The Committee on Commerce and Labor was called to order at 3:45 p.m., on Monday, April 5, 1999. Chairman Barbara Buckley presided in Room 3142 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All Exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Ms. Barbara Buckley, Chairman

Mr. Richard Perkins, Vice Chairman

Mr. Morse Arberry, Jr.

Mr. Bob Beers

Ms. Merle Berman

Mr. Joe Dini, Jr.

Mrs. Jan Evans

Ms. Chris Giunchigliani

Mr. Lynn Hettrick

Mr. David Humke

Mr. Dennis Nolan

Mr. David Parks

Mrs. Gene Segerblom

COMMITTEE MEMBERS ABSENT:

Mr. David Goldwater, Excused

GUEST LEGISLATORS PRESENT:

Assemblyman John Lee, Assembly District 3

STAFF MEMBERS PRESENT:

OTHERS PRESENT:

Following roll, Chairman Buckley opened the hearing on A.B. 673.

Samuel P. McMullen, representing the Retail Association of Nevada introduced Mary Lau, Executive Director, Retail Association of Nevada. He noted the association was the requester and sponsor of A.B. 673. Mr. McMullen then introduced John Dickson, Attorney, Service Contract Industry Council.

Mr. McMullen explained A.B. 673 was an opportunity for the state to study the issue of whether, and under what circumstances, service contracts should be considered and passed. The association tried to work closely with the Division of Insurance because the issue was one the department had to consider in terms of the offering of insurance. In addition, the area was one the association thought could benefit from rules, regulations, standards, and restrictions that would be common across the board.

Mr. Dickson explained the Service Contract Industry Council was a national trade association made up of manufacturers, retailers, insurance companies, and third party administrators. The council covered all facets of the service contract industry. He noted A.B. 673 would require members of the council to come forward and be regulated. Under A.B. 673, members would be required to provide information and comply with regulations with which they previously did not have to comply. The council sought the regulations because of regulatory certainty. Every state had a broad definition of the term insurance. Some states took service contracts and swept them into the realm of insurance. The Division of Insurance had done such with some service contracts. They were told service contracts offered by manufacturers of products or sellers of products would not be considered insurance in the State of Nevada, but all other service contracts probably would. The Division of Insurance would make the determination on a case-by-case basis.

Regulatory certainty was necessary because if the industry was regulated as an insurance company, the regulations became too burdensome and denied consumers service contract options enjoyed in other states. Administrators or those involved with third party administrators would like to compete on the same level playing field as others in the industry.

Another reason the council sought the regulation was to set industry standards. In the past, there were a number of large insolvencies. Some of the insolvencies involved situations where service contracts were sold by manufacturers or retailers. The most notable insolvency involved "Crazy Eddies" in New York where approximately $10 million was absconded by the owner of the business leaving thousands of consumers without service contracts. The result was chilling and affected all bona fide operators in the industry.

A.B. 673 was based on a model adopted by the National Association of Insurance Commissioners (NAIC). Providers had to register with the state. In addition they had to submit information, such as telling the state who they were. As part of the registration, providers had to demonstrate they had the financial responsibility to back their contracts. The bill provided a number of methods for such demonstration, which were a net worth in excess of
$100 million, the purchase of an insurance policy covering 100 percent of obligations, a reserve account, which was maintained, as well as a deposit placed with the department for use in the event the business defaulted with any of the service contract obligations.

Section 19 considered consumer disclosures, which detailed the contents that must appear in a service contract. The disclosures in A.B. 673 closely tracked those developed by the National Association of Insurance Commissioners and were currently in use in a number of states.

There were a number points with which a service contract company had to comply under the act. A copy of the contract and a receipt had to be provided to the consumer. In addition certain records had to be maintained and be open to the Commissioner of Insurance for inspection.

The bill also had an enforcement provision allowing the Division of Insurance to take regulatory action against providers. The enforcement provisions of the act were set forth in sections 24 and 25 and were essentially carried out in the same manner that the Division of Insurance enforced the insurance code against authorized insurance companies. Existing insurance code regulations would be used to enforce the provisions of the act.

Mr. McMullen noted automobile dealers indicated they currently were authorized to act in such a manner under a construct developed through the Division of Insurance and would like to continue to operate under such a construct and not be regulated by A.B. 673. In the proposed amendment (Exhibit C), they were exempted. The Division of Insurance reviewed the amendment and believed it was acceptable.

Mr. Dickson referred to page 1 of Exhibit C amending the definition of administrator. As originally drafted, the term administrator included any person who carried out the terms of a service contract. He noted an administrator was not the individual who would carry out the terms of service contracts. The person who did such would be the one who repaired the covered product. The administrator was the one who managed the program behind the scenes. Administrators were not contractually bound to provide the service but made filings with the state, oversaw the accounting of the program to ensure financial standards were met, and ensured the provider met obligations.

Mr. McMullen said for simplicity of regulation they attempted to ensure the provider, as the obligor, was the "one stop shop." The administrator’s activities were the responsibility of the provider. They were responsible for their administrator’s actions and the Division of Insurance needed to go to the provider and inform them they had a complaint, which would allow for clarification of the problem.

Mr. Dickson explained the second change in the bill was on page 1, lines 2 through 5 of Exhibit C. The change would delete the definition of the term "issue." Issue, as used in the act, was not a definable term. Limiting the term "issue," in the manner done in the bill, excluded a number of other avenues for delivery of service contracts or for the way providers would do business in the state. They thought there was a common understanding of the term, and the definition in the bill did not do it justice.

The term liability insurance needed to be clarified to reference contractual liability insurance. Liability was guaranteed under service contracts. In addition, the substance of the definition was changed to clarify the two types of contractual liability insurance that were authorized. There could be contractual liability insurance that provided for coverage in the event of a provider’s nonperformance. Such meant if a provider did not perform on a claim within
60 days, a claim could be made with the insurance who was bound to provide the service purchased under the service contract. Another type of reimbursement insurance policy provided coverage to the provider whenever the provider contacted the reimbursement insurer for coverage. If a claim was made with a provider, the provider could decide to have the reimbursement insurer pay the claim. If the provider failed to perform, the insurance company was still bound.

In section 10 of Exhibit C on lines 2 through15, the words "a separately stated" were inserted. The change was technical to specify what a service contract was.

Lines 2 through 28 of section 11 in Exhibit C referenced the automobile dealers and said, "a service contract sold or offered for sale by a vehicle dealer on vehicles sold by the dealer if the dealer is licensed pursuant to NRS Title 43, Chapter 482.325." The language tightened the exemption to apply only to service contracts issued by the manufacturer or the actual automobile dealer, which would require third party automobile dealers to register.

The changes in sections 12, 13, and 14 of Exhibit C were technical in nature.

Mr. McMullen noted the above changes in sections 12, 13, and 14 were enacted to bring the language closer to what was proposed in the bill draft request.

Mr. Dickson said the same was for section 16.

In section 19, there were several changes made to disclosures required in the service contract. The first was to insert a new subparagraph requiring a service contract to indicate it was backed by the full faith and credit of the service contract provider if the contract was not insured. Such brought the act into conformity with the NAIC Model Act.

Subparagraph (d) of section 19 was changed in light of privacy concerns. There were a number of situations where consumers would purchase service contracts but not want to provide their name or other personal information. In such a situation, they tracked the service contract by a unique contract number. Such would eliminate the need to obtain the name and address of the consumer.

Subparagraph (e) of section 19 allowed for printing the price of the service contract on the contract at the time of the contract sale. The division wanted an amendment that said, "the purchase price should also be determined pursuant to a schedule of fees established by a provider." The industry did not oppose the amendment.

Mr. McMullen noted Exhibit D listed two additional amendments.

Mr. Dickson explained the remainder of the changes in Exhibit C, section 19, beginning subparagraph (h) and continuing through subparagraph (m) brought the language into conformity as originally agreed with the division.

As the bill came out of the bill drafter’s office, it required a copy of the service contract be provided to the consumer within 15 days. Such was changed to state a copy of the service contract be provided to the consumer within a reasonable period of time. Typically the seller sent the service contracts to the administrator once a month. The administrator then processed contracts and mailed them to the consumers. The process could not be accomplished in 15 days in all instances. At the point of sale, the consumer received the product and had a receipt for their purchase. In addition, the consumer typically received a copy of the terms and conditions of the service contract. Most service contracts did not take effect until after the manufactures warranty expired. For the period of time the consumer was without the actual contract, they were still covered under the manufacturer’s warranty.

In addition, there was a "free look" provision. Once the consumer received their contract, they still had the ability to cancel the contract and receive a complete refund if they changed their mind about their purchase. The consumer had
20 days to make such a decision upon receipt of the service contract.

Chairman Buckley noted testimony that the bill was based on the NAIC Model Act. She asked if there was information available as to how the bill differed and the rationale for the difference from the act.

Mr. Dickson did not have written information but explained the council went forward in about six different jurisdictions with the bill. Originally they started with the NAIC model in Alabama, and there were concerns raised with the NAIC language. Some of the NAIC language was nonsensical when the model was viewed in its entirety.

