Legislature(2003 - 2004)
03/12/2003 04:03 PM House L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 120-SERVICE CONTRACT SALES ARE NOT INSURANCE Number 0041 CHAIR ANDERSON announced that the first order of business would be HOUSE BILL NO. 120, "An Act excluding service contracts from regulation as insurance; and providing for an effective date." Number 0054 RYNNIEVA MOSS, Staff to Representative Jack Coghill, Alaska State Legislature, sponsor of HB 120, explained that this bill was held over from the March 5 meeting because of concerns expressed by Representatives Rokeberg, Lynn, and Senator Ralph Seekins [about businesses selling home warranties and auto service contracts without an insurance license]. Representative Rokeberg's suggested revision was sent to the bill drafter Mike Ford, Legislative Legal and Research Services. Ms. Moss relayed Mr. Ford's opinion that the language in [Version 23-LS0537\D] removed those types of service contracts from insurance regulation and that additional changes were unnecessary. She distributed a proposed amendment by the Division of Insurance, Department of Community and Economic Development, which set a maximum value on the purchase price of items whose service contracts would be exempted from the insurance code. She said the concerns of the Division of Insurance might best be addressed in separate legislation. Ms. Moss said Representative Coghill wants to pass a bill that legalizes the activities of many honest businessmen. Number 0181 REPRESENTATIVE ROKEBERG summarized the testimony from last week's meeting. He said that there are special provisions for automobile service contracts in current law. Home warranties that are sold by realtors and homebuilders fall under the purview of the insurance law. He asked if that was Ms. Moss's understanding of the current law. MS. MOSS replied that Mr. Ford said that the use of the word "property' in [Version D] of the bill would probably cover those concerns [by removing home warranties and auto service contracts from oversight by the Division of Insurance]. REPRESENTATIVE ROKEBERG asked to make clear for the record that automobiles and home warranties would be excluded from the purview of insurance under HB 120. MS. MOSS replied that Mr. Ford had said yes, they would be excluded. Number 0266 REPRESENTATIVE LYNN questioned what had changed since the last hearing in which the committee was told that realtors who sold home warranties were violating the insurance law. MS. MOSS replied that the bill drafter and the administration interpret the current law differently. REPRESENTATIVE LYNN asked which agency is going to interpret the law if he sells someone a home warranty. MS. MOSS said that is one reason for this legislation; Representative Coghill does not want the law interpreted on a case-by-case basis. She said he believes that service contracts should be excluded from the insurance title. Number 0326 REPRESENTATIVE ROKEBERG suggested getting a letter from Mr. Ford that states that the sellers of auto service contracts and home warranties are covered by this bill and thereby exempt from the insurance statute. He added that Mr. Ford should be asked whether any amendments to HB 120 are necessary. Number 0365 STAN RIDGEWAY, Deputy Director, Division of Insurance, Department of Community and Economic Development, addressed the questions raised by Representatives Rokeberg and Lynn. He agreed that HB 120 does exempt homeowner warranties and automobile service contracts. He said when he testified last week, he made a misstatement when he said the division does not regulate service contracts at this time. He explained that he should have said that the division does not regulate the aspect of a service contract that requires someone to have a license. This is because the only way the division knows if someone is selling insurance without a license is when a customer files a complaint against the seller. He said that most of the auto and homeowner contracts sold are above board. Number 0455 MR. RIDGEWAY explained that the division has rate and form filings from all the companies that sell home owner warranties and auto contracts; they all pay premium taxes to the State of Alaska. Some 24 insurance companies sell home owner warranties (which are listed as "other than auto type" warranties), and another 34 insurance companies sell mechanical breakdown insurance, for example, covering problems with home heating systems. The division lists 45 companies that sell vehicle service contracts, and 17 companies sell contracts specifically related to autos. He said that's 62 insurance companies (with some duplication between the two lists) that pay premium tax on auto-related products. He said if these products were exempted from the insurance code, HB 120 would have a significant financial impact because the Division of Insurance would lose these premium taxes. Mr. Ridgeway said he also researched automobile