could decide whether or not they wanted to pursue enforcement action based on unfair claims practice. And what the bill does now is just extend that protection to third party claimants. What the two options the committee has here is whether to leave the existing law alone and just add this standard for third party or whether to the proposal from Mr. Lessmeier was to change the existing status quo and use this standard for both first and third. Number 1163 REPRESENTATIVE HALCRO said he always gets a little worried "when we start talking about the unsophisticated consumer. These are the same unsophisticated consumers who put us in office," he pointed out. "When you go to buy insurance, you know what you are buying. I understand your example with the earthquake and the fire, but you are not dealing with a faceless company. You are dealing with your local neighborhood agent." He asked how many states allow for the enforcement, the penalization of one single unfair practice. Number 1204 SENATOR DONLEY explained that the Division of Insurance had polled all states and asked them that question. The majority of the states that responded allow enforcement for single incidents. They include California, Connecticut, Florida, Idaho, Indiana, Kentucky, Maryland, Nebraska, Oregon, Pennsylvania, Rhode Island, Tennessee and Wisconsin. Number 1322 REPRESENTATIVE HALCRO asked about the case in which there is a legitimate dispute over the value, such as that of a car that had been wrecked. If the consumer goes to court and receives a settlement greater than what the insurance company had offered, does this mean the Director of Insurance is going to go after them? SENATOR DONLEY said the director is not going to waste the division's time. It would be possible to bring an action, but they [cases] are all subject to administrative process, and that administrative process is subject to appeal to the court. So it is going to be at the discretion of the enforcement officers just as it is with all of the other state agencies now. Number 1831 CHAIRMAN ROKEBERG [indisc.]. SENATOR DONLEY replied no. That is the safeguard here. The Division is the only entity that gets to enforce this, and anything the Division does is going to be filtered through the [administrative] process and also through due process. Number 1398 REPRESENTATIVE HALCRO asked if the law says now that there has to be a pattern of denying claims, why should the state be penalizing for one incident when there could be a legitimate complaint. Number 1447 SENATOR DONLEY countered, "Why should we not be enforcing the law when one instance of abuse of the law could ruin, devastate an Alaskan family? All it takes is one serious abuse by an insurance company to ruin a family, deny a claim and wipe them out." CHAIRMAN ROKEBERG asked, "[Indisc.] . . . I mean to have a cause of action [Indisc.] insured to protect their own interest?" Number 1465 SENATOR DONLEY said the family would not have a private cause of action. It could take them years of going through the court system, strung out on appeals for many years before they ever collected. "There are horror stories," he said, "about what happened to people when their medicals have been denied, when their homes have burned down and they have been denied insurance." CHAIRMAN ROKEBERG asked if there is not already due process for them to bring a cause of action against the insurer. SENATOR DONLEY said yes, they could bring a claim for the loss. CHAIRMAN ROKEBERG noted, "But this adds the ability of the commissioner to intercede on behalf of the insured, isn't that right?" SENATOR DONLEY said that is right, that it allows the commissioner to enforce individual violations of the Unfair Claims Practices Act. The intent is not really to win a claim for individuals; the intent is to make insurance companies follow the Unfair Claims Practices Act. "We start from that," he said: We shouldn't allow single bad acts and just say, "Well, they're not that important," because they can be very important. Let's go back to the idea or first compel a proof of a series? It is very difficult to prove a series, and the argument becomes, when is it a practice? You may hear today from representatives of the insurance industry, well, two can be a practice, but when they go to court, they're not going to admit that, they're going to fight that. They are going to say that a practice has to be more than two incidents. Then you have to have proof. Right now it is hard to develop data because everybody out there knows if it's just a single consumer complaint, you're wasting your time going to the Division of Insurance. So the Division is not getting the data coming in to even develop the case numbers to prove a pattern of bad acts because consumers are not coming forward in the volume they would if they knew they might be able to get some corrective action by [reporting] a single act. Number 1569 REPRESENTATIVE KEMPLEN asked if consumers are not coming forward, how do we know they're out there? SENATOR DONLEY said it is anecdotal evidence, "but I can tell you this. I have called people, attorneys who deal with insurance matters and asked for examples of clients going to the Division of Insurance and being told they couldn't be helped because it was a single issue." The attorneys told him they tell their clients not to bother, that they quit referring people to the Division of Insurance years ago because