Legislature(2003 - 2004)

03/05/2003 03:15 PM House L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 120 - SERVICE CONTRACT SALES ARE NOT INSURANCE                                                                             
Number 2379                                                                                                                     
CHAIR ANDERSON announced  that the final order  of business would                                                               
be HOUSE BILL  NO. 120, "An Act excluding  service contracts from                                                               
regulation as insurance; and providing for an effective date."                                                                  
TAPE 03-17, SIDE B                                                                                                            
Number 2370                                                                                                                     
REPRESENTATIVE  JOHN  COGHILL,   Alaska  State  Legislature,  the                                                               
sponsor of HB 120, said service  contracts are being treated as a                                                               
form  of  insurance  in  Alaska.     Service  contracts  are  not                                                               
insurance,  he  said, and  in  this  bill he  proposes  excluding                                                               
service contracts  from Title 21,  Insurance.  He pointed  to the                                                               
language on  page 1, Section 1,  line 5, of the  bill that states                                                               
in part,  "(e) This title  does not  apply to a  service contract                                                               
offered, issued".   He explained that the  service contract could                                                               
then  be  regulated through  other  existing  laws, for  example,                                                               
contractual  law  or  the Unfair  Trade  Practices  and  Consumer                                                               
Protection Act.                                                                                                                 
Number 2300                                                                                                                     
REPRESENTATIVE COGHILL said that  regulating service contracts as                                                               
insurance  requires bonding  and many  pages of  regulations.   A                                                               
service contract for  an appliance or a  computer doesn't involve                                                               
a risk  pool; it's  simply a  contract to  repair the  item under                                                               
certain circumstances.   He explained that he  considered a model                                                               
law used  by other states  but rejected that approach  because he                                                               
didn't want to  create more regulations and government.   He said                                                               
he  wants  to  clarify  that  service  contracts  should  not  be                                                               
regulated   under   insurance   law,   as  done   by   the   last                                                               
administration.   He said he's  looking for the  simple approach.                                                               
His  only  question  involved  whether   HB  120  should  include                                                               
automobile   service  contracts   that  are   covered  under   AS                                                               
45.25.620, Motor Vehicle Transactions.                                                                                          
Number 2210                                                                                                                     
CHAIR  ANDERSON noted  that the  sponsor's  bill packet  included                                                               
information from  the Department of Law  listing various contract                                                               
and consumer protection laws.                                                                                                   
REPRESENTATIVE  COGHILL gave  an example  of one  company, Sears,                                                               
which  sells  service  contracts   in  Alaska.    Its  subsidiary                                                               
company,  Sears   Protection  Company,  will  not   sell  service                                                               
contracts in Alaska  because the Division of  Insurance treats it                                                               
like an insurance company.                                                                                                      
Number 2146                                                                                                                     
STAN   RIDGEWAY,   Deputy   Director,  Division   of   Insurance,                                                               
Department of Community and  Economic Development, explained that                                                               
the  division  has been  dealing  with  complaints about  service                                                               
contracts, receiving several  calls per month.   This bill covers                                                               
service  contracts  on  property,  but the  division  gets  calls                                                               
regarding a multitude  of other types of  contracts, for example,                                                               
ambulance  service, towing  service,  and legal  services.   This                                                               
legislation could cull some of  the smaller service contracts for                                                               
which regulation might be overbearing.   The current bill is very                                                               
broad  and covers  extended warranties  and service  contracts on                                                               
all property  including automobiles, homes, and  home appliances.                                                               
He said  the bill appears to  be directed at items  like stereos,                                                               
home appliances, or  hot tubs, which range in value  from $200 to                                                               
$2,000.  These dollar amounts  are quite different from the those                                                               
involved in  a home  or automobile warranty.   He  said insurance                                                               
has  a very  broad and  complicated definition,  but simply  put,                                                               
it's a contract to pay or  provide a benefit for an unforeseeable                                                               
loss.   Service  contracts, including  those covered  by HB  120,                                                               
fall under that definition.                                                                                                     
Number 2045                                                                                                                     
MR. RIDGEWAY  said he'd like to  work with the sponsor  to see if                                                               
they can narrow the scope of  the bill and remove home warranties                                                               
and  automobile extended-service  contracts and  warranties.   He                                                               
recommended focusing  on what  the bill  intends to  cover, while                                                               