companies that have licenses to sell automobile insurance, a type of credit insurance. He has a 10-page list of new and used auto dealers that have filed for insurance licenses to sell credit and/or property insurance. He said some of those auto dealers have an appropriate license and some do not. Number 0584 MR. RIDGEWAY explained that after the legislature passed the Omnibus Insurance Bill last year, the division changed the licensing process and added a limited lines license that covers credit insurance. He suggested that the division add a new limited lines license that would cover service warranties, assuring that these were regulated by the state. This would allow people selling service contracts to register for a small fee. Number 0610 MR. RIDGEWAY described the division's proposed amendment to HB 120, which read: (e) This title does not apply to a service contract offered, issued for delivery, delivered, or renewed in this state where the tangible property has a purchase price of $8,000.00 or less, exclusive of sales tax. In this subsection, "tangible property" means household consumer goods; "service contract" means a contract or agreement to provide for the repair, replacement, or maintenance of property over a definite period of time in exchange for a fixed amount of money. MR. RIDGEWAY explained that the division's proposed amendment would classify tangible property that has a purchase price of $8,000 or less, exclusive of sales tax, and would define it as household consumer goods. This amendment would exempt service contracts on household consumer goods but would leave service contracts for homes, autos, ambulance services, and many other products currently interpreted as insurance under the Division of Insurance. Number 0669 REPRESENTATIVE LYNN asked Mr. Ridgeway about a realtor's liability for a customer's complaint about a home warranty. MR. RIDGEWAY replied that normally the dispute is between the company settling the claim and the customer, not necessarily the seller of the insurance. Under the current law, a realtor should have a license to sell that product; under HB 120, a realtor would be exempt from having to have a license to sell a home warranty. Number 0766 MR. RIDGEWAY, answering a question from Chair Anderson, said the department prepared an indeterminate fiscal note with the hope that the committee would accept the division's amendment. If it is not accepted, the department would have to research the cost of the legislation. The resulting fiscal note would be an estimate because companies combine their insurance products to calculate their premium taxes. REPRESENTATIVE ROKEBERG commented that Mr. Ridgeway has identified automobile businesses that are covered under AS 45.25.620 [Service contracts] as having to file with the Division of Insurance. MR. RIDGEWAY replied that according to the department's assistant attorney general, AS 45.25.620 requires a disclosure document if the business sells automobile service contracts. He said the statute does not exempt service contracts from the insurance code. REPRESENTATIVE ROKEBERG clarified that he was saying that it sounds as if most automobile companies are complying with the division's regulations. Number 0872 MR. RIDGEWAY replied that 90 percent of those businesses have a license to sell credit insurance, and a few have a license to sell property insurance. He said in that sense, the businesses are not complying with the insurance law when they sell service contracts. REPRESENTATIVE ROKEBERG asked the difference between credit insurance and property insurance as they relate to service contracts. MR. RIDGEWAY replied that credit insurance covers a loss if a person dies while they have and are paying a contract; it is a hybrid type of life insurance. He added that service contracts fall under the property and casualty insurance. He confirmed that credit insurance would not be affected by HB 120. Number 0929 MR. RIDGEWAY, upon questioning by Representative Rokeberg, explained that a few automobile dealers have licenses to sell service contracts. REPRESENTATIVE ROKEBERG asked why there would be a large fiscal note if most of the companies referred to earlier sell credit insurance and their payment of fees would not be affected by this bill. MR. RIDGEWAY replied that the fiscal note would be tied to exempting service contracts from the insurance code. The insurance companies that pay premium taxes - a percentage on the gross premiums sold in the state - would no longer have to pay those premium taxes. So the impact would be the loss of thousands and thousands of dollars. Number 1003 REPRESENTATIVE ROKEBERG replied that the committee would like to know the amount of that loss. He asked if there's only a few firms selling property insurance now, if they're registered and paying premium taxes, then how much premium tax would the division lose? Many firms aren't registered with the division [and therefore