Chairman Buckley asked Mr. Dickson to present the above information in writing before the committee voted on the bill. A.B. 675 was a large bill with major policy steps, and the information in writing would provide additional comfort for the committee. She asked why the council wanted to be regulated. Most individuals sought to be released from regulation. Chairman Buckley inquired as to how the regulation benefited the industry.

Mr. Dickson sought regulatory certainty to sell their product in Nevada. Currently Nevada had a broad definition of the term insurance, which was common for most states with NAIC language in their insurance code. There was concern that products sold would be swept into the definition. The Division of Insurance determined a few types of service contracts were actually insurance, as the insurance code was drafted, because there was no service contract regulation in place. Regulations placed on insurance companies were onerous. In order to qualify as an insurance company, very high standards had to be met. The standards were so high they acted as a barrier to service contract providers acting in the state.

Another reason they desired to see the regulation pass was for consumer protection. He again referenced "Crazy Eddies" in New York and noted when they went out of business, the regulators clamped down on the sale of service contracts, and consumers did not want to purchase them. The chill in the industry lasted for a number of years, and the council thought the standards put forward in the bill would keep the "bad actors" out of the industry and allow bona fide providers to operate in the state.

Chairman Buckley asked for an example of the most typically offered service contract in the State of Nevada.

Mr. Dickson said the most typically offered service contract offered by those in his membership was on consumer electronic products. An extended service warranty provided coverage beyond the manufacturer’s warranty. Typically the "brown and white" goods were covered. In addition, there were service contracts sold by other industry facets such as automobile dealers and home warranties.

Mr. McMullen referenced Chairman Buckley’s question as to the NAIC and noted the issue was specifically discussed with the Division of Insurance, which included the deviations, because it was a model act and the Division of Insurance clearly needed to know exactly why. The provisions, as proposed in the bill draft and as they were in the amendment with the two changes, were compatible with the division.

Ms. Evans asked with how many providers the Division of Insurance would be dealing. She noted the term providers considered all those who would fall under the new statute.

Mr. Dickson said the estimate would be tough to make. They saw the law passed in other states, and the results were anywhere from 28 providers to
186 providers. Some of the states had a larger retail market than Nevada and some of the states had a smaller retail market. He thought Nevada would have between 70 to 150 providers.

Mr. McMullan noted they conducted a survey and attempted to discover the number. There were as few as 6 in some states; 52 was the midrange. There was one state that had 89 and Virginia had 186.

Ms. Evans noted the $25 fee for each type of service contract and asked how that was defined. She noted Mr. Dickson’s discussion of the electronics business where there might be dozens of products. She did not think the fee would be for each individual product line.

Mr. Dickson said the $25 fee went along with the required record keeping. A record needed to be maintained for each type of contract sold, and each type was a form. If there was one form used for all products, then only one contract needed to be filed. There were members who were administrators and obligors who offered private label contracts where a warranty company would sell service contracts for an individual shop. Such was a service contract. If the same administrator sold in three different shops, they had three different contracts. A copy of each contract would be kept and filed with the division.

Ms. Evans said such applied only to whatever the retailer was offering because manufacturers had their own warranties over and above what an individual store had.

Mr. Dickson said it was actually the converse of what Ms. Evans suggested. Warranties offered by the manufacturers were limited warranties. There could be a 90-day manufacturer’s warranty on an item, and someone could purchase an additional service contract over and above the 90-day period. If the item broke down after the 90-day period, the individual who purchased the warranty would contact the warranty provider to receive service, not the manufacturer. If a manufacturer sold a service contract, under the act in addition to the limited warranty, the manufacturer had to file the contract and comply with the act.

Mr. McMullen said they were attempting to deal with the situation where someone paid additional consideration over and above the purchase of the item and the warranty included therein, but paid separate consideration for a longer period.

Mr. Hettrick asked if the manufacturers wanted to offer their own extended warranty, would they be bound by the same requirements as someone who provided extended coverage as a separate service.

Mr. Dickson noted under A.B. 675 a manufacturer who sold a service contract on one of their products and someone who did not manufacture but wanted to sell a service contract on the same product were regulated in the same manner because of a level playing field. In the past, insurance departments and state regulators focused on the warranties offered by individuals unrelated to the manufacture and sale of the product, because they were the items that most resembled insurance. Insolvencies and consumer abuse occurred within all industry components. The danger was not just from third parties, it was from anyone offering the product.

Mr. Hettrick noted a manufacturer selling an electronic item and sold the consumer an additional 3-year warranty that went beyond the 90-day manufacturer warranty. He did not worry about a large manufacturer, such as SONY, skipping out on the consumer. He understood a retailer who provided the warranty on another’s product being regulated. He questioned the manufacturer being bound by the same regulations. The manufacturer’s cost to provide was significantly cheaper than someone who had to pay for service outside to maintain a product. He wondered if they were bound by the same requirements.

Mr. Dickson referenced a store such as Sears who sold service contracts. Most individuals were not concerned about a store such as Sears going out of business, but Sears was one of the companies that came forward and pushed for the legislation. It was not the size of the manufacturer that was at issue; it was the product offered to consumers. If a large company offered the product to consumers, such a company should be able to comply with the regulations. They were drafted in such a way as to not create an impediment to the industry in the State of Nevada, but to provide regulatory certainty, minimum necessary consumer protections, and financial stability requirements.

Mr. Hettrick explained he understood, but thought the cost of the product would be raised. The companies would have to jump through many "hoops" when they could do the same for less. He was not sure it was appropriate. Mr. Hettrick pointed out Sears was a retailer, not a manufacturer and would fall into the "Crazy Eddies" category. He noted a difference between a company who made an item, versus one such as Sears who sold the item. He was talking about the manufacturer, not the retailer.

Mr. Hettrick noted he had a retail business for many years and sold a product that came from a manufacturer and they had a warranty that was included in the price. They did not charge separately for the product. He wondered if such would also be included.

Mr. McMullen explained they tried to define warranty as covering such a situation described by Mr. Hettrick and service contract as covering the additional or extended period having separate consideration. If the warranty was included in the purchase price as a regular warranty, such would not be covered and there was no requirement to register under the bill.

Mr. Hettrick noted tire companies who charged a certain amount and put an extended warranty on the tires. Because of the added amount, the tire companies would fall under the statute.

Mr. Dickson said there was a minimum exemption. Warranties sold on products costing under $350 were not regulated by the act. The purchase price of the product had to exceed $350 for the regulation to apply to the service contract covering the product. He noted the tire dealers crafted the exemption.

Chairman Buckley noted $500 seemed high and asked why the fee was such.

Mr. Dickson said the Division of Insurance told them the revenue was needed to cover the cost of regulating the industry. They were open to any fee the legislature thought was appropriate. The fees charged by other states fell below and above the $500 set forth in the bill.

Chairman Buckley said the legislature generally liked to ensure the fee was as low as possible.

Jim Jeppson, Chief Insurance Assistant, Division of Insurance, confirmed the division worked closely with the industry on the development of the A.B. 675. The division had been reviewing service contracts, extended warranties, and warranty service agreements for many years. There were legal opinions from the division dating to 1988. They applied a loose interpretation of a federal act passed in 1972, known as the Magnuson-Moss Warranty Act allowing manufacturers or retailers to warrant or guarantee products they sold. The division looked at service agreements submitted to them to ensure they were issued and backed up by the manufacturer or retailer. If they were, the division generally granted their approval and saw no reason to regulate the product because the division did not consider them as insurance.

Mr. Jeppson noted the division had many third parties wanting to sell service agreements for a wide variety of products. The division saw agreements for many different types of products. The two amendments the division requested considered the fee paid by the consumer. They wanted to ensure the fee charged by the manufacturer or retailer was set pursuant to a schedule rather than based on how much the consumer could afford at the time the product was sold. In addition, the cancellation and nonrenewable provisions within the contract conformed to the cancellation and nonrenewable provisions the division applied to insurance contracts in general.

The main concern of the division was the impact on the agency. They thought they would need to provide service to any consumer who purchased a service agreement. The division would not be able to exclude anyone from service just because their product was under $350. It was not the division’s philosophy to deny protection in such an event. Mr. Jeppson thought there would be a fiscal impact on the division, and he drafted and submitted a fiscal note.

Mr. Humke asked why the division worked with NAIC on the particular bill. He asked if there were other uniform bodies promulgating the same type of legislation.

Mr. Jeppson said the division worked with NAIC because NAIC contacted them during the interim saying they were going to propose such legislation and desired to work with the division using the NAIC model as a starting point. The NAIC Model Act was adopted in some form or another in six other states. The division thought if there was legislation coming forward, they wanted their input in it.

Mr. Humke asked if there were other competing model acts by other uniform groups available.

Mr. Jeppson was unaware of others.

Mr. Humke noted the Magnuson-Moss Act covering warranties and asked if it served as a model act.

Mr. Jeppson said the division used it as a guideline to review service agreements. The division allowed manufacturers and retailers to provide the free warranty with a product as well as sell extended warranties and service agreements. Such programs were not under the definition of insurance.

