SENATE LABOR AND COMMERCE COMMITTEE  January 18, 2000 1:35 p.m. MEMBERS PRESENT  Senator Jerry Mackie, Chairman Senator Tim Kelly, Vice Chairman Senator Dave Donley Senator Lyman Hoffman MEMBERS ABSENT  Senator Loren Leman COMMITTEE CALENDAR  SENATE BILL NO. 177 "An Act relating to insurance trade practices; and providing for an effective date." -HEARD AND HELD SENATE BILL NO. 176 "An Act permitting a physical fitness facility or gymnasium to limit public accommodation to only males or only females." -SCHEDULED BUT NOT HEARD PREVIOUS SENATE COMMITTEE ACTION  SB 177 - No previous Senate action. SB 176 - See L&C minutes dated 1/13/00. WITNESS REGISTER  Bob Lohr Director, Division of Insurance Department of Community and Economic Development PO Box 110805 Juneau, AK 99811 POSITION STATEMENT: Supports SB 177 Michael Lessmeier State Farm Insurance 431 N. Franklin Juneau, AK 99801 POSITION STATEMENT: Opposes SB 177 John George National Association Independent Insurers 3328 Fritz Cove Road Juneau, AK 99801 POSITION STATEMENT: Commented on SB 177 Mike Ford Attorney, Legislative Legal and Research Services Terry Miller Legislative Office Building State Capitol Juneau, AK 99801 ACTION NARRATIVE  TAPE 00-02, SIDE A  Number 001 CHAIRMAN MACKIE called the Senate Labor and Commerce Committee meeting to order at 1:35 p.m. Present were Senators Hoffman, Donley, Tim Kelly, and Mackie, Chair. The first order of business to come before the committee was SB 176, however Chairman Mackie announced the prime sponsor was not ready to proceed, therefore the committee took up SB 177. SB 177-INSURANCE TRADE PRACTICES & ACTS  SENATOR DONLEY explained that SB 177 makes a series of reforms in the current Insurance Consumer Protection laws. The Division of Insurance (DI), under existing law, does not have the authority to protect individual consumers from individual unfair trade practices acts or violations of unfair acts by insurance companies. It only has the authority to intervene on behalf of consumers in Alaska if there is a pattern of unfair trade practices acts by insurance companies. SENATOR DONLEY referred to a handout that compares legislation in a number of different states and the Insurance Consumer Protection Act. Many states do have the authority to protect consumers from unfair trade practices acts but that protection is not available to Alaskan consumers. Nationally, more evidence is being put forward about the types of acts that insurance companies are performing to block legitimate claims. It is in the best interest of an insurance company to slow down the payment of claims given that insurance companies can make more money by investing claims while the company litigates them. Because insurance companies make a huge amount of their income from investments, it is becoming harder to get a fair claim settlement. Insurance companies are refusing to pay claims until claimants threaten to take them to court. The Division of Insurance should be able to step in when such acts occur. SENATOR DONLEY explained that the Alaska statutes require insurance companies to treat consumers fairly. SB 177 will empower the DI to protect consumers when it believes something is wrong. Most people believe the DI already has that power. People are discouraged when it comes to dealing with insurance companies and need protection from the DI. It is very difficult to actually prove a pattern of unfair trade practices acts by the insurance companies. SENATOR DONLEY noted Section 4 of SB 177 gives people who come forward with information to the director of DI immunity from liability. Section 5 applies to both first and third parties; exceptions are listed in Sections 7 and 11. This bill simply expands the protections of Sections 7 and 11 to protect third party claimants as well as first party claimants. First party is the relationship between the consumer and the insurance companies. A third party is someone that benefits from the insurance you buy, someone who has a claim against you. A policy holder's insurance company handles a claim that has a third party beneficiary. SENATOR DONLEY pointed out that existing law basically states that insurance companies cannot offer a claimant less than the amount the claim is actually worth because it is very hard to actually sue an insurance company. If that is appropriate for first parties then it should be made available for third parties as well. If the insurance company recognizes that a claim is worth a certain amount, it should be obligated to pay that amount. Number 686 CHAIRMAN MACKIE asked if the third party will have the right to sue the insurance company instead of the policy holder. He stated that under current law one cannot sue an insurance company - the only option is to sue the insured person. SENATOR DONLEY explained that a third party should not have to take a settlement offer from an insurance company that is less than the actual damages. The legislation only prohibits an insurance company from offering a lesser amount. Number 872 CHAIRMAN MACKIE asked Mr. Lohr if a third party can sue the insurance company directly for the damages owed. MR. BOB LOHR, Director of the Division of Insurance, replied that only a first party claimant has the right to sue an insurance company. Number 913 SENATOR DONLEY explained that SB 177 is aimed at avoiding abuse by insurance companies. It gives the power to DI to prevent insurance companies from offering lower amounts for claims to first and third party claimants without first finding a pattern of such activities. He noted the last section of the bill contains a definition of probable causation. It was added at the recommendation of the DI to clarify the meaning for insurance policies in Alaska. Consumers should not have to go through intricate legal arguments to get insurance companies to pay for damages. Insurance companies need to act with the DI so they can adjust their rates accordingly. Number 1240 