are not paying premium taxes]. Number 1019 MR. RIDGEWAY explained that there are two kinds of taxes: premium taxes and licensing fees. The people who sell the product for the auto dealers have to have a license; to get a license, they pay a fee. The insurance company that files forms with the division to sell products in Alaska pays the premium tax, not the auto dealer who sells the insurance policy. The insurance company pays a flat percentage on gross sales. For example, the individual State Farm insurance agent who sells a customer an auto policy does not pay premium taxes; State Farm pays those taxes. REPRESENTATIVE ROKEBERG said Mr. Ridgeway testified that there are very few people who are covered by this bill who are registered with the department. Why is the division going to lose a lot of premium tax? Number 1079 MR. RIDGEWAY explained that if service contracts are exempted, the insurance companies servicing them will no longer pay premium taxes. Every insurance company that files to sell a product in the state is paying the premium tax; the agent and the auto salesperson do not pay the premium tax. For every automobile service contract or home warranty that is sold, the division receives a premium tax. Even though the person selling the contract might not have a license to sell it, the division gets the premium tax on the contract. REPRESENTATIVE ROKEBERG repeated Mr. Ridgeway's testimony that the insurance company paying the premium tax is registered with the department. He asked why the division would have difficulty identifying the amount of lost premiums. He asked whether it is because the companies sell multiple products, making it hard to determine which line would be affected. Number 1135 MR. RIDGEWAY used State Farm to illustrate the difficulty in separating out [lost premium taxes on service contracts.] He said State Farm might sell service contract policies; the company also sells auto policies. When State Farm pays its premium taxes, the amount is calculated on gross premiums times 3 percent. If the companies broke those products out, a simple computer run could determine the amount of lost premiums. As it is, the division will have to estimate the premiums currently paid on service contracts. REPRESENTATIVE ROKEBERG asked about using the division's proposed amendment but leaving the auto service contracts intact and including home warranties in the bill. He asked if Mr. Ridgeway knew the dollar amount represented by the home warranty policies. Number 1193 MR. RIDGEWAY responded that he did not know the dollar amount of [home warranty premiums paid], but he said he does have information on the number of companies - roughly 60 - that have filed to sell those products and how many the division has approved. Some 34 companies sell contracts for mechanical breakdowns [on homes], and 24 companies sell contracts for insurance other than auto, which is home warranties. He confirmed that a mechanical breakdown could include an item such as a boiler. MR. RIDGEWAY said the division wants to preserve the premium tax because it is the third or fourth largest revenue producer for the state. He said the committee's concern about licensing real estate agents and automobile salesman is a issue separate from the state receiving the premium tax. With this proposed legislation, the state exempts all of those companies from a premium tax. Number 1293 REPRESENTATIVE ROKEBERG explored the solution of specifically exempting businesses from getting an insurance license to sell home warranties. He asked if that would avoid the loss of the premium tax. MR. RIDGEWAY said that is correct. REPRESENTATIVE ROKEBERG suggested exempting automobile dealers from the requirement to get a license to sell auto policies and asked Mr. Ridgeway's opinion. MR. RIDGEWAY confirmed that [automobile dealers] would be excluded from a licensing fee but the insurance companies would still pay the premium tax. REPRESENTATIVE ROKEBERG asked why the division's proposed amendment included the figure of "$8,000.00 or less". Number 1356 MR. RIDGEWAY explained that the amendment was directed at consumer products. He said his understanding of the intent of the bill was to exempt products like TVs, home appliances, and hot tubs from the insurance code. A lot of retail dealers sell service contracts with their products. He said the bill is very broad as written, and the division was not sure whether the sponsor and the committee understood how broad it was. REPRESENTATIVE CRAWFORD asked Representative Rokeberg if he objects to the division's proposed amendment. He said it gives the division quite a bit of leeway on service contracts, with the $8,000 ceiling. REPRESENTATIVE ROKEBERG suggested he address the question to the sponsor of the bill. Number 1458 CHAIR ANDERSON turned the gavel over to Vice Chair Lynn. MS. MOSS said there is a philosophical difference here about service contracts versus credit insurance. She