giving  some  of  the  higher dollar  items  and  more  confusing                                                               
contracts the  protection of insurance.   He said there  are lots                                                               
of hybrids in this field:   some insurance companies sell service                                                               
contracts,  and  some  automobile  insurance  covers  towing  and                                                               
rental  reimbursement.   He strongly  recommended clarifying  the                                                               
scope  of service  contracts up  front, keeping  the fiscal  note                                                               
low,  and meeting  the needs  of Sears  and other  companies that                                                               
would like to provide these contracts.                                                                                          
Number 2008                                                                                                                     
CHAIR ANDERSON asked Representative Coghill  if he would agree to                                                               
hold the bill over to work with the Division of Insurance.                                                                      
REPRESENTATIVE COGHILL said yes.                                                                                                
Number 1997                                                                                                                     
REPRESENTATIVE  ROKEBERG asked  Mr. Ridgeway  if home  warranties                                                               
come under the Division of Insurance's purview.                                                                                 
MR. RIDGEWAY said yes, they  do, but admitted upon questioning by                                                               
Representative Rokeberg that the  division has not been enforcing                                                               
the sale of home warranties by unlicensed sellers.                                                                              
REPRESENTATIVE ROKEBERG  asked Mr.  Ridgeway if his  division was                                                               
concerned  that consumers  wouldn't have  a regulatory  agency to                                                               
look  after their  interests if  service  contracts were  removed                                                               
from oversight by the Division of Insurance.                                                                                    
Number 1953                                                                                                                     
MR. RIDGEWAY responded  that the Division of Insurance  has a lot                                                               
of work  to do,  and HB  120 could help  clarify where  it should                                                               
direct its  efforts.  He  said it's not a  turf battle.   He said                                                               
the division  just wants to  clarify what a service  contract is,                                                               
for legal  services, ambulance, homeowners, automobiles  - all of                                                               
those areas.                                                                                                                    
REPRESENTATIVE   ROKEBERG  proposed   considering  a   change  in                                                               
language in HB  120, on page 1, line 8,  after "property", to add                                                               
"or services  unless sold as part  of an insurance product".   He                                                               
asked if  that language would  remove all service  contracts from                                                               
the department.   He asked if  Mr. Ridgeway would support  such a                                                               
Number 1899                                                                                                                     
MR. RIDGEWAY said  that one major issue is that  anyone who sells                                                               
service contracts should have an  insurance license.  Some people                                                               
who  sell extended  warranties for  automobile  dealers and  home                                                               
warranties do have  insurance licenses.  But  currently there are                                                               
many sellers of service contracts who  are not licensed.  He said                                                               
he's  not saying  that  they  need to  be  licensed; rather,  the                                                               
division wants to clarify it so that staff can deal with it.                                                                    
Number 1867                                                                                                                     
REPRESENTATIVE LYNN explained that  he's an associate broker with                                                               
a real estate company, and  occasionally he sells a home warranty                                                               
in  addition to  a  home.   He  asked if  he  needs an  insurance                                                               
license in addition to his real estate license.                                                                                 
MR.    RIDGEWAY   replied    that   currently    the   division's                                                               
interpretation of  the insurance  statute is  that yes,  he would                                                               
need an insurance license.                                                                                                      
REPRESENTATIVE ROKEBERG asked  what kind of fee  and paperwork is                                                               
involved in registering to sell insurance.                                                                                      
Number 1825                                                                                                                     
MR.  RIDGEWAY said  the cost  of an  insurance license  is around                                                               
$200.   The Motor  Vehicle Transactions law,  AS 45.25,  does not                                                               
exclude automobile  service contracts from  insurance regulation;                                                               
it simply tells people selling  these service contracts what kind                                                               
of  guidelines  they  have  to   follow.    He  referenced  model                                                               
legislation  by  the  NAIC  [National  Association  of  Insurance                                                               
Commissioners]  that   has  a   different  approach   to  service                                                               
contracts  that would  require smaller  companies  to purchase  a                                                               
bond or  reimbursable insurance that  would pay the  consumers in                                                               
case  the company  went  out of  business.   But,  he added,  the                                                               
division doesn't want to  go there.  He said he  wants to make it                                                               
as simple  as possible  to exempt these  types of  contracts from                                                               
the insurance code.                                                                                                             
Number 1765                                                                                                                     
REPRESENTATIVE  ROKEBERG  confirmed  Mr.  Ridgeway's  point  that                                                               