the Division couldn't do anything for them because they couldn't act on single acts. Number 1610 CHAIRMAN ROKEBERG added that, in fact, the Division does receive a number of complaints. He then mentioned that he was going to have to leave the meeting early to attend another meeting, and planned to turn over the gavel to Vice Chairman Halcro when he needed to leave. Number 1640 MICHAEL LESSMEIER, attorney, representing State Farm Insurance Company, came forward to testify. He said there has been a lot of work done on CSSB 177(L&C) in an effort to address Senator Donley's concerns, the Division's concerns, and the industry's concerns. He said he thinks, "We're not there yet. I think we're close. Despite the work that has been done there remains a fundamental lack of understanding about some of the important issues addressed by this bill." He said one has to do with the issue of dominant causation. It is a complicated issue, but the example Senator Donley gave of the earthquake causing the fire, the damage caused by the fire would be covered under State Farm's policy. He said he also believes that under most policies, the damage caused by the fire would be covered. Essentially, what this provision would do would be to take Alaska to join a minority of states. As far as he knows, only California and Washington have this dominant proximate cause language. That language would be new to Alaska and "most certainly would be litigate and litigated and litigated until we have substantial agreement and interpretation amongst the courts as to what that language really means." The way the law is now in Alaska is that if an insurer is going to exclude a risk, it has to be done in a crystal clear way that is meaningful to the lay person. CHAIRMAN ROKEBERG said, "That's where we have the litany of earthquake, riot, acts of God, et cetera, et cetera, et cetera." MR. LESSMEIER said he understood Senator Donley's concern, "which is a legitimate concern and I think one we all share, which is to meet the reasonable expectations of the insured." He continued: I am not sure that his language really accomplishes that, and I think it may well have a detrimental effect in terms of causing litigation over many different complicated issues where the law right now is at least reasonably clear and reasonably predictable. Basically, the law right now is that if an insurer clearly excludes a risk, and if the insurer uses clear language to say that if that excluded risk is a substantial factor in causing the loss, then the loss is not covered. It has to be very, very clear, and our Supreme Court has reiterated that over and over and over again, and has in some cases gone to rather surprising lengths to reiterate that proposition. So I think there is a fundamental disagreement there about as a matter of public policy what would be best for the citizens of the state. Number 1820 MR. LESSMEIER said the second issue over which there is some disagreement has to do with the role of the Division of Insurance and particularly in response to some of the questions raised by Representative Halcro. Right now, the Division keeps statistics of complaints. Number 1851 MR. LESSMEIER then provided some statistics related to insurance claims in Alaska: In 1998 State Farm had approximately 38,000 automobile claims. Of that number, State Farm paid a little over 30,000 [claims]. State Farm had approximately 7300 homeowner claims and paid approximately 5,000 of those claims. According to the Division's statistics, in 1997 the Division received 52 complaints for State Farm, and 43 for 1998. So that is 43 complaints out of approximately 45,000 claims handled. "That's not too bad," he said. "I would suggest that's pretty good." We don't know how many of those complaints are valid. And what I would say to you is that when you're in a business where you are making decisions about whether to pay or deny claims, that does not indicate that there is a significant problem. MR. LESSMEIER said that in cases that he is involved in, first party casees in which there is a dispute between an insurance company and the insured, the practice is to involve the Division of Insurance for purposes of leverage. They try to get the Division to take action so it affects the merits of the dispute. Usually, those claims involve disputes of fact or disputes of law that are appropriate for the court to decide. MR. LESSMEIER continued that in his experience, the Division has not wanted to get involved in those kinds of claims until the issue works its way through the court system, because there are legitimate disputes of fact where one person says one thing and the other person says another, and the Division is not in a position to resolve those kinds of disputes. In the first party situation, the consumers have a very powerful tool that is not affected by this legislation, he said. They have the ability to file a "bad faith" cause of action against an insurer, which gives them tremendous leverage because there is tremendous exposure every time an insurance company has to defend one of those cases. So in a first party situation, insurers that deny first party cases have to do so very, very carefully and should not do so unless there is a very good reason and there is an objective basis that they can point to in the evidence. Number 2018 MR. LESSMEIER then turned attention to the bill itself. One of the reasons State Farm opposes this