said credit insurance is clearly an insurance; it's insuring a risk that somebody's going to die and the person is going to leave the family with the debt of a new vehicle, for example. A service contract, however, is tied directly to property; an auto is property, a house is property. Putting a value limit of $8,000 would probably exclude some home heating systems in Alaska, most cars in decent running condition, and vacuum systems in a new home. If the bill is amended with a dollar amount, she said $8,000 is pretty low. And the $8,000 figure would tie many service contracts back into the insurance provisions. Number 1546 REPRESENTATIVE CRAWFORD asked whether it was the sponsor's intention to exempt these insurance companies from paying their premium tax. MS. MOSS replied no, she is not convinced that's going to happen. She said that there's very few auto sales companies in the state that realize that they're supposed to be licensed. She said she doesn't think the revenue lost is going to be that significant. She also said the Division of Insurance is spending a lot of manpower deciding, case by case, whether somebody is supposed to have an insurance license to be selling service contracts. She estimated that [the benefit of] relieving staff from making piece-meal decisions would outweigh any loss of premium tax revenue incurred. Number 1591 REPRESENTATIVE CRAWFORD asked whether the sponsor favors changes in HB 120 that would exempt these businesses from licensure but would require the insurance companies to continue paying their premium taxes. MS. MOSS replied that the sponsor has not discussed this possibility with the bill drafter, but he could do so. She said this bill excludes the premium tax on service contracts, which the division has admitted is insignificant at this point. Number 1647 REPRESENTATIVE ROKEBERG commented that too many amendments might trigger a fiscal note, which could be a good way of getting the lost premium tax figure from the Division of Insurance. He pondered using the division's suggested amendment but modifying the purchase price to a figure that meets the sponsor's approval. He considered further amending the bill to exclude home warranty sales, which would force the department to determine the true amount of the premium tax loss. He also mentioned excluding automobile companies from the provisions of the bill. He asked Ms. Moss if that's a good approach - triggering a fiscal note and moving the bill on to the House finance committee. Number 1709 MS. MOSS replied that she thinks that approach would work. She noted that Representative Coghill had discussed a dollar amount of $20,000, not $8,000, with the Division of Insurance. She cautioned that $20,000 limit might buy a decent used car, but there are very few new cars that can be bought for $20,000. She said $8,000 is too low a figure. REPRESENTATIVE ROKEBERG asked Ms. Moss how the sponsor would feel about the committee adding amendments that excluded home warranties and the automobile companies, thereby triggering a fiscal note. MS. MOSS said Representative Rokeberg has a legitimate suggestion to get the bill to the House finance committee so this issue can be resolved. She said she does not think its going to attract a big fiscal note, but Representative Coghill would be willing to amend it with a larger purchase price than $8,000 and send it to finance committee to have a discussion on the fiscal impact. Number 1744 MS. MOSS, in reply to a question from Vice Chair Lynn, said that if a bill triggers a fiscal note, when it is read across the floor, it would be referred to the finance committee where a hearing would be scheduled. REPRESENTATIVE ROKEBERG suggested using the Division of Insurance's amendment but replacing the $8,000 with $20,000. REPRESENTATIVE CRAWFORD pointed out that the $8,000 amount served the purpose of limiting the bill to service contracts that cover consumer goods; he said he didn't think that the bill was intended to include automobiles and other high figure items. MS. MOSS said HB 120 is intended to separate service contracts on property from insurance; the sponsor views them as two different things, regardless of the value of the property. She said Representative Coghill is compromising because he perceives a policy on an automobile to be a service contract on a piece of property, regardless of whether the property costs $20,000 or $50,000. With a service contract, there is no real risk tied to a financial disaster; something on the piece of property becomes dysfunctional for some reason and the seller of the service contract agrees to replace it or repair it. Number 1850 REPRESENTATIVE ROKEBERG moved to adopt Conceptual Amendment 1, which read, Page 1, line 6, after "state" Insert "where the tangible property has a purchase price of $20,000 or less, exclusive of sales tax. In this subsection, 'tangible property' means household consumer goods." There being