Legislature(2003 - 2004)

04/10/2003 10:10 AM House RLS

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 120-SERVICE CONTRACT SALES ARE NOT INSURANCE                                                                               
CHAIR ROKEBERG 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 0080                                                                                                                     
REPRESENTATIVE  McGUIRE  moved to  adopt  CSHB  120, Version  23-                                                               
LS0537\V, Ford, 4/8/03, as the  working document.  There being no                                                               
objection, Version V was before the committee.                                                                                  
Number 0125                                                                                                                     
RYNNIEVA  MOSS,  Staff  to Representative  John  Coghill,  Alaska                                                               
State   Legislature,  testified   on  behalf   of  the   sponsor,                                                               
Representative  Coghill.     Ms.  Moss  explained   that  HB  120                                                               
basically  exempts service  contracts from  state statute.   [The                                                               
Division of Insurance] was concerned  that some premium taxes now                                                               
collected for home  warranties would be lost.   Therefore, HB 120                                                               
was  amended such  that those  premium taxes  on home  warranties                                                               
will continue  to be  collected by  the division,  however, those                                                               
selling home warranties won't be  required to be licensed to sell                                                               
insurance.   She  noted that  there  are two  amendments for  the                                                               
committee to consider.  [Amendment 1] reads as follows:                                                                         
     Page 2, line 18:                                                                                                           
     DELETE: ", or a part of the household structure"                                                                           
     INSERT:  after "system,", insert "or"                                                                                      
     Line 18 would then read:                                                                                                   
     "limited to a household system or appliance."                                                                              
MS. MOSS explained  that [Amendment 1] should  solve the concerns                                                               
that  the  Division of  Insurance  has  with regard  to  conflict                                                               
between home service contracts and home warranties.                                                                             
Number 0248                                                                                                                     
REPRESENTATIVE McGUIRE  moved that the committee  adopt Amendment                                                               
1.  There being no objection, it was so ordered.                                                                                
MS. MOSS offered Amendment 2, which read:                                                                                       
     Page 2, line 19.                                                                                                           
     (3) is not a contract of insurance under Alaska law.                                                                       
MS. MOSS explained  that Amendment 2 adds the  above provision to                                                               
explain  that  under  Alaska  law  a  service  contract  isn't  a                                                               
contract of insurance.  In  response to Representative Berkowitz,                                                               
Ms.  Moss clarified  that  Amendment 2  would  add paragraph  (3)                                                               
under Section 1 and thus Section 2 would move down.                                                                             
REPRESENTATIVE McGUIRE  moved that the committee  adopt Amendment                                                               
REPRESENTATIVE BERKOWITZ  objected.  He  then inquired as  to the                                                               
[definition]of a  contract of insurance  and asked  what attaches                                                               
when a contract of insurance exists.                                                                                            
MS.  MOSS  informed  the  committee  that  [Amendment  2]  was  a                                                               
suggestion  from   an  attorney  who  is   dealing  with  service                                                               
contracts throughout the country.   She related her understanding                                                               
that  [Amendment 2]  attempts to  clarify that  service contracts                                                               
are   much  different   from  actual   contracts  of   insurance.                                                               
Insurance  covers  repair  or replacement  from  perils  such  as                                                               
fires,  earthquakes, et  cetera whereas  service contracts  cover                                                               
repair or replacement from faulty parts or normal wear and tear.                                                                
REPRESENTATIVE  COGHILL  pointed out  that  this  is an  explicit                                                               
Number 0439                                                                                                                     
REPRESENTATIVE BERKOWITZ  asked if there  is a problem  that this                                                               
legislation is attempting to rectify.                                                                                           
MS.  MOSS replied  yes.    She explained  that  there are  people                                                               
selling service  contracts who are  unaware of the fact  that the                                                               
Division of Insurance has, for  at least eight years, interpreted                                                               
service contracts  as insurance  and [the  seller] should  have a                                                               
license to sell  insurance.  When someone  purchases an appliance                                                               
or radio  from Fred Meyer  and the  cashier asks if  the consumer                                                               
wants an  extended warranty or  service contract,  the [business]                                                               
is actually violating state statute.                                                                                            
REPRESENTATIVE BERKOWITZ  inquired as to the  special protections                                                               
that  the consumer  would receive  when the  service contract  is                                                               
considered insurance.                                                                                                           
MS. MOSS  answered that  she wasn't sure  there were  any special                                                               
protections  because  the  only  folks  aware  that  the  service                                                               
contracts  are  supposed  to  be insurance  is  the  Division  of                                                               
Insurance.  In further response  to Representative Berkowitz, Ms.                                                               