Mr. Humke asked if the programs were exempted pursuant to Mr. Hettrick’s question.

Mr. Jeppson affirmed such was the division’s position.

Chairman Buckley asked who was currently exempt that would no longer be exempt.

Mr. Jeppson said manufacturers and retailers of products.

Mr. Humke again noted the Magnuson-Moss Warranty Act as an "over-arching" type of model and asked if such would not work in the area in question. He inquired as to whether a supplement was necessary.

Mr. Jeppson was not sure the Magnuson-Moss Warranty Act would not work. He thought it was the desire of the industry group in question to establish guidelines for the sale of all service agreements. The bill would also allow third parties, other than manufacturers, retailers, or insurance companies to meet the standards expressed in the bill and provide service contracts. There were many insurance companies who sold service contracts. The companies filed their products with the division who treated them just like any other insurance contract.

Chairman Buckley asked for clarification as to testimony by the Division of Insurance applying a loose interpretation of the Magnuson-Moss Warranty Act. She asked to whom the loose interpretation was made. Chairman Buckley further asked if the amendment on page 2 of Exhibit C, which said, "The provisions of Title 57" was accepted, who would no longer be regulated who was previously regulated. She noted the existing provisions of Title 57 meant all the existing provisions, including the new chapter did not apply to the group. Chairman Buckley asked Mr. Jeppson to specifically comment on vehicle dealers and whether the division had any jurisdiction and whether by the amendment the division would no longer have such.

Mr. Jeppson explained vehicle dealers offered the standard warranty that came with the vehicle. Ford motor company probably had a 3-year 30 thousand-mile warranty. The vehicle dealer might sell an extended warranty, which was similar to a service contract. The warranty, if Ford motor company offered it, would not be regulated by the division under current guidelines. Mr. Jeppson did not like to use the term loose with the word regulated, and he was not certain the Magnuson-Moss Warranty Act would extend to the sale of the additional service contract or warranty but such was the way the division interpreted it for many years. In addition, some motor vehicle dealers who were not affiliated with manufacturers, such as used car dealers, sold service contracts. If the used car dealers remained directly obligated under the contract, the division applied the standards under the Magnuson-Moss Warranty Act. The division thought such was all right because the dealer was the retailer.

When a retailer, including a car dealer, sold a service agreement to a consumer and the service agreement became the obligation of another entity, such was when the division treated the agreement as insurance. Often the other entity was an insurance company but not always. There were independent third party administrators or independent service contract providers who the division considered insurers when they became obligated under contracts. Mr. Jeppson believed the bill would allow them to come in, and if they complied with the provisions of the act, they could sell agreements without having to meet the standards of being an insurance company.

Chairman Buckley clarified if a used vehicle dealer sold a service contract for someone else, the division currently treated it as insurance, but if the dealer wrote their own service contract, separate and apart from the manufacturers warranty, then the division did not treat it as insurance.

Mr. Jeppson said they did not. In most cases, there was an insurance company backing up the used car dealer. The used car dealer was not in the business of selling service contracts; they were not drafting the service contract. Usually an insurance company approached the dealer who encouraged them to sell service contracts, and the insurance company sold the dealer an insurance policy covering the dealers losses incurred under the contract. Such was basically a contractual liability insurance policy. The division reviewed such policies in the normal course of business and approved or disapproved the contracts based on their merits. The division often received a filing from an insurance company that noted its contractual liability policy and showed the service agreement the dealer would sell.

Chairman Buckley said such would change under the new exemption in A.B. 673 because no longer would it be considered insurance if a car dealer sold the service contract.

Mr. Jeppson explained the amendment under section 11. l (f) would exempt some products the division currently tried to regulate.

Chairman Buckley asked the sponsors of the bill to provide to her an analysis of how the bill differed from the model act with a rationale for each difference. She had concerns as to why they would change existing law with regard to motor vehicle dealers.

Mr. Dickson pointed out the amendment with regard to the motor vehicle exemption was drafted with very short notice after discussion with motor vehicle dealer representatives. Before the hearings, he had a chance to speak with John Sande and they discussed limiting the exemption to only apply to motor vehicle service contracts sold through motor vehicle dealers which obligated either the manufacturer or the dealer. Therefore, the third party contracts the division currently considered as insurance would still be regulated under A.B. 673.

Chairman Buckley noted Mr. Dickson should have further discussions with Mr. Sande and clarify the committee’s questions. It was one thing to present a new bill and another to change existing law.

There being no further testimony or additional questions, Chairman Buckley closed the public hearing on A.B. 673 and opened the hearing on A.B. 635.

Jim Wadhams, representing Wadhams & Akridge, presented Exhibit E and illustrated a captive insurance company by describing a major business who might buy commercial insurance but leave a self-insured retention, which was often referred to as a deductible. The insurer might go to another state or a foreign country and form a captive insurer; captive in the sense that the company who had the risk owned the company. The company did not sell to the public but was a captive of the employer or business who formed it. They were specialized and limited purpose entities that did not market to the general public but were available only to the enterprises that formed them.

Mr. Wadhams pointed out the insurance companies were formed in the Bahamas or Bermuda, which were the most numerous but not necessarily the most common. A.B. 635 was patterned after a law in the State of Vermont, which was the residence of a number of captive insurance companies.

The reason he asked for the law was there appeared to be an opportunity for the State of Nevada to become an attractive place for such a business to locate. Often the issue of insurance was discussed in the context of consumer issues, and he wanted to reiterate the transaction was closed and not generally open to the public.

There were more forms of captives than what was referenced to as a pure captive that could be formed by an association. The bill would allow employers to form a limited purpose insurance company in the State of Nevada.
Mr. Wadhams noted the worker’s compensation self-insured groups and said the concept was similar but could be used for any number of other purposes. A group of small casinos wanting to insure the portion of their fire insurance that was in the deductible might get together and form an insurance company for those purposes.

Mr. Wadhams explained the committee would later see a survey bill covering much of the insurance code. There were about 2,000 pages condensed into
3 or 4 for the purpose of allowing the creation of captive insurance companies. Captive insurance companies would be subject to regulation by the Commissioner of Insurance and they had specific capital and surplus requirements, even for the pure captive formed by the business owner.

The theme of the regulation was parallel to what would apply to a retail insurance company that sold to the public, although the parameters were less restrictive because it was a limited purpose and limited access issue.

Mr. Wadhams noted the first 14 sections of the bill set up definitions that were used throughout the bill.

Section 17 authorized the issuance of the license.

Section 18 described the kinds of insurance that could be offered, which was any insurance a business might purchase. The company could form a captive insurance to cover the portion of insurance that was not commercially insured.

Section 19 set the requirements for the operation of a captive. The captive needed a board of directors, needed to hold meetings, utilize actuaries, accountants, and other professionals the Commissioner of Insurance was satisfied had adequate experience to provide background information.

Section 20 laid out standard information that would go into the application.

Section 22 set the licensing fee and authorized the commissioner to use outside contract individuals to review the applications. Mr. Wadhams understood the Commissioner of Insurance might request an amendment to increase the range of fees for which the commissioner could contract. He noted he had no problem with the amendment. The license extended from year to year and had to be renewed. There were also reports that were required to be filed.

Section 23 required a business plan which would be reviewed by the Commissioner of Insurance and ensured the plan stayed consistent with a limited purpose.

Section 24 considered confusion of names. The commissioner controlled the utilization of the captive’s name so as to not be confused with a retail operation.

Sections 25 and 27 set the minimum capital and surplus requirements. The capital and surplus for the purpose of an insurance company was its net worth. Because captives were limited purpose and not selling insurance to the general public, the capital and surplus were more limited.

Section 26 considered the commissioner’s authority to adopt regulations dealing with any excess built up money. The commissioner had direct control over distribution of dividends to ensure policyholders were aware of what occurred and yet maintained enough money that the minimum requirements were met.

Section 28 required prior approval for any other dividends beyond those set up by a formula.

Section 29 considered several types of insurance corporations that could be formed. One was a traditional stock corporation called a C Corporation in which stock was issued. That form of corporation would be available for a company that would be formed just by a single employer or single business. Employers coming together to form an association might want to use one of the other forms such as a mutual company, which would be a cooperative type of arrangement or potentially reciprocal. An example of a reciprocal insurance company would be like AAA, Farmers Insurance Company, and USAA.

Section 30 set forth annual reporting requirements.

Section 31 established the examination process and the financial condition review that would be conducted. Such was parallel to regulation that would be applied to a commercial insurance company.

Section 32 was a situation under which the commissioner could suspend or revoke the license of a captive insurer.

Section 33 set forth requirements on investments. The most flexibility belonged to a single business that set up its own insurance company. The business was taking its own risk. Under the federal tax law, the business would receive an advantage, which was why captives were formed under the laws of other countries and other states. The incentive was to bring additional capital into Nevada and allow for additional business development.

Section 34 subjected the operation to the review of the Commissioner of Insurance and indicated a captive insurer had to be in compliance with certain sections of the Nevada Revised Statutes (NRS) that were applicable to insurance companies.