CHAIRMAN MACKIE asked Senator Donley how often insurance companies give lesser amounts than the actual damages are worth and what led him to believe these changes are necessary. SENATOR DONLEY explained that he hears from a lot of people about this type of activity going on with insurance companies. Also, many national articles have appeared, specifically about Allstate, so it is not just a problem in Alaska. He thought that many claims are being handled fairly but there are cases in which an insurance company is not handling claims fairly because it knows that unless a pattern can be proven there will be no consequence. He repeated that most consumers in Alaska think they are protected. Number 1339 MR. LOHR stated the majority of insurers write small numbers of policies. Alaska's current insurance statute does not grant the private right of action to victims of abusive practices. Mr. Lohr referred to O.K. Lumber vs. Providence Washington Insurance Company, a 1988 Alaska Supreme Court case. MR. LOHR gave six examples of unfair claims settlement practices listed in AS 21.36.125: misrepresentation, advertising of guaranteed association membership, false advertising, listing, boycott coercion and intimidation, and premium financing. Mr. Lohr explained that a pattern must be committed so frequently as to commit malpractice. He said the DI pondered how often the pattern would have to occur before it can take action. DI worked on AS 21.36.125 between 1984 and 1989 and came to the conclusion that one percent or more of claims per year are bogus or are not handled properly. That is a very high threshold to trigger and, to his knowledge, it has not been triggered by any company in Alaska. DI believes that Section 125 is not set at a realistic level. The heart of the issue lies within the language of Section 125. It is not the role of the DI to penalize honest mistakes. Number 1648 CHAIRMAN MACKIE asked if SB 177 will give the DI the power to take action in just one case, instead of several. Number 1682 MR. LOHR said it would. The insurance consuming public and the insurer community would benefit by the change in this legislation. Mr. Lohr then referred to a case entitled, State Farm Insurance Company v. Bongen, in which a D-9 cat operated on behalf of Kodiak Electric to clear a right-of-way caused a land slide that damaged a house. Number 1850 SENATOR KELLY asked if the insurance company that insured the house was the same that insured the D-9 Cat and, if not, why the owners of the house did not sue the D-9 Cat owner. MR. LOHR explained that the D-9 Cat was operated on behalf of Kodiak Electric and was clearing a right-of-way on the top of a hill. SENATOR KELLY asked if anyone ever paid for damages caused to the house by the landslide. MR. LOHR said he is unsure, but there may have been collateral damages paid. SENATOR KELLY asked why the home owner did not sue Kodiak Electric. MR. LOHR named all the parties involved in the case and said the Supreme Court determined that the earth movement exclusion was unenforceable. SENATOR KELLY asked if the insurance policy contained a specific exclusion for earth movement. MR. LOHR said it did. CHAIRMAN MACKIE asked what SB 177 will do to insurance rates. MR. LOHR said he is unsure but the DI has authority over rate making for insurance companies. The DI did not see a dramatic reduction in 1996 when this kind of coverage was added to quite a few homeowner policies. Number 2007 SENATOR DONLEY explained contracts of adhesion. In 1996 insurance companies started adding this adhesion to policies which actually changed homeowners' policies. The rates were not affected, but the coverage was significantly reduced by the addition of this specific clause in the homeowner's policy. Now, more companies are adding this provision. Number 2095 MR. LOHR explained that the DI supports what Senator Donley said about not creating a private cause of action with respect to the language. CHAIRMAN MACKIE asked if the DI just needs the authority to cover the person trying to sue the insurance company, which it cannot do now. MR. LOHR said that is correct. SENATOR HOFFMAN asked Mr. Lohr what he envisions will happen to insurance rates if this legislation becomes law. MR. LOHR predicted that it will significantly impact insurance rates. SENATOR HOFFMAN asked if there would be a change in litigation. MR. LOHR said if there is a general ambiguity with respect to creating private cause of action he believes that could become a significant industry expense. Number 2216 CHAIRMAN MACKIE asked if this bill becomes law this year, what will happen to people who have the exclusion clause in their policies that may be in effect for two years. MR. LOHR said he believes that it would actually change within the policy and the policy would still be effective without writing a new one. MR. MIKE FORD, attorney with the Legal Services Division, explained that a statute deals with those specific issues. If the Legislature makes a change to insurance laws, the change does not go into effect until the policy is renewed. It does not effect an existing policy. CHAIRMAN MACKIE asked Mr. Ford if it is his interpretation that SB 177 will not have a third party lawsuit ability toward insurance companies in Alaska. MR. FORD stated that is correct. Number 2285 MR. MIKE LESSMEIER, State Farm Insurance Company, explained that he has concerns about the third party policy. If the committee decides to carry on with the bill, the language of the bill needs to be changed or clarified. Mr. Lessmeier gave some statistics on State Farm Insurance Company claims. TAPE 00-02, SIDE B  Number 2305 MR. LESSMEIER explained that according to the Division of Insurance web site's most recent data, in 1997 only 52 complaints were filed against State Farm. It does not say how many of those complaints resulted in action by the division. He said, "If we are looking at changing the statutory scheme in the