Moss specified that  this problem was brought forward  by some of                                                               
the folks selling these service  contracts.  The sellers of these                                                               
service contracts don't  feel that they are  selling insurance or                                                               
covering the recovery of damages  from natural disasters or other                                                               
areas covered under insurance.                                                                                                  
CHAIR  ROKEBERG  interjected  that  this  legislation  is  for  a                                                               
service contract  that has legal  protections under  the contract                                                               
not as  insurance.   This legislation attempts  to draw  a bright                                                               
line between what's insurance and what's a contract obligation.                                                                 
MS.  MOSS, in  response  to  Representative Berkowitz,  explained                                                               
that the language in HB 120  is patterned after language that has                                                               
been  adopted by  about six  states.   This [delineation  between                                                               
service contracts and insurance] is a nationwide trend.                                                                         
REPRESENTATIVE BERKOWITZ said that he  was unclear with regard to                                                               
what the term  "contract of insurance" means.  As  a term of art,                                                               
"contract  of insurance"  could  include  product warranties,  he                                                               
MS. MOSS said  that perhaps the language [in  Amendment 2] should                                                               
say, "a  service contract is not  insurance in Alaska law."   She                                                               
noted that insurance is regulated by Title 21.                                                                                  
Number 0687                                                                                                                     
LINDA  HALL,  Director,  Division  of  Insurance,  Department  of                                                               
Community  & Economic  Development (DCED),  said that  the things                                                               
covered [in  this legislation] for  service contracts  are perils                                                               
that aren't typically  covered in an insurance  contract, such as                                                               
wear and tear,  mechanical failure, and power  surges.  Normally,                                                               
an insurance policy includes a list  of perils that is really the                                                               
insurance  contract and  those perils  are  different than  those                                                               
covered by the service contract.                                                                                                
REPRESENTATIVE BERKOWITZ  posed a  situation in which  a business                                                               
sought to  insure its computers  against power surges.   He asked                                                               
if there  would be a  conflict if  the business had  an insurance                                                               
contract with  an insurance company  for that purpose.   In other                                                               
words, would  the business  purchase a  service contract  from an                                                               
insurance company, he asked.                                                                                                    
MS. HALL replied no.   Generally, insurance specifically excludes                                                               
power  surges, she  noted.    She agreed  that  there is  nothing                                                               
excluding the business from  purchasing insurance [that includes]                                                               
power  surges.   However,  she  said  that  she wasn't  aware  of                                                               
insurance companies that sell coverage for power surges.                                                                        
REPRESENTATIVE  BERKOWITZ pointed  out  that  one could  purchase                                                               
insurance for  defects in materials, workmanship,  or normal wear                                                               
and  tear,  all of  which  he  characterized as  fairly  standard                                                               
[coverage under insurance].                                                                                                     
MS.  HALL pointed  out that  typically [coverage  for defects  in                                                               
materials,   workmanship,   or   normal  wear   and   tear]   are                                                               
specifically  excluded  in a  standard  insurance  policy.   Your                                                               
personal computer would be covered under the homeowner's policy.                                                                
REPRESENTATIVE BERKOWITZ  surmised that if a  service contract is                                                               
defined as [specified in HB 120],  would there be the risk that a                                                               
personal  computer   at  home  wouldn't  be   covered  under  the                                                               
homeowner's  insurance because  [the  personal  computer] is  now                                                               
excluded as part of the service contract.                                                                                       
MR. HALL answered  that she didn't believe that it  would have an                                                               
effect on changing exclusions on a homeowner's contract.                                                                        
The committee took an at-ease from 10:32 a.m. to 10:34 a.m.                                                                     
Number 0885                                                                                                                     
REPRESENTATIVE  BERKOWITZ informed  the committee  that insurance                                                               
is defined in  AS 21.90.900(23), which reads:   "(23) "insurance"                                                               
means a contract  whereby one undertakes to  indemnify another or                                                               
pay  or provide  a specified  or determinable  amount or  benefit                                                               
upon determinable contingencies".   He expressed concern that the                                                               
definition  of the  service contract  excludes  insurance and  if                                                               
there  is an  inconsistency  between the  definitions of  service                                                               
contract and insurance, there may be ambiguities in the law.                                                                    
CHAIR  ROKEBERG  related that  subsection  (e)  is basically  the                                                               
bill.    This  is  an  attempt  to define  what  is  and  is  not                                                               
insurance, he explained.                                                                                                        
REPRESENTATIVE  COGHILL remarked  that the  language proposed  in                                                               
[Amendment 2]  is really  to specify what  a service  contract is                                                               