Section 35 stated a captive insurer did not have to join a rating organization. The companies were not selling insurance to the public but were controlled by the individuals who formed them. The rate information was set internally by an actuary that had to be filed with the Commissioner of Insurance.

Section 36 set the operations aside from the insurance guarantee fund. The guarantee fund mechanism covered commercial insurance companies. If one insurance company had difficulties, they participated in a guarantee fund made up of all other insurance companies. The reason captive insurance companies were excluded from the insurance guarantee fund was they were formed by limited businesses and were not available to the general public.

Section 37 set forth a premium tax. Such would be new money. The tax would not be a new tax since there was already a premium tax that applied in the State of Nevada. But in order to attract the business, there was a transaction fee that was applied.

The remaining sections triggered the application of those provisions of the general insurance code in terms of regulation, reorganization, or liquidation.

Section 40 allowed the commissioner to establish whatever regulations were necessary.

Sections 42 and 43 established the effective date of the act.

Mr. Wadhams noted the concept in the bill was new to the State of Nevada.

Chairman Buckley asked if there were any captive insurers currently in the State of Nevada.

Mr. Wadhams noted Nevada did not have any captive insurers. The insurers who were currently licensed were licensed to sell insurance commercially to the general public. Captive insurance was a limited form of insurance in which they would be limited to sell insurance only to themselves. It was a self-insurance mechanism. He was aware that one company might have been formed at one point in time for one of the cab companies to insure their fleet of cabs. The company had a license and they could have sold to the public and might be operating as a defacto captive, but it was not directly organized for such a purpose.

Chairman Buckley asked if someone wanted to currently form a captive insurance company, without the legislation, could they do so under the general provisions of insurance law.

Mr. Wadhams said they could, but the difficulty was the capital and surplus requirements were between five to eight times greater, which would make it commercially unattractive. Financially there would be no incentive for one of the major corporations to go to such an expense when they could go to Vermont and do it for approximately the investment represented in A.B. 635. The bill was set up to compete with Vermont for captive insurers.

Chairman Buckley asked what requirements made it a disadvantage.

Mr. Wadhams explained it would be disadvantageous because of the surplus to policyholders, which was the net worth requirement. The net worth requirement for a general insurance company was $1,500,000 as opposed to the pure captive insurer in the bill, which was about $300,000. The differential was $1,200,000, and it would be cheaper to pay the fees and go through the process in Vermont.

Chairman Buckley asked if there was a downside to having the reserve so low and if there was model legislation on the topic.

Mr. Wadhams did not believe there was any model legislation although most states had begun to pattern their statutes after the Vermont statute, which was patterned after statutes in foreign countries. Vermont had become the model many states were attempting to copy.

Donald L. Drake, President, Baker and Drake Inc., Deluxe and Yellow Cab supported A.B. 635. His company participated in captive insurance programs one of which was established through the International Taxi and Livery Association and had approximately 80 members. They had a very good experience in the program and were in it for about 3 years. He would like to see the program permitted in the State of Nevada.

Chairman Buckley asked what advantages Mr. Drake thought captive insurers would offer his company.

Mr. Drake thought there would be a savings, and he would have a greater comfort level knowing the Division of Insurance had a watchful eye on the program. He also thought the Division of Insurance could help protect any person injured who would present a claim.

Lee Duncan, President, Innovative Insurance Solutions, offered written testimony in support of A.B. 635 (Exhibit F). He noted there were currently over 3,500 captives worldwide with the majority being domiciled in Bermuda and Vermont. The captives provided direct revenue to their domicile through taxes (nearly $10,000,000 to Vermont in 1998) and indirectly through professional jobs and services created by the captive, substantial deposits placed and held by banks within the domicile, and travel, restaurant and entertainment expenditures within the domicile. If A.B. 635 was passed and signed into law, Mr. Duncan would seriously consider moving his captive domicile to Nevada.

Ms. Giunchigliani sought clarification as to whether Mr. Duncan was a captive insurer presently.

Mr. Duncan affirmed her question noting he recently formed an agency rent-a-captive that was located in Bermuda.

Ms. Giunchigliani asked if he was interested in paralleling such action in the State of Nevada so as to be able to function as a captive in the state.

Mr. Duncan again affirmed Ms. Giunchigliani’s question.

Ms. Giunchigliani asked Mr. Wadhams if there was anything in the legislation that affected the three-way situation that was coming forward.

Mr. Wadhams explained he illustrated the self-insured groups as being a form of captive insurer that was done several sessions prior. The new legislation would not interfere and might be a complement. The regulation was a different form of regulation and one did not cancel out the other. The excess would be that portion beyond what was required for the minimum satisfaction.

Alice Molasky-Arman, Commissioner of Insurance, Division of Insurance, proposed three amendments to A.B. 635 (Exhibit G). She noted the first proposed amendment was in section 19 on page 4, line 14, where language referred to a "registered" public account as well as a certified public account. The division was not aware of any designation as "registered" and sought the word to be deleted.

The second proposed amendment was in section 21, page 5, lines 5 through 7. She had concerns about the amount allowed for the initial examination of applicants. The bill, as it currently read, stated, "the cost of those services, which must not exceed $2,750 for a pure captive insurer and $5,000 for an association captive insurer, an agency captive insurer, or a rental captive insurer." The division proposed deleting the limits. If the bill was enacted, the division intended to outsource the review of applications. Captive insurers would be a new experience, and she thought those who were reviewing applications needed the sort of expertise demonstrated in other states. Attorneys or accountants could give advice to the commissioner as to whether an applicant should receive the registration or certification. She could not say how much such would cost, and she would not want to limit it. Currently the division was not limited for examinations of applications for a certificate of authority as an insurer. The cost could run from $500 to several thousand dollars. The division did not know the cost until they received the application. She did not believe the division would know with regard to captive insurers as to cost until they saw what sort of applications they received.

The third proposed amendment considered section 25, page 6, where the division would like to insert a phrase stating the letter of credit was "automatically renewable each year unless the issuer gives written notice to the commissioner and the captive insurer at least 90 days before the expiration date." The provision was the same as was in the worker’s compensation law for self-insured employers where letters of credit might be acceptable. There were instances where letters of credit had been cancelled or terminated, and it was a great benefit to self-insurers and the division to have notice as to such.

Chairman Buckley noted testimony as to the law regarding captive insurers attracting business to Nevada thus creating an alternative for local businesses who went out of the state or country and perhaps bringing in additional premium tax. She noted such were all positive for the State of Nevada and asked if there was any reason why the enactment of the bill would not be good policy for the state.

Ms. Molasky-Arman said she had an economic development committee who looked at different ways in which the economy could be benefited by the insurance industry. One of the subjects that came up in the forum was the establishment of captive insurers. She was not aware of any downside to captive insurers. It was the sort of industry where experience needed to be developed. Commissioners in other jurisdictions guarded their captive insurer business, and she could not say any of them would be happy if the law was enacted.

Chairman Buckley asked if there were any concerns with the reserve requirements or some of the other statutory provisions that would regulate the industry.

Ms. Molasky-Arman said there were none because of the unique difference between what a captive insurer was and what an ordinary insurer was.

Mr. Humke referenced Exhibit E noting the reference to the 3,665 captive insurers worldwide. He asked what the rate of formation was for such companies.

Ms. Molasky-Arman did not know what the rate of formation was.

Mr. Wadhams explained the number requested by Mr. Humke was a difficult number to estimate with any definitive degree. He would anticipate there would be four or five captive insurers per year that would be attracted to the State of Nevada. He thought the first attraction would be companies who had captives, who brought them back to Nevada.

There being no additional testimony or further questions on A.B. 635, Chairman Buckley closed the public hearing and began the work session with A.B. 193.

Vance A. Hughey, Principal Research Analyst, Research Division, Legislative Counsel Bureau, noted there were several amendments proposed and discussed in work session on March 8, 1999. He briefly reviewed the amendments (Exhibit H) and noted the first proposed amendment was to change the time period with which a person could not use an automatic dialing and announcing device.

The second amendment requested by Robert Barengo, representing the Nevada Consumer Finance Association, suggested the definition of a device for automatic dialing and announcing be amended to read as follows, "Incorporates a storage capability of telephone numbers to be called and utilizes a random or sequential number generator producing telephone numbers to be called."

Mr. Barengo also suggested a new provision to the chapter regarding when a person who used a device for automatic dialing and announcing engaged in a deceptive trade practice be made consistent with similar provisions that currently existed in NRS chapter 597.

Barbara Teal Clark, representing the Nevada Parent Teachers Association, submitted the attached memorandum (Exhibit H, Attachment A) in which she proposed adding a provision allowing a school district to use a device for automatic dialing and announcing for purposes other than notification of student attendance.

Mr. Hughey noted during the previous work session on the bill, a question was raised regarding whether the State of Nevada could effectively enforce the provisions of the bill with respect to calls placed to Nevadans from outside the state or calls placed from Nevada to other states. The legal opinion was requested, and Chairman Buckley was in possession of it.