third party context, we need to look at the power given to the Director of the Division of Insurance. I believe that there are already two statutes that give the division the authority to take action for a single act." Mr. Lessmeier read from AS 21.36.150. Procedures as to undefined practices. (a) If the director believes that a person engaged in the insurance business is engaging in this state in an unfair method of competition or in an unfair or deceptive act or practice in the conduct of the business that is not defined as being unfair or deceptive under this chapter, the director shall hold a hearing on the matter, if the director believes it would be in the public interest to do so after giving notice of the hearing and of the charges. Upon conclusion of the hearing the director shall make a written report of the findings of fact relative to the charges and serve a copy upon the person and any intervenor at the hearing. MR. LESSMEIER said the director has the authority to act. If the act is committed more than once the director does have the power to take action. He noted that one of the significant things about the duties that are created in terms of settlement has to do with duties that are owed to an insured by the insurer and the duties by the insurer to a third party. The Supreme Court ruled that the duties between these parties are not the same. The tort reform legislation that was passed in 1997 changed the law to provide significant incentives for both sides in litigation to take fair positions. It created significant penalties for a party who does not make a responsible litigation decision. MR. LESSMEIER stated it is not always in the best interest of an insurance company to pay what a suing party asks for. If that happens, the insured will have to pay more because the insurance premiums will ultimately go up. The case that the DI referred to was a State Farm case. The language that was stated in the State Farm case has been litigated to make it more clear and less ambiguous and the new language has been in effect for quite some time. Now, new language is proposed in SB 177, perhaps with good intentions, but it is totally different. If the new language is enacted, it will have to be litigated to find the boundaries. Mr. Lessmeier reminded the committee that this language appeared before the Supreme Court. He urged the committee not to overrule what the Supreme Court turned down. Number 1864 CHAIRMAN MACKIE asked Mr. Lessmeier what his major objection is to what Senator Donley is proposing. MR. LESSMEIER stated that what Senator Donley is proposing would create additional duties in the regulatory setting to a third party, duties that an insurance company does not have at this time. Mr. Lessmeier referred to section 5, page 2, of the bill. Number 1758 CHAIRMAN MACKIE asked if the new language would give a third party the power to take action if the case is not fairly handled. MR. LESSMEIER stated that they already have the power to do that in AS 21.36.15(a). The director clearly has the power to take action on a specific act. The definition of a business practice in the division's own regulations is much more restrictive than one percent of the claims. It is repeated without reasonable explanations. An insurance company can make a mistake once and the division will not sanction it, but the company cannot make the same mistake twice, or the division will sanction the company for it. SENATOR DONLEY asked Mr. Lessmeier to be a little more specific as to what his objection is to the bill. He asked why the Legislature should not make the language clear that the director has the authority to take action in a single case. MR. LESSMEIER referred to the O.K. Lumber case, ruled on by the Supreme Court and stated the director clearly has the power to take action for repeated violations of the specific standards without explanations. He asked why the director needs more specific power than what the division is granted. Number 1522 SENATOR KELLY asked if statistics are available for Allstate, State Farm, and Aetna on the website. MR. LESSMEIER gave some statistics on Allstate Insurance Company, State Farm Insurance Company, and Aetna Insurance Company. SENATOR DONLEY explained that the way the law is now, the director does not really have the authority to act. Number 1343 MR. JOHN GEORGE, National Association of Independent Insurers (NAII), said that he has a unique perspective because he was the Director for DI from 1984-1988. Mr. George said that not many people are actually going to agree with an insurance company on what the claim amount should be. It is hard for the director, or anyone else, to decide what claim is actually unfair. At some point some claims must be litigated, that is part of the process of insurance claims. The DI takes a lot of complaints, and they also resolve a lot of complaints. The DI may not think it has the authority that it needs. CHAIRMAN MACKIE asked the director of DI if he thinks he does have the power to act on a single case and, if he does not believe that, why. MR. LOHR referred to AS 21.36.125 and AS 21.36.150 and stated that he has talked to the Attorney General's Office who told the DI to take it easy when it comes to complaints that do not have a pattern of practice elements. SENATOR DONLEY referred to section 5 (7). Number 737 SENATOR KELLY asked if there has to be at least one case of bad faith. MR. LOHR said they find hundreds of cases each year that they deal with in a certain manner. The DI tries to nudge them in the right direction. Number 642 CHAIRMAN MACKIE stated it is hard to get a handle on all of the cases that get turned into the DI. He announced the committee will be holding this bill so that people can provide some factual information about the cases themselves. There being no further testimony, CHAIRMAN MACKIE announced SB 177 would be scheduled for a second hearing. He adjourned the meeting at 3:02 p.m.