under  AS 45.25.620,  automobile service  contracts are  still an                                                               
insurance product  regulated by  the Division  of Insurance.   He                                                               
asked  Mr. Ridgeway  to explain  his statement  about a  required                                                               
bond for selling insurance.                                                                                                     
MR. RIDGEWAY said  the bond was an option available  if the state                                                               
adopted the NAIC model legislation for consumer protection.                                                                     
Number 1737                                                                                                                     
REPRESENTATIVE  DAHLSTROM confirmed  that an  insurance agent  or                                                               
broker must  also pass extensive  tests in order to  be licensed,                                                               
in addition to paying a fee.                                                                                                    
REPRESENTATIVE  LYNN   asked  how   many  licensed   real  estate                                                               
practitioners are in Alaska.                                                                                                    
REPRESENTATIVE  ROKEBERG said  there are  1,800 to  2,000 in  the                                                               
Anchorage municipality.                                                                                                         
REPRESENTATIVE  LYNN  wondered  what percentage  of  real  estate                                                               
agents in the  past have sold home warranties  along with selling                                                               
or listing the house.                                                                                                           
MR. RIDGEWAY reiterated  that this part of the  insurance code is                                                               
not being enforced.                                                                                                             
REPRESENTATIVE ROKEBERG expressed his  frustration with laws that                                                               
are not enforced.                                                                                                               
Number 1651                                                                                                                     
REPRESENTATIVE  GATTO asked  Mr.  Ridgeway to  comment about  the                                                               
recourse available to a consumer who  paid $100 for a lifetime of                                                               
oil changes  and then discovered  the company disappeared  a week                                                               
MR. RIDGEWAY said that is  an example of a maintenance agreement,                                                               
which is  not covered  under the  Division of  Insurance.   It is                                                               
different from a  service contract that is designed  to repair or                                                               
replace a product.  He added  that people tend to use these terms                                                               
interchangeably:    referring to  a  maintenance  agreement as  a                                                               
service  contract, and  a service  contract  as a  warranty.   He                                                               
explained  that warranties  are  not insurance.   Warranties  are                                                               
provided only by the manufacturer;  they come with the product at                                                               
no additional cost.                                                                                                             
Number 1581                                                                                                                     
REPRESENTATIVE  ROKEBERG said  the Division  of Insurance  had no                                                               
authority  to investigate  individual  consumer complaints  until                                                               
about three  years ago,  when the  legislature gave  the division                                                               
additional  authority.   Before this  change, the  division could                                                               
only act on a pattern of activity.   He asked Mr. Ridgeway if the                                                               
division's  ability  to  follow  up on  consumer  complaints  was                                                               
relatively limited.                                                                                                             
Number 1525                                                                                                                     
MR. RIDGEWAY  said there are  two separate issues.   The division                                                               
has a  section that deals  only with consumer complaints.   Those                                                               
complaints   are   usually   a   misunderstanding   between   the                                                               
policyholder and  the underwriter or  the agent.   Division staff                                                               
are  able to  resolve most  of these  complaints in  a relatively                                                               
short  period  of  time.    The division's  ability  to  look  at                                                               
practices  of the  insurance industry  is totally  different from                                                               
helping  a consumer  resolve  an issue.   If  HB  120 passed  and                                                               
service contracts  were excluded  from the  division's oversight,                                                               
then the  division's consumer protection  section would  not take                                                               
complaints about service contracts.                                                                                             
REPRESENTATIVE ROKEBERG  summarized two  key issues raised  in HB
120.  People  must be licensed to sell home  warranties, and auto                                                               
warranties  fall under  the  jurisdiction of  the  division.   He                                                               
noted that  Representative Coghill can  choose to deal  with only                                                               
certain  types  of service  contracts;  he  can either  limit  or                                                               
expand the scope of the bill.                                                                                                   
Number 1418                                                                                                                     
REPRESENTATIVE COGHILL said  again that he's willing  to hold the                                                               
bill over.   He  noted that  HB 120  does not  exclude automobile                                                               
warranties under  Title 45, Motor Vehicle  Transactions, and that                                                               
provision would remain as is.                                                                                                   
Number 1395                                                                                                                     
CHAIR ANDERSON announced that HB 120 would be held over.                                                                        

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