Chairman Buckley explained she was just handed the legal opinion prior to the meeting. The opinion was 16 pages long and stated the widespread use of automatic dialing and unsolicited sales pitches raised concern causing federal and state governments to enact legislation. Nevada was the first state to do so in 1989. Congress followed in 1991 making it unlawful to initiate any telephone call to any residential telephone line unless the call was exempted by rule of the Federal Communications Commission. Undue burden on interstate commerce was considered as well as First Amendment rights, and the conclusion was A.B. 193 would not be any more likely to be held unconstitutional than any other existing statute in the area. Both the federal law and A.B. 193 would get into jeopardy when restrictions appeared to be content based. She read, "the only two other cases where there has been some concern were not limited to commercial purposes unlike" A.B. 193. Chairman Buckley said legal counsel thought the bill would not violate the commerce clause and be held unconstitutional.

Ms. Segerblom said there were about 40 states that had the same type of statute and the language in the California statute was upheld when it was appealed to the Supreme Court.

Mr. Humke said he would be participating, but he might have a conflict due to client activity.

Ms. Giunchigliani noted A.B. 5, regarding the push-pull, was passed during the 69^th Session of the Nevada Legislature. She noted there had been no challenge regarding A.B. 5 and A.B. 193 would be segregated and have no impact on A.B. 5.

ASSEMBLYWOMAN GIUNCHIGLIANI MOVED TO AMEND AND DO PASS A.B. 193 REGARDING ITEMS 1 THROUGH 4 ON PAGE 2 AND 3 OF EXHIBIT H.

ASSEMBLYWOMAN EVANS SECONDED THE MOTION.

Chairman Buckley inquired as to whom the bill would cover and if it was limited to commercial activities.

Ms. Segerblom referenced a company who had a contract with a customer and noted if the call was expected the company could automatically call and tell the customer an item was ready.

Chairman Buckley referenced page 2 of A.B. 193, lines 3 and 4, which were to specifically solicit a person called to purchase goods and services. She noted there was an exemption for individuals such as Girl Scouts and said the committee might want to make it clear the issue was commercial only so political activities, First Amendment activities, and other such issues were still protected.

Mr. Parks noted the issue of random or sequential number generators to produce the telephone numbers to be called, and asked if someone had a selected bank of telephone numbers, would such be exempted from the bill.

Chairman Buckley said they would not be incorporated because of the definition.

Mr. Hughey thought the question might call for a legal interpretation, but noted the random or sequential number generator did not seem to include an existing list of telephone numbers that might be called. If there was a standard list of individuals called, he did not think such would be random or sequentially generated but rather an existing list.

THE MOTION CARRIED.

Mr. Hughey noted a letter was received from Roger Bremner, Administrator, Division of Industrial Relations, in which he indicated that on March 31, 1999, Jim Wadhams spoke with John Wiles, Division Counsel, and informed him that A.B. 476 was being withdrawn (Exhibit I).

ASSEMBLYMAN HETTRICK MOVED TO INDEFINITELY POSTPONE A.B. 476.

ASSEMBLYMAN DINI SECONDED THE MOTION.

THE MOTION CARRIED.

Mr. Hughey referenced A.B. 279 on page 3 of Exhibit H.

A.B. 279 was initially heard on March 8, 1999, and there were no amendments proposed.

ASSEMBLYMAN HUMKE MOVED TO DO PASS 279

ASSEMBLYMAN ARBERRY SECONDED THE MOTION.

THE MOTION CARRIED.

Mr. Hettrick voted no.

There were several proposed amendments to the bill (Exhibit H, page 2 and 3.) Assemblyman John Lee proposed amending section 5 by changing the word "inspector" to "official."

Irene Porter, Executive Director, Southern Nevada Homebuilders Association, proposed amending section 5 regarding the proposed composition of the State Contractors’ Board by adding two additional members who were contractors.

Danny Thompson, representing the Nevada State AFL-CIO, and Jack Jeffrey representing the Southern Nevada Building and Construction Trades Council, proposed the composition of the board remain as it currently existed in statute.

Ms. Porter proposed amending section 5 to allow the chairman of the board to be chosen from among the board’s entire membership. Currently in the bill there were some restrictions on who could serve as chairman.

Ms. Porter proposed deleting the new provision in section 10, page 5, lines 9 through 15. The provision required the board provide notices regarding certain disciplinary actions taken by the board to the licensee and each person with whom the board knew the licensee had an uncompleted contract. Ms. Porter indicated such would present a burden to the board.

Chairman Buckley asked Assemblyman John Lee, representing Assembly District 3, to come forward and clarify which of the presented amendments he supported and which he did not support.

Mr. Lee referenced Exhibit J, which were the proposed amendments to
A.B. 259. He explained the amendments mirrored many of the complaints of individuals.

Mr. Lee noted section 2 was deleted and jurisdiction for enforcement was left with the district attorney’s office.

Section 5 changed the composition of the board to four general contractors, one subcontractor, one architect or engineer, and one representative of the general public. He thought such a composition would better reflect the type of individuals who came before the board. There was some discussion as to the architect or engineer, but he felt strongly about having someone with such a background on the board.

In section 5 on page 2, Mr. Lee wanted lines 36 through 38 deleted to remove the limitation on which member may be chosen as chairman of the board. He was resolved to the fact that anyone the governor put on the board would be a good person and be able to properly chair the board.

Mr. Lee desired the revision of lines 39 through 41, on page 2 to say, "A member shall serve for a term of 4 years or until his successor has been appointed. A member may not serve for more than two consecutive terms of any length."

Mr. Lee noted all of the changes such as "the board shall employ at least one person to receive and facilitate resolutions" shall remain in the bill.

The next change was the deletion of the section of the bill regarding notification of the board’s action.

There was also an adjustment to section 11 to provide for staggered terms for the members of the board under the new configuration set forth above so the terms of all members did not expire at the same time.

Mr. Lee said with the changes, the contractors’ board was left intact and strong. There was a livable term limit with which those in or out of the industry would be satisfied. Those on the board would be reflective of the individuals who came before it.

Mr. Arberry referenced Exhibit J noting the language stating, "a member shall serve for a term of 4 years or until his successor has been appointed." He further noted the amendment said, "a member may not serve for more than two consecutive terms of any length." Mr. Arberry asked if the board member could serve 4 or 8 years.

Mr. Lee said he had a discussion with Kim Morgan, Chief Deputy, Legislative Counsel Bureau, and noted 8 years was the total length of time. The board members served at the will of the governor. After 8 years a board member had to take a rest; they would not be appointed to another 4 year term. The terms were each 4 years in time.

Chairman Buckley noted the board member would have a term of 4-years and may not serve more than two terms, and the only exception would be if the governor was late with an appointment.

Ms. Giunchigliani said late appointments had been a problem with any governor. At times the governor could not find an appointment, or they had to wait for names to be submitted.

Chairman Buckley said the board was currently made up of seven members, six of whom must be a contractor with an unexpired license, actively engaged for a period of 5 years preceding the appointment, with one member from the general public. She expressed the preceding information was for the purpose of comparing and contrasting the current board with Mr. Lee’s most recent amendment.

Mr. Nolan asked Mr. Lee if he had any "buyoff" by the opposition. He then asked if Mr. Lee presented the amendment to the contractors’ board or the Office of the Attorney General.

Mr. Lee did not present the information. He worked hard on the issue and thought a little self-praise was better than no praise.

Ms. Giunchigliani noted the attempt at staggering the terms so the individual who had the first term of 2 years could have only one additional 4 year term so the member would be "maxed" at a total of 6.

Mr. Lee said such as described by Ms. Giunchigliani was only until the process got started because at the present time all members quit at the same time, and he did not want to lose all the institutional knowledge.

Ms. Giunchigliani asked if the provision allowed for the staggering of the terms.

Chairman Buckley asked Mr. Lee what his intent was with regard to current board members. She noted one board member who was appointed in 1998, and asked how such an individual would be affected by the bill.

Mr. Lee explained he currently had no problem with anyone on the board. His concern was the length of service time members were on the board. He expected the governor would appoint the best individuals, and if he chose to reappoint the same individuals, he could. Mr. Lee was attempting to provide an opportunity for the governor to choose the best individuals for the board without Mr. Lee telling the governor who to choose.

Chairman Buckley asked Mr. Lee if the bill should be prospective or retroactive in its applicability.

Mr. Lee thought the bill should be retroactive because the governor had not yet made any appointments, and he would be looking at the bill to craft the future.

Chairman Buckley offered an example of the governor choosing not to reappoint an individual asking if someone served only 1 year of their appointment and was not term limited out, would the individual’s time start ticking at the present time, all over again, or would it go back for the individual.

Mr. Lee thought the process needed to begin right away. If there was the one odd person, he was sorry.

Chairman Buckley noted Mr. Hughey clarified on the last page of the bill the language said the bill was prospective. Section 11 said, "the term of office for each member beginning July 1, 1999, shall be deemed his first term of office."

Ms. Giunchigliani said the language did not prevent nor cause the governor to appoint the same individuals if they had already been "maxed out." They could have their names resubmitted, but based on the new criteria, the governor could take such into consideration.

Chairman Buckley noted if one of the current board members was not a subcontractor, architect, or an engineer, presumably all would be general contractors or the one representative from the general public.