legislation is because the company believes the Division already has the power to take action in individual acts. There are a number of provisions in the statutes that give the Division that power. The trade practice section of the Unfair Claims Practices Act does require a pattern of practice, but there are other statutory provisions that clearly give the Division the power to take action in the event that there is an individual act. Number 2056 CHAIRMAN ROKEBERG asked Mr. Lessmeier to cite those statutory provisions to the committee, although not necessarily at the moment. Also, he requested the case citation of the [indiscernible] case to which Mr. Lessmeier had referred. He then asked Mr. Lessmeier if he was comfortable with the Ford amendment. MR. LESSMEIER said he fears that it "gets us right back to the situation that Representative Halcro was talking about." He said he thought the Ford amendment was an attempt by Senator Donley to meet the concerns of the industry halfway, because the amendment does address the third party situation. But it doesn't address the first party situation, and there could well be a situation in the first party context where there is a reasonable basis in fact and in law for the denial of a claim. "The court disagrees, and so immediately when the court disagrees and the insurer loses, there is under the present language of this act a violation of the act," he said. Now Senator Donley's response is that it's then up to the discretion of the director then whether to take action or not, but the point is, there is a violation of the act, and the director certainly could take action. State Farm does not believe the director should have discretion if there is a good faith basis in fact and law. Number 2160 CHAIRMAN ROKEBERG observed, "By having the liability clear, you're actually backing up to the current statute, I think." Number 2173 MR. LESSMEIER said: There's no question that what we would be doing would be changing the status quo, and the reason we would be changing the status quo is because the status quo does not allow for the defense based on (inaudible) . . . interpretation of law and fact. And as long as we're changing this statutory scheme, we ought to correct that as well. If we agree that it is good public policy not to second-guess judgment reasonably based on fact and law, that applies equally in the first party situation and in the third party situation. CHAIRMAN ROKEBERG said it seemed that it would prevail throughout the entire section. MR. LESSMEIER said it should: Otherwise, no matter how reasonable your position is, if you lose, you've violated this act. And then it's up to the director to take action, and the director can take action, and I don't think you can second guess that action in a court of law if the act has been violated. You might be able to argue about the penalty, but you can't argue that you didn't violate the act. There's no excuse in here for reasonable interpretation of the law or the facts, and there should be. I don't think that anybody believes that we should be second guessing reasonable judgments of law or fact... I think the intent really is in a situation where there is no reasonable basis in law or fact, where there's an abuse of the power situation, and we don't have any problem with that. But when you're second guessing judgment, then that's where we do have a problem, and that applies equally in the third party as well as the first party situation. Number 2263 CHAIRMAN ROKEBERG asked if he was suggesting that the senator had taken the wrong approach to try to ameliorate the problem, "because he is using trade practices which were traditionally based on a pattern because they're practices rather than an isolated, discreet incident which could and should be investigated by the Division of Insurance and give rise to an individual cause of action also?" Number 2283 MR. LESSMEIER said he thinks there are a number of different ways of attacking the problem that the senator intends to attack. One of the ways to attack the problem is to give the director the authority to investigate an individual act. Another approach is to give the Division authority to investigate patterns or practices. "That was the approach that was originally adopted by Governor Hammond when he introduced this legislation back in the 1970s," Mr. Lessmeier said. "If you have time to look at the regulations that were written by the director to apply these practices, there were definitions that were promulgated as to what is an unfair practice or what is a pattern or practice. One of the definitions that was adopted was the repeated violation of a single practice without a reasonable explanation. In other words, if you do it once, it's not a violation, but if you do it a second time and you don't have a reasonable explanation, it's a violation." Number 2340 REPRESENTATIVE BRICE asked if in that instance, "can the person who got hit the first time come back on you?" MR. LESSMEIER said not under present law; there is no claim for bad faith under the present law, nor would there be under this one. The director would have the power under the existing law to take administrative action. He thinks the director has that power already under other provisions of the statute. Senator Donley's approach is one that some other states have adopted, the approach of allowing their director to take action in response to individual