CHAIR McGUIRE  related her initial  thought to insert  the phrase                                                               
"a service contract  is not a contract of  insurance under Alaska                                                               
law".  However, now she  realizes that the [language suggested in                                                               
Amendment  2]  does  modify the  earlier  definition  of  service                                                               
contract and thus is appropriate.   She noted that she maintained                                                               
her motion to adopt Amendment 2.                                                                                                
Number 0998                                                                                                                     
REPRESENTATIVE BERKOWITZ  withdrew his objection to  Amendment 2.                                                               
However, he  requested that the  department review  whether there                                                               
are legal  issues that would arise  from incompatible definitions                                                               
of service contracts and insurance.                                                                                             
REPRESENTATIVE COGHILL  assured the  committee that if  there are                                                               
incompatibilities he would work on [correcting them].                                                                           
There being no further objection, Amendment 2 was adopted.                                                                      
Number 1034                                                                                                                     
REPRESENTATIVE  KERTTULA expressed  concern  with  regard to  the                                                               
definition of  household structure  excluding insurance  for home                                                               
warranties.   She pointed out  that the language seems  broad and                                                               
makes her nervous.                                                                                                              
CHAIR ROKEBERG  pointed out that the  committee adopted Amendment                                                               
1, which should address her concern.                                                                                            
REPRESENTATIVE BERKOWITZ  highlighted that [with the  adoption of                                                               
Amendment 1] home  warranty now means a warranty  that covers the                                                               
entire home.                                                                                                                    
CHAIR ROKEBERG agreed.                                                                                                          
REPRESENTATIVE BERKOWITZ  surmised then  that [the  home warranty                                                               
wouldn't include] a roof, foundation, or floor.                                                                                 
CHAIR ROKEBERG  clarified that those  could be  service contracts                                                               
that stand alone or  could be part of a home  warranty.  The idea                                                               
is  to allow  home  warranties to  remain  as insurance  products                                                               
while the component parts [falls under] a service contract.                                                                     
REPRESENTATIVE BERKOWITZ related his  belief that the entire home                                                               
is an aggregate of its component parts.                                                                                         
REPRESENTATIVE KERTTULA  pointed out that the  language specifies                                                               
that a  service contract doesn't  include the home  warranty that                                                               
covers  the  entire home.    She  inquired  as to  the  statutory                                                               
definition of "household system."                                                                                               
REPRESENTATIVE  COGHILL  highlighted that  subparagraphs  (A)-(C)                                                               
[under Section 1]  describe what is intended  by service contract                                                               
and  thus would  be  the direction  for  determining the  systems                                                               
MS. MOSS noted  that there was some thought  to listing household                                                               
systems.   However, Legislative Legal  and Research  Services was                                                               
concerned that  such a list  might exclude something  [merely] by                                                               
not including it on the list.                                                                                                   
CHAIR  ROKEBERG remarked  that this  [legislation]  will rely  on                                                               
common sense.                                                                                                                   
Number 1296                                                                                                                     
REPRESENTATIVE  KERTTULA  said  she understood  the  intent,  but                                                               
pointed  out that  the  language on  page 2,  lines  7-8 sort  of                                                               
confuses it.  She offered to work with the sponsor.                                                                             
REPRESENTATIVE BERKOWITZ  offered to  work with the  sponsor with                                                               
regard  to  the  entire  home  being  an  aggregate  of  all  the                                                               
household systems.                                                                                                              
REPRESENTATIVE  COGHILL said  that  he was  willing to  entertain                                                               
discussions  on   these  matters.    However,   he  reminded  the                                                               
committee  that these  things will  be  addressed in  contractual                                                               
language.   [This legislation] attempts  to address what  will be                                                               
CHAIR McGUIRE noted that on  page 2, lines 26-27, "home warranty"                                                               
is  not  included  and  "home warranty"  does  have  a  statutory                                                               
Number 1906                                                                                                                     
REPRESENTATIVE McGUIRE  moved that the committee  adopt the House                                                               
Rules Standing Committee fiscal note.   There being no objection,                                                               
it was so ordered.                                                                                                              
REPRESENTATIVE  McGUIRE moved  to  report CSHB  120, Version  23-                                                               
LS0537\V,  Ford,  4/8/03,  as  amended   out  of  committee  with                                                               
individual  recommendations and  the  accompanying fiscal  notes.                                                               
There being  no objection,  CSHB 120(RLS)  was reported  from the                                                               
House Rules Standing Committee.                                                                                                 

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