Ms. Giunchigliani thought such would accomplish some of what Mr. Lee wanted.

Mr. Nolan understood the amendment Mr. Lee brought forward and wondered if it would impact the board in an unanticipated fashion. He noted the presence of Doug Carson, who was a member of the contractors’ board and an original opponent to the bill. Mr. Nolan asked if Mr. Carson would come forward and if there was anything in the amendment that helped the board’s position.

Chairman Buckley asked Mr. Carson how he felt about the proposed amendments to A.B. 259.

Mr. Carson said there were issues within the amendments that were fairly neutral to the duties of the contractors’ board. He thought the composition of the board limited its ability to be effective and noted currently there was a mechanical, electrical, painting, and general contractor on the board, as well as a member of the public. The board drew on the expertise of each individual during certain hearings. Many of the conducted hearings were on what was standard in the industry in so far as workmanship and contracts. He would hate to see the committee dictate the composition of the board; it would be detrimental.

Mr. Perkins referenced the membership of the board and Mr. Lee’s suggested composition, which included four general contractors, one subcontractor, one architect or engineer, and one member of the general public. He asked Mr. Carson which members were currently not on the board.

Mr. Carson explained there were two general contractors, a steelwork subcontractor, a mechanical subcontractor, an electrical subcontractor, a painting subcontractor, and one representative from the general public. There was not an architect or engineer. He then noted there were four subcontractors and one general contractor.

Mr. Perkins noted Mr. Carson’s comment about drawing from the expertise in different fields and asked how Mr. Lee’s amendment would impact the drawing of such expertise if the governor decided not to appoint a contractor in a field such as painting or steel. He noted there were a number of contracting disciplines that were not currently on the board.

Mr. Carson said general contractors had an overall knowledge of the industry, but when the board was presented with issues regarding specific codes in areas such as electrical or mechanical contracting, the expertise of the subcontractors was drawn upon. In the past, the governor’s appointments had been structured to fill voids in the expertise on the board. He thought the structure of the board was currently well balanced.

Mr. Perkins asked how many contracting disciplines were not on the board.

Mr. Carson said there were several if he got specific in the trades. The board did not have anyone from ceramic tile and other such craft.

Mr. Perkins noted Mr. Carson’s comment about drawing from the expertise of mostly subcontractors, but there were a number of fields not represented on the board, which would cause the board to look elsewhere for information.

Mr. Carson noted individuals who served on the board generally had a long tenure in the industry so there was an overlapping in areas of expertise.

Mr. Humke asked if the board served a quasi-judicial function. Whereby, Mr. Carson affirmed his question. Mr. Humke then noted there were some agencies in state government that when they did not have expertise on the board or commission, they used outside expert witnesses. He asked if the contractors’ board ever did such.

Mr. Carson explained in the short period of time he served on the board, he never recalled hiring an outside company to come in and provide expertise.

Mr. Humke noted such might be a funding situation but explained there were so many disciplines in contracting maybe bringing in outside expertise might be something the board had to do. He noted Mr. Carson would not want the legislature to form a board of "39" members.

Mr. Carson said such would be too large and cumbersome.

Ms. Giunchigliani noted general contractors could also have expertise in areas of subcontractors.

Mr. Carson said most did, but not all.

Ms. Giunchigliani said she appreciated the approach being taken. She attempted to do the same in another session and was unsuccessful in changing the makeup of the board, which was overly concentrated with large contractors and not medium or small contractors. She hoped the governor would take into consideration the verity of different sizes of contractors who participated.

Chairman Buckley asked for clarification of Exhibit J section 11. Section 11 in the original bill said anybody who was on the board was off now or off effective June 30, 1999. The amendment suggested staggered terms. There was a competing philosophy of application as to whether it should be applied prospectively or retroactively.

ASSEMBLYMAN PERKINS MOVED TO AMEND AND DO PASS A.B. 259 USING THE AMENDMENTS PRESENTED BY ASSEMBLYMAN LEE IN EXHIBIT J, NOTING HIS PREFERENCE FOR THE BILL LOOKING PROSPECTIVELY AND STILL PROVIDING FOR STAGGERING IF NECESSARY.

ASSEMBLYMAN PARKS SECONDED THE MOTION

Chairman Buckley noted the amendments in Exhibit H and clarified which applied and which did not. She noted amendments 2, 3, and 4 in Exhibit H were supplanted by Exhibit J. Chairman Buckley then noted amendment 1 in Exhibit H was also changed by virtue of Exhibit J.

Chairman Buckley noted she would vote to support the motion noting Mr. Lee’s intention was to send a message that a balanced approach needed to be considered. The board needed to look at consumer protection as well as ensuring frivolous claims were disposed of quickly. By applying the law prospectively, the board’s new approach was not stopped. She noted the new approach had been much more aggressive and in the best interest of the consumer. There was also concern that while the board was ultimately the "captain of the ship," a lot had to do with those who ran the ship on a day-to- day basis. She thought the public was better served than it had been in the past and desired the good work to continue.

Mr. Hettrick wondered if the proposed amendments were going to clear the fiscal note or if there was still an attached fiscal note.

Chairman Buckley noted there was a $350,000 fiscal note submitted by the Office of the Attorney General that was deleted.

THE MOTION CARRIED.

Mr. Hughey explained A.B. 633.

Mr. Hughey explained the bill established a program for the issuance of a contractor’s license in an expedited manner. The bill also established an inactive status for a contractor’s license, increased the amount of fees the board could charge, provided for notification to the board by a surety within
30 days after an action was commenced by or against the surety, provided for service of process and notice of certain actions, and amended certain requirements for a hearing if the board summarily suspended the license of a contractor. He noted there were a number of amendments submitted to the bill by Margi Grein, Executive Officer, State Contractors’ Board.

Chairman Buckley asked Ms. Grein to come forward and outline any amendments that were not discussed at the original hearing.

Ms. Grein explained there were a few changes in addition to what was presented in Exhibit H. She pointed out attachment C of Exhibit H was replaced by Exhibit K.

Ms. Grein noted page 3 of Exhibit H, item 1, considered amending A.B. 633 by adding a new subsection to NRS 624.275 to provide for the immediate suspension of a licensee’s bond upon payment of a claim by the surety. Her proposed amendment was included as attachment B, and she noted when a claim was paid out on a bond, the board could immediately suspend the license so there was no lapse in protection with the bond amount. If the contractor did not provide another bond, the license would be revoked rather than suspended. If the contractor did comply with the requirements and replenish the bond, the license would be reinstated.

Attachment C of Exhibit H was replaced with Exhibit K and it related to clarification on licensing provisions as far as establishing the monetary license limit and what the determining criteria was.

Ms. Grein noted the board adopted by regulation a provision to address one time raises in license limits, which was the amount a contractor could bid one time on one particular project.

In NRS 624.260, language was included stating "licensee" not just "applicant" to demonstrate experience, knowledge, financial responsibility, and qualifications as needed. Such would allow the board to check a licensee as well as an applicant.

Page 2 of Exhibit K included a proposed amendment to existing provisions in statute concerning experience and knowledge of an applicant or license.

Ms. Grein noted the board asked for a new subsection 5 to NRS 624.260 relating to an applicant’s experience and requirements. Currently the law said the applicant had to be a "workman" for 4 years.

The amendment to NRS 624.265 was a language change indicating the requirements were the same for an applicant or a licensed contractor.

Page 3 of Exhibit K noted the board would take into consideration a plea of guilty or no contest where guilt was found. The language did not prohibit anyone from obtaining a license but was part of the criteria used to screen an applicant or licensee. In addition, language stating "misdemeanor" was included. The board also asked consideration be given to a suspended license, which was a technical change.

There were several parts of NRS 624 where the executive officer was referred to as executive director. When the board went through some of their audits, the section was brought forward, and she reworded it to say, "the executive officer, upon receiving such information should take appropriate action." Language stating "as he deems appropriate under the circumstances" was removed, as there should only be one method of handling an action.

Page 4 of Exhibit K allowed for corrective action when the board imposed discipline. The contractor could comply by paying another licensed contractor to do the corrective work. At times, there was "bad blood" between the two parties and the homeowner did not want the contractor on the property.

NRS 624.300, section 1(e) 2, allowed an alternative for corrective action. It might be best for the contractor to reimburse the injured party rather than do the corrective work.

Exhibit K, page 4 requested language be deleted that was included in S.B. 395 in the 1995 Session of the Nevada Legislature. The language prohibited the board from taking disciplinary action regarding a constructional defect during the period in which a claim that arose out of the defect was being settled, mediated, or otherwise resolved. The board did not follow chapter 40 as far as the definition of construction defect. There were times when a contractor would state they could not be disciplined because they were in mediation. The section delayed the board’s ability to take action if a violation was found.

Page 5 of Exhibit K, subsection 6 (b) of NRS 624.300 said the board could recover the cost of their investigation if there was a stipulated settlement or agreement.

Subsection 7 of NRS 624.300 was added indicating failure of a licensee to pay a fine within 30 days of the date of assessment was cause for disciplinary action.