acts. MR. LESSMEIER testified that the National Association of Insurance Commissioners (NAIC) has updated the model act that was the source of Alaska's original act. The updated act allows action by directors of insurance for individual acts if the acts were committed flagrantly and in conscious disregard. Senator Donley has proposed something else, and there is a basis for what he has proposed. He also has been very careful to work with the industry to prevent a situation in which this statutory scheme by going from a trade practice to an individual act does not create a third party bad faith cause of action, "because to do that I think we all recognize would be disastrous for the state," he said. "In other states that have one that, costs of insurance have just skyrocketed. He's worked with us to try to ensure that that doesn't happen here." Number 2426 VICE CHAIRMAN HALCRO noted that Chairman Rokeberg, as previously announced, had left to attend another meeting and passed the gavel to Vice Chairman Halcro. VICE CHAIRMAN HALCRO asked Mr. Lessmeier if he was recalling correctly that there were 43 complaints filed in 1998. MR. LESSMEIER said that was correct according to records kept by the Division of Insurance. VICE CHAIRMAN HALCRO asked if that included the full range of complaints, irrespective of their nature. MR. LESSMEIER did not know. He said the Division's web page shows the number of complaints by company per year, and for the total industry per year. "They don't tell us how many of those complaints they believe are valid," he added. Number 2461 VICE CHAIRMAN HALCRO posed a hypothetical question: "Let's say there is a class action suit, and you're found guilty. How would this act affect a class action suit settlement? Would the director then be able to come and you'd be in violation of this act and be able to impose fines? MR. LESSMEIER said it was hard to answer that question in the abstract. TAPE 00-46, SIDE B MR. LESSMEIER continued, saying he thinks it is possible that if there were a class action lawsuit against an insurer, "that as a result of the finding in that class action, the director could probably investigate and take additional action. I think that is a possibility". Number 0055 BOB LOHR, Director, Division of Insurance, Department of Community and Economic Development, came forward to testify. He said the Division strongly supports CSSB 177(L&C), believing it would enhance insurance consumer protection in Alaska. The current mission statement of the Division is to protect and serve the state by developing, interpreting and enforcing the insurance statutes and regulations; to protect and educate the consumer, and to enhance the insurance business environment. He said the Division believes that each of the three prongs of the mission would be enhanced by adoption of this legislation. MR. LOHR said it is fairly clear that consumer protection is at the heart of the single act authority, and he believes that CSSB 177(L&C) would enhance the Division's ability to deal with the very limited number of cases in which there is "a truly bad act by an insurance company." He said he was not talking about the innocent mistake of a company, or even necessarily a series of mistakes. "If a company comes to us and can show that mistakes were made and that they were innocent in nature, we are not even going to go after that under the existing authority of the Division" he said, "because frankly, we don't have the time. There are bigger issues out there in the insurance world with which the Division needs to deal." Number 0136 MR. LOHR pointed out that in rare cases, a customer or a family is "truly put through the wringer" by a company. "It may be a combination of gross negligence or it may be actual intentional bad acts, but the bottom line is that it can leave a family devastated," he said. He gave an example: Valid claims were filed by a policy holder, a family, for $186,000 worth of medical claims in May and June, 1997. The treatment had been pre-certified. Six months later, the family was reimbursed for those expenses; the hospital was paid, but in the meantime, the family's credit rating had been affected and other costs were incurred because of the company's failure to timely pay the hospital bill. The company finally acknowledged that its case reviewer never notified the claims office that the claim had been certified as valid, so it was an internal mistake of the company. " Innocent? Well, maybe," Mr. Lohr said. "But the bottom line is that the customer was severely impacted. I can't say that would be a candidate for enforcement, but it would certainty be a candidate for investigation to determine more details about why the customer was put into that situation and what was done to remedy it afterwards." Number 0221 MR. LOHR said in a case like that, the Division would be less interested in fining the company than in requiring a prevention plan to avoid similar occurrences in the future, without having to wait for a pattern of practice. He continued: As Mr. Lessmeier indicated, under regulations the Division adopted under the current statute, one of the other standards is that one percent or more of the claims in a given year have to be found to be not valid, improperly handled by the company. If you took all of the complaints handled by the Division in a given year, and assumed they were all valid (which they are not), and that they were