no objection, it was so ordered. Number 1866 REPRESENTATIVE ROKEBERG moved Conceptual Amendment 2, which read, Page 1, line 5, after "service contract" Insert: ", or home warranties" REPRESENTATIVE ROKEBERG explained the purpose of the amendment was to exclude the sale of home warranties from the purview of the Department of Community and Economic Development. He said according to Mr. Ridgeway's testimony, such an amendment would require the department to describe any cuts to premium taxes, thereby tripping a fiscal note which would require a referral to the House finance committee. Number 1930 CHAIR LYNN asked whether there was any objection to adopting Conceptual Amendment 2. There being none, it was so ordered. REPRESENTATIVE ROKEBERG discussed another possible amendment that would exclude motor vehicle sales activity from the bill, leaving it under the purview of the division. MS. MOSS replied that she couldn't answer for Representative Coghill because it was a new concept. She added that the Senate intends to exempt motor vehicle [service contracts from insurance regulation]. REPRESENTATIVE ROKEBERG said in his proposed third conceptual amendment, the motor vehicle activities would be exempt from the provisions of HB 120. He said he doesn't intend to delete subsection (e) but wants to add a new subsection (f). Number 2029 MS. MOSS proposed revising the language drafted by the Division of Insurance. On line , a period would be placed after the words "means household consumer goods". She suggested adding the words "In this subsection, 'service contract' means" and then continue with the rest of the language in HB 120's subsection (e). She repeated her wording at the request of Vice Chair Lynn and Representative Rokeberg. She explained that all the language in HB 120 would consist of subsection (e). Number 2105 REPRESENTATIVE ROKEBERG moved to adopt Conceptual Amendment 3, as follows: Page 1, line 8, after "money." Add: "Motor vehicle sales and activities are excluded from this subsection." MS. MOSS asked for clarification. She said that if motor vehicle activities and sales are excluded from subsection (e) of the bill, that puts them back within Title 21, Insurance. REPRESENTATIVE ROKEBERG confirmed that's what the committee wants to do because that's the status quo. MS. MOSS said that the language leaving motor vehicle service contracts out of the bill would probably be amended in the Senate. She said if the committee excludes motor vehicle contracts, then they would remain under the regulation of insurance statutes. She said it's a matter of opinion [about whether motor vehicle service contracts are regulated by the Division of Insurance], and it's part of the reason for this legislation. Number 2185 REPRESENTATIVE ROKEBERG said he still wanted to exclude the motor vehicle sales from this legislation. MS. MOSS asked for clarification about whether Representative Rokeberg would exclude motor vehicles over the value of $20,000. REPRESENTATIVE ROKEBERG said the intention of Conceptual Amendment 3 is to maintain the current status [with motor vehicle sales of any amount] so there is oversight by the Division of Insurance, with the hopes of diminishing the size of the fiscal note. He said motor vehicles appear to be the largest area of premium tax impact. He suggested that automobile dealers would like to maintain the status quo. Number 2222 REPRESENTATIVE DAHLSTROM asked for clarification on where home warranties fall [in terms of regulation and consumer protection]. MS. MOSS said that a list of statutes that cover state contract law was included in the bill packet last week. Number 2240 REPRESENTATIVE GATTO said he was too confused to vote on this amendment. He suggested that the amendment or the bill be rewritten so that the language is clearer. MS. MOSS suggested that the committee adopt Conceptual Amendment 3 and then hear the committee's next bill. Staff could write up the three conceptual amendments so the committee could see [later this afternoon] the bill's exact language. Number 2290 VICE CHAIR LYNN, asked if there were any objections to adopting Conceptual Amendment 3. There being no objection, it was so ordered. REPRESENTATIVE ROKEBERG clarified that Conceptual Amendment 3 excluded vehicle sales from subsection (e), maintaining the status quo, continuing oversight by the Division of Insurance. Conceptual Amendment 2 excluded home warranties [from oversight by the Division of Insurance]. Conceptual Amendment 1 excluded any service contracts up to $20,000. REPRESENTATIVE GATTO said this bill needs to be read and understood by ordinary people. He said his concern is that people will read these exclusions and violate the law unknowingly or get around the law deliberately. Number 2341 VICE CHAIR LYNN ordered HB 120 held over until the committee could see the rewritten paragraph. REPRESENTATIVE CRAWFORD confirmed that Conceptual Amendment 3 passed without objection.