Ms. Grein referenced NRS 624.3011 and noted the provision relating to constructional defects was removed because the board did not have such a term in their law.

Subsection 2 of NRS 624.3011 said, "the board shall not require the contractor to obtain that permit more than 90 days after the construction is completed." No one knew why the language was in the law as it made no sense. The board wanted a contractor to have a building permit whether it was 90 days or not.

On page 6 of Exhibit K provisions were added under disciplinary action, which included:

• "Failure to comply with requirements for contracts for construction of residential pools required by Nevada Administrative Code (NAC) 624.695 through 624.697." Ms. Grein noted the board adopted regulations in August of 1997 to address situations with pools, and the board would like to have a provision where they could penalize a contractor for failure to comply with the requirements.

• Language stating "securing a license by fraud, deceit, or misrepresentation of a material fact or omitting to state a material fact" might be repetitive, but it was a little clearer than NRS 624.3014.

• Subversion of licensing exams was to prohibit or regulate those who were falsely taking the exam or taking the exam on behalf of another.
• In 1997, a provision was put into the law stating all contractors must provide homeowners with a notice to owner’s statement, which was developed by regulation. The board would like to have a clause for discipline for failure to give a notice required by NRS 624.321.

Chairman Buckley asked what was in the proposed amendments that the committee did not hear at the original hearing.

Ms. Grein said at the original hearing there was general discussion on discipline, qualifications, and background checks. Specifically grounds for discipline for pool contractors or subversion of licensing exams were not discussed. She said such related to qualifications and background but were not specifically addressed. She asked if the Chairman would like her to amend the bill in the Senate.

Chairman Buckley would not like that; the committee wanted to be presented with the entire bill at the first hearing. She noted it was very confusing to be working off of three documents. The committee preferred to have all of the amendments at least 48 hours in advance to allow research staff the ability to analyze and organize information.

Speaker Dini indicated he would like a mockup bill so as to view all of the information in final bill form.

Ms. Grein asked Chairman Buckley if she wanted her to put A.B. 633 together with A.B. 634 as the issues were similar.

Chairman Buckley wanted to see the entire bill and did not want it to deviate from the original version. She noted people not having an opportunity to present testimony if the mock bill deviated from the original.

Chairman Buckley asked if there was anyone in the audience who would like to comment on the amendments on A.B. 633.

Irene Porter, Executive Director, Southern Nevada Home Builders, noted she just saw the amendments to A.B. 633 so it was difficult to comment on specifics. She would like to take the next 24-hours to review the amendments.

Chairman Buckley said the bill would be on the work session for Wednesday and asked Ms. Grein to provide a mockup draft of the bill to Mr. Hughey no later than noon the next day with no additional amendments than what had been presented.

Chairman Buckley asked Mr. Hughey to present A.B. 634.

Mr. Hughey noted A.B. 634 provided for the establishment of a special investigations unit within the State Contractors’ Board and expanded grounds for disciplinary action against a contractor. The bill authorized a special investigator or the executive officer to issue written citations under certain circumstances, authorized the board to impose administrative fines for violations of various provisions, and provided a process for contesting the issuance of a written citation. In addition, the bill amended various provisions concerning construction fraud, required certain persons to submit fingerprints to the board, amended provisions governing advertising, and provided a penalty. Mr. Hughey noted the proposed amendments to the bill (Exhibit H), which were proposed by Assemblyman Hettrick, Assemblyman Perkins, and Margi Grein of the State Contractors’ Board. Mr. Hughey said some of the proposals were similar to those previously discussed in A.B. 633.

Chairman Buckley asked Ms. Grein what amendments she proposed for A.B. 634.

Ms. Grein said the board addressed all of the committee concerns. She noted the board changed the fingerprinting language from "shall" to "may," which was what they originally requested.

Ms. Grein said the board had an investigations department, and they were separating criminal investigations from licensee investigations. She explained the board clarified administrative citations versus criminal citations and noted there were two types of issues, which they would be citing; the criminal unlicensed versus licensed contractors. The purpose was to find a better means of achieving resolution for homeowners. By clarifying and separating the two departments, the board would be able to focus on licensed and unlicensed contractors.

George Lyford, Director, Special Investigations, State Contractors Board, noted the board’s proposed amendments reflected changes recommended by the committee.

Chairman Buckley referenced Exhibit L and asked if it was shared with anyone. Whereby Mr. Lyford noted it had not been shared.

Chairman Buckley asked if anyone in attendance had any concerns with the amendments presented in A.B. 634.

There were no comments and Chairman Buckley noted the committee could do the same with A.B. 634 as they did with A.B. 633, which was to have the newly amended amendments merged with the others so as to have one final mockup on the bill with which to take action. She pointed out the difficulty of working with so many different documents and asked the board to present a mockup of A.B. 634 with all proposed amendments to Mr. Hughey by noon the next day so he could prepare it for Wednesday’s work session.

Chairman Buckley pointed out there were some bills appearing to not have much committee support during the original hearings. She told sponsors she did not plan to set a bill for work session unless they indicated concerns had been worked out or they talked to eight members of the committee and believed there was a consensus. Chairman Buckley noted A.B. 433 was one such bill (Exhibit M).

Ms. Evans explained she was concerned about quality and standards, but at the same time she was empathetic to circumstances unique to very small jurisdictions. She asked that last minute issues be cleared up and A.B. 433 be put on the next work session document.

Chairman Buckley noted Ms. Evans’ suggestion to bring A.B. 433 back on the work session to enable the committee time to consider the issues. Mr. Perkins seconded the suggestion. She asked the committee to review the amendment and the committee would vote on the bill on Wednesday.

Mr. Hughey explained there were a number of proposed amendments to A.B. 636 (Exhibit H) and noted Chairman Buckley proposed items 1 through
12 as amendments to A.B. 636.

Chairman Buckley noted all of the amendments, with the exception of the amendment considering the funding mechanism, were presented at the original hearing. It was clear to her there were problems with "shoddy" construction in southern Nevada. She noted there were problems with the judicial system, and there were a small number of contractors giving a bad name to good contractors. There were also problems with the contracting system whereby the bond was not sufficient to pay the consumer.

Chairman Buckley noted she had a proposed amendment on the funding mechanism. In the first hearing, she suggested a flat amount of $600. There was confusion about whether the amount would apply to residential contractors or subcontractors. She had two competing proposals for committee consideration. The first was to make both versions applicable to residential contractors, not subcontractors. A residential contractor with a license limit of less than $100,000 would have an assessment of $200. A license limit of less than $500,000 would have an assessment of $400, and a license limit of more than $500,000 would have an assessment of $600. There was a staggered fee scale for implementation.

The second version also applied only to residential contractors and would be funded out of receipts deposited from a 5 cent per square foot surcharge on building permits. The surcharge for the recovery fund would be based on a total square footage of building permits. She thought it made sense not to affect small businesses to the same extent as very large businesses. Chairman Buckley was open to either proposal. It was her contention the recovery system was pathetic and consumers often received nothing. She wanted to prevent individuals from going to court, as small cases could not afford the costs and consumers were then forced to contend with faulty work.

Mr. Hettrick preferred the second of the two options as far as the funding mechanism was concerned. He considered it to be the fairer of the two. Mr. Hettrick noted a $100,000 bond would cover very few homes and stated few would then pay the $200 fee. Most contractors would pay $400, and the cap was only $600. There was a problem with a contractor who had a license limit of under $500,000 who built two houses per year and then a contractor with a license limit of over $500,000 building 150 houses per year. He thought the mechanism should be on square footage so smaller businesses did not get "burned."

Chairman Buckley thought language should be added stating "in no event could it exceed" and as a further protection place a cap.

Mr. Hettrick addressed the "cap" and noted a contractor who built a greater number of houses would have greater opportunity for problems than a small business. He thought the 5 cents per foot was equal for all.

Mr. Humke asked if the original version of the bill had a recovery fund taxing mechanism, and if so, was it still in the bill pursuant to the amendments.

Chairman Buckley noted the original bill had a $600 dollar assessment, which was discussed being removed and replaced with a staggered mechanism based on the amount of business generated by a company.

Mr. Humke thought he recalled there could be an additional assessment by the contractors’ board.

Chairman Buckley said such was out of the bill.

Mr. Hettrick asked if the 5 cents per square foot surcharge was currently collected. He inquired if they were discussing removing a portion of the funding that was going somewhere from the 5 cents and if so where the money went.

Chairman Buckley said she received all of the figures on the building permits from the contractors’ board, and asked Ms. Grein to come forward and discuss the board’s current actions.

Ms. Grein said the figures were a rough estimate and noted some of the counties did not respond, and to her knowledge there was not a current surcharge.

Chairman Buckley noted the assessment would be a 5 cent surcharge, and instead of using the current bonding system, an assessment mechanism would be used to create a recovery fund for victimized consumers.

Mr. Hettrick noted the amount would be 5 cents per building permit based on the square footage of the permit and would be assessed quarterly. He assumed each contractor’s total permits would be quarterly polled, summed up, and multiplied times .05.