all against one company, it would not rise to anywhere near one percent of total claims. I would submit to you on that basis that that standard is effectively ineffective, it doesn't work. The multiple violations of the same standard without a reasonable explanation is closer to reality. It is closer to a real world standard. But it does not deal with the single serious violation of a consumer's rights, and that is what this section is talking about, I believe. Number 0273 MR. LOHR said he thinks that this would also address the third branch of the mission of the agency, and that is the insurance business environment, because "I don't think anyone would come to the table and testify in support of bad apples." He continued: The reason that we have a very strong effective, investigative unit within the Division of Insurance is because we take insurance fraud seriously. We do this both for claimant fraud, where somebody is just putting together a false claim for reimbursement, and we refer to the district attorney a number of those for prosecution every year. We also enforce fraud within companies, and that's more what we're talking about here. We have authority to investigate in any case in which we believe that is indicated, but we don't have authority to enforce for unfair claims for the single bad act, and that is what we are talking about here. I have said more about that than I will about the other provisions of the bill. I am not going to go for my half-hour that has become customary. Number 0318 MR. LOHR then addressed the proximate cause question. He said he wanted to acknowledge an innocent mistake by the Division of Insurance, which was that they used the example of earthquake causing a fire and whether or not that is covered. Upon further review, they determined that under the Insurance Services Office (ISO) standard policy language, the fire would not be an excluded cause coming from the earthquake. "That is our mistake; we take full responsibility for it, and we are doing what we can to correct the record on that," he said. That does not, however, lessen the need for language to address the issue, because once again, there are rare instances in which this chain of causation problem is going to lead to somebody being denied appropriate coverage. In that very limited number of circumstances, the Division believes that the change in the definition of concurrent causation is appropriate and necessary. While it is not of the magnitude to rise to affecting rates, in the Division's opinion, it is something that can really devastate a family. "So if there is a theme through this bill" he said, "it is looking out for those single horror stories, those worst case abuses, where a family is just left devastated because they either thought in good faith they had coverage or they were just really treated in a rotten fashion by a company. In either of those cases, I think that the Division's authority to enforce is important." Number 0395 REPRESENTATIVE BRICE asked if he could give the committee an accurate hypothetical example of the chain of causation scenario. Number 0408 MR. LOHR said there is a court case, Murray v. State Farm Insurance, a 1988 case in which the West Virginia Supreme Court considered the type of concurrent causation with contract language that CSSB 177(L&C) is designed to deal with. In that case, there was a high wall above the Murrays' house. The wall had been negligently designed originally, and then was maintained by the subsequent owner. As a result of the negligence, sandstone holding some large boulders in place gradually eroded away. The boulders fell through the air and through the roof of the Murrays' house, causing extensive damage. Fire officials turned off power to the home and condemned it. The policies involved covered damage resulting from negligence of third parties and falling objects, but not erosion or earth movement. The chain of causation was thus negligence, erosion and falling object. Because erosion, an excluded coverage, was in the chain, the insurer denied the claim. The court found that whether the proximate cause of the loss was negligence, erosion, or falling object was a question of fact for the jury. But the court found that concurrent causation language in the contract to be invalid as a matter of public policy because it was not consistent with the reasonable expectations of the insured. The court acknowledged Alaska's bonding case and criticized it, pointing out that our court suggested that the policy holder's reasonable expectations were more in line with being "a fervent hope usually engendered by a loss." Number 0499 MR. LOHR quoted from the Murray case record: Indeed, if we were to give full effect to the State Farm policy language excluding coverage, whenever an excluded peril is a contributing or aggravating factor in the lass, we would be giving insurance companies carte blanche to deny coverage in nearly all cases. Number 0519 VICE CHAIRMAN HALCRO asked Mr. Lohr if it was correct that the Division already has the ability to investigate, but does nothave the ability to enforce. MR. LOHR said that was correct with respect to unfair claims practices, for a single act. VICE CHAIRMAN HALCRO noted that in the example, the $186,000 [payment being delayed for six months] was resolved. The insurance company said it was more or less a clerical error. Has that company committed other such offenses? Number 0542 MR. LOHR said he did not believe so, which is why the Division thought it was an appropriate example. VICE CHAIRMAN HALCRO asked Mr. Lohr if at any time in the future, he might be levying fines or, as he had said the Division was simply going to use that as leverage to hopefully produce some form of corrective policy within the insurance organization. Number 0563 MR. LOHR believes the bill would grant authority to impose fines. However, as Senator Donley had indicated, doing that involves "the full-blown administrative due process within the Division with a hearing officer involved, with my review of that decision, and then, if necessary, if somebody feels aggrieved by that decision, appeal to Superior Court." But the way he would anticipate it working in most cases is that the Division would be trying to use this tool to prevent other consumers ending up in the same boat. The Division would do that is by requiring a company to submit a plan to show how there would be no recurrence. It might involve better training of the people that were involved, {or] looking at the notification procedure to see if there is something obvious about it that could be fixed. But if you take a company that does not even acknowledge wrongdoing and does not give the Division "the time of day with respect to a plan to fix it, I think in those cases we'd look at a fine," he said. "Or if we found a plan that made good sense on paper and simply wasn't implemented over a reasonable period of time, which we would try to specify as part of the plan, there again we would look at a fine to make the point that that's not OK to treat customers that way." Number 0620 VICE CHAIRMAN HALCRO asked if under current law, the people whose payment of $186,000 was strung out for six months would have the right to sue the insurance company. MR. LOHR said he would prefer to leave that question to the attorneys. He said there was an attorney from the Division who could try to address it. Number 0659 MR. LESSMEIER said the answer to the question is yes. In fact, he said: There have been some huge verdicts against [Aetna, Inc.], one of them here in Juneau, that although I think it was reduced by the federal district court judge who was hearing it, there was a punitive damage award of some $17 million against Aetna. There also was another case against Aetna in Anchorage that was tried just a couple of years ago where there was a punitive damage award for a delay in payment that ran in the millions of dollars. VICE CHAIRMAN HALCRO summarized that currently, the consumer would have the ability to bring a cause of action. MR. LESSMEIER concurred, and said he thought it was important that everybody understand that the cause of action would not be based on a violation of the act, but on the duty that the insurer owes its insured, independent of the act. Number 0716 JOHN GEORGE, representing the National Association of Independent Insurers (NAII), came forward to testify. He said Senator Donley had considered the proposed changes the NAII had put forward. "We have had a dialogue and there have been some significant improvements, and my clients want to acknowledge that," he said. MR. GEORGE continued: There is no law that you could write but what someone couldn't come up with an anecdotal story about how it doesn't work for a particular case. It is unfortunate that sometimes we write laws to fix a specific situation which can't fix everything. You try and get laws that kind of go down the middle and take the vast majority and there are going to be a few that fall outside the deal. In the past, the Division of Insurance when they found a single act and said boy this is bad we can't let that happen, would issue a cease and desist order that says, "Don't ever do that agin." The director just testified that they would hope to use this leverage to say, "OK, and you must come back with a plan of how you are going to fix it so it doesn't happen again, whether it be training or you're going to change your policy, or your going to pay cash instead of checks, whatever the fix is, I don't think that anyone would object to being brought to bear to yea we screwed up, we can't do it again, and we're going to have to fix it and this is what we are going to do. My clients are very concerned that one act could be considered a trade practice and we might find that the next director of insurance is not quite so benevolent and understanding, and might say boy I've got 'em now and I'm going for the mat." As long as reasonable people are interpreting the law whether it be the old law or the one proposed by Senator Donley, there probably isn't a lot to argue about. Bt we never know what the next guy is going to be like, and I think the Division has always when complaints came in used the standard of is there some basis, is the insurance company just kind of off the wall or did they have some basis for denying a claim or for offering $10,000 instead of $2 million that was asked, and I think they have to use that kind of standard. You can do virtually only do that after the fact; you can't do it before the fact because . . . Number 0848 MR. GEORGE continued: The Division does have a lot of almost coercive power. Insurance companies live in fear that the Director of Insurance is going to do something to them whether it be additional examinations or deny their rate and form filings, or whatever. And they are most anxious to comply with whatever it is, and if complying mens to come up with a plan to reorganize how they do things and fix it, I think that's a reasonable standard that we certainly could live with. So as long as it is benevolently applied, it doesn't matter if we have the new law or the old law. Our concern is that we just don't know how it's going to be applied in the future, and we'd like law therefore that allows us under the worst case scenario to be able to continue without draconian penalties. I can see after Director Lohr testified on his plan of action that I could see how maybe we could craft some language to go in here that we wouldn't necessarily call it a "trade practice," but on a single event, a company could be ordered to come up with this kind of a resolution. I think we could probably support that. Number 0970 MR. GEORGE said: The examples the director came up with in virtually all cases were health insurance claims, and you notice the health insurance people are not here, it's the property casualty people who are here today. And I guess we all agree that health insurance is a real different animal, that the claims are adjusted at a different level, by telephone and send the receipts in as opposed to when an adjuster goes out and actually looks at the property and analyzes the legal liability and that kind of thing. I don't know how the health insurance problems; that's a whole different can of worms. When the only three examples the Division could really come up with in Alaska were health insurance, I think it may indicate that that's a whole different kind of problem, but I still think the plan to come up with a resolution is a good idea. The director seemed to think that was an avenue he would like tot take on single cases, and I think that's something the industry could support as opposed to a $50,000 fine and those kind of penalties. Number 0986 SENATOR DONLEY said the only thing from the testimony he would like to clarify is that there is an opinion from the Attorney General's office saying that the director does not have the authority Mr. Lessmeier has suggested. "Based on his interpretation of some other section of the statutes, he believe the director has authority to act on individual acts," Senator Donley said, "but the administration and the Department of Law disagree with that analysis and believe the director does not have the authority to act, and since they are the ones that he has to take the advice from, he is subject to what the Department of Law says his powers are." He distributed copies of the attorney general's opinion. Number 1019 VICE CHAIRMAN HALCRO noted that the director stated in his testimony that he does have the ability to investigate, and if his desire is simply to persuade or to mandate that insurance companies come up with a corrective policy, couldn't that be done on a kind of a working relationship rather than giving him the ability to levy fines? Number 1043 SENATOR DONLEY said the director does have the ability to investigate. The Division can't do anything about it once they have investigated. The director doesn't have the authority to take corrective action regarding individual acts. If he did, "under this he could issue divisional bulletin saying here's something that's going on, we want you to not do this any more. As it is now, he would have to wait until there is a pattern develops and they can proved that there's a pattern before they can take that kind of action." Number 1072 MR. LOHR said he thought Senator Donley had accurately stated: . . . the record under AS 150 specifically which is one that State Farm earlier suggested did have single act authority. The attorney general's office found that it does not. The pattern of practice is something the Division really does need to be able to move right now and a simple investigation taken alone won't solve the problem. We need to have the teeth their somewhere to really get the attention. While I think that what Mr. George said that we do have the respect and the attention of industry is generally true, that may be far less so for the problem insurance company. Look what we have as two paradigms here. One is the rogue regulator, and I agree that could be a risk; and the other is the rogue insurance company. So far the movies have tended to focus on the rogue insurance company, not on the rogue regulator, and I think there is good reason for that. It is a much more plausible scenario, and I think given the opinion of the public about insurance. We want to keep the reputation of the industry as good as possible. One way to do that is by weeding out the problem cases early, dealing with the effectively. That involves teeth beyond simply the prevention plan that is our first approach, but it shouldn't stop there. Number 1137 SENATOR DONLEY noted that the company Mr. Lessmeier represents, State Farm, has one of the better records of claims as far as complaints in the state. "If you go to say Progressive Insurance {Progressive Mutual Insurance Company], the number of complaints is dramatically different," he said. "There is very different experience from company to company. He is correct; State Farm has an excellent record. Some of the other companies do not." [CSSB 177(L&C) was heard and held.] Number 1162 ADJOURNMENT There being no further business before the committee, the House Labor and Commerce Standing Committee meeting was adjourned at 5:45 p.m.