Ms. Grein affirmed his comment and said in some of the smaller counties, permits might not be issued so the board would not be able to assess such individuals.

Chairman Buckley said one of the reasons she liked the first version rather than

the second was the first version allowed for stability, planning, and caps. Based on Ms. Grein’s knowledge of the numbers, Chairman Buckley asked her to tell the committee what an average new builder would pay with the surcharge and contrast a small, medium and large contractors. She did not what to charge more than necessary to protect the consumer.

Ms. Grein did not have such information.

Chairman Buckley asked Mr. Carson, a member of the contractors’ board, to come forward. She asked how the second funding mechanism would affect a small, medium, and large contractor.

Mr. Carson said the average home was about 1,800 square feet. The amount would be $90. He noted they were going to attempt to have building departments collect the fee for the board but was unsure if such would be successful. The assessment was more equitable than any other they could come up with because the assessment was based on square footage.

Chairman Buckley explained if they estimated the amount necessary would be $600 per residential contractor, the mechanism might raise more money than needed.

Mr. Carson agreed. There needed to be a means to fluctuate, and a cap may be necessary. The figure might be reduced. The board did not want to take in any more money than necessary. He noted the bill needed to be fine-tuned.

Chairman Buckley asked if lowering the amount below 5 cents would be better or placing cap on the amount.

Mr. Carson said the board would need additional time to go through the numbers. They were guessing at the average square footage, and some of the counties did not report.

Chairman Buckley asked that A.B. 636 also be held until the next work session to allow time for a better statement of the facts and figures.

Mr. Dini noted some counties did not have building permits and asked how many did not. He noted a contractor could build in such a county for nothing because there was no way of enforcing the requirement.

Chairman Buckley thought such an issue might bring the committee back to the first option. She noted the genesis of the bill was problems in Clark County, but it also did not mean they did not want to look at an effective mechanism statewide.

Chairman Buckley noted the work session was complete and she opened the hearing on A.B. 675.

John Sande, representing the Nevada Bankers Association, introduced Alan Rabkin, Senior Vice President, SierraWest Bank, and explained there were two bills pending on the subject matter contained in A.B. 675. There were many parcels held by lenders within the state that were in various forms of contaminated status, and lenders were not willing to foreclose on those parcels of land. Federal and state statutes caused a lender to be fully liable for the cost of property cleanup, even though at the time the lender took the collateral, they did not know the property was contaminated. He also noted the property could have become contaminated after the time the lender took the collateral. Lenders faced a situation where a commercial piece of property was contaminated, and they had to decide whether to proceed with foreclosure thereby incurring liability for cleanup, or not foreclosing on the property and allowing the borrower to proceed with the default and not pay taxes. The property went into a hiatus state, and at such a point, there was no productive value for the property. Another option was to allow the lender to go into district court and declare the property contaminated which would only accomplish an elimination of the collateral held by the lender and allow the lender to proceed on the unsecured note. In order to get over the hurdle, the lender must show the property was substantially contaminated and had a majority of its worth "eaten up" by contamination.

Mr. Rabkin proposed another solution, which was to free up various parcels of property and allow them to be freely traded, sold, and eventually cleaned up. A.B. 675 stated those who caused the contamination would remain responsible under current statutes. His concern was for innocent lenders who lent on property, which they probably ran a phase one examination and got the borrower to certify that the property was free of contamination, took their collateral, and then something happened. Those types of lenders, whether they were private or bank lenders were the ones he was discussing.

The proposed remedy was allowing the bank or private lender to proceed to foreclose on their property and have a shielded status after a 20-day notice to the state agency charged with the environmental aspects of the property. The lender would not be responsible for cleanup. Mr. Rabkin noted the lender would be able to freely transfer the property in its contaminated state. If the lender transferred the property, other state laws required the lender disclose the contaminated status so they could not transfer the property to another innocent person. The lender would have all their rights, under current statute, to go against the prior owner who caused the contamination to help rectify the problem, proceed to resell the property, or at the foreclosure, allow a bid to be larger than the banks bid. The lender could then sell the property to a third- party who would buffer into their bid the fact there was contamination, but also know they would not be personally liable for the cleanup. The new buyer would probably buy the property with an eye towards cleaning it up and ultimately getting recompense from the prior, potentially responsible parties, who contaminated the property.

A.B. 675 allowed for a freer transferability of the property onto the next level of purchasers who had an interest in working with the prior owners and working with the property to clean it up. Because the maximum amount was buffered into the bid that would be required to repair the contamination on the property, the bidder was already 90 percent home free because the equity was already in the property to start the remediation. Such would serve the state’s interest, which was to clean up the property. Lenders were uncomfortable with going to district court to prove contamination because of the expense, and not willing to foreclose and be unlimitedly responsible for cleanup. Another option was needed to move the properties, and through the bill, an option was proposed.

Mr. Rabkin noted a bill in the Committee on Natural Resources that attempted to address the problem but from a different angle. The other bill created a regulatory framework within the Nevada Division of Environmental Protection. Anyone interested in participating in a cleanup would present plans and pay fees in order to seek approval from the agency to go ahead and do the work.

His concern with the other bill was banks did not like to add additional expense onto their liquidation costs and did not like to jump through additional hoops to liquidate collateral they innocently took. In addition, he was not sure it was necessary to involve additional state regulation and cost in the area. Mr. Rabkin was not discussing relieving anyone of responsibility; he was discussing innocent lenders and successors being recognized for being the innocent purchasers. The bill asked that the innocent lenders be allowed to transfer the property without stepping into the liability of prior parties.

Chairman Buckley asked if the bill conflicted with federal law.

Mr. Rabkin stated during the past 5 years, there had been several federal statutes giving banks a similar protection. The law was a secured lender protection. If the lender had a certain innocent status, under federal law, they might be exempt from federal statute. It was not inconsistent, but he could not say A.B. 675 was an identical mirror of the federal law. The federal statutes mainly considered issues such as clean water or clean air. A.B. 675 considered the issue of real estate. They were looking at the issue as a secured lender and not as relieving anyone of contamination to water or air.

Chairman Buckley said the bill went beyond an innocent lender. Someone who would be immune would be someone who could clean the property or if someone purchased the property at a foreclosure, other than the bank, then no one was liable.

Mr. Rabkin agreed and noted the real bottleneck was at the point of the secured lender’s decision to foreclose or not, which was what he was attempting to address with the bill. Unless a subsequent transferee was provided immunity, it would be worthless for the bank to have immunity because the bank, by law, could not retain the property; they must move the property as real estate owned (REO). Ultimately the property would end up in the hands of a successor transferee who was assumed to be innocent. Just in case the transferee was not innocent, the bill included relief noting the transferee would lose their immunity should they participate in subsequent or prior contamination.

Chairman Buckley said the situation was difficult because if someone was cited for a environmental violation, they would let the bank take the property back if the cost was astronomically high. At such a point, the bank could then transfer the property without cleaning it up and without liability.

Mr. Rabkin said in the transaction mentioned by Chairman Buckley, the borrower who contaminated the property would not lose any responsibility they had to the state or to the bank in the subsequent transfers. They would be liable. There was no gain in allowing the bank to take property back. Subsequent transferees were going to price the property knowing they might never get recompense from prior responsible parties, and they would bid low at the bank sale knowing there was a prior borrower who might be able to help pay for cleanup. At least the bank could move some of the equity in the property, and have recourse to sue the borrower on the note.

Ms. Evans asked if it was an easy matter to determine who contaminated the property.

Mr. Rabkin said it depended on the facts and on the type of contamination. In a typical contaminated site scenario, it was easy to determine who contaminated the property. Typically the situation involved hydrocarbons, gasoline products, or dry cleaning solvents, and it was easy to identify who operated in and around the property and who caused the concern. Remediation specialists were getting better at identifying the source. They drew maps showing plumes and where the gradient was based upon slope. In other types of contamination, there were certain areas that had a certain mineral content caused by mining operations. In those situations or if a property sat on a huge pool of groundwater, it became difficult to determine source, but it could be done at a great cost. The type of contamination determined if it was easy or hard.

Ms. Evans considered that over a period of years and after a property changed hands a number of times, it might be difficult to identify a responsible party. While she was sympathetic to the "innocent lender," she was concerned about the ultimate mitigation of the contamination. She thought the issue could continue to cycle for awhile thus not dealing with the problem.

Mr. Rabkin thought such was the case under current statutes. Banks were uncomfortable becoming involved in such property, and unless the banks moved on the collateral, nothing happened to it. The property could not be liquidated, no one would buy it, the bank did not foreclose on the property, and the borrower did nothing to the property. Probably the borrower was under some sort of order or investigation by federal or state authorities because of certain mandatory reporting that had to be done by remediation companies. When a bank found out there was a problem, they usually sent their own remediaiton specialist who usually had an obligation to report the problem to the state or Federal Government. At such a point, the property would end up sitting. Mr. Rabkin said they were attempting to find a reasonable solution to put the property into productive use without eliminating the state’s rights or anyone’s rights against the contaminators.

Mr. Dini referenced mine tailings in the Comstock area. He noted a superfund cleanup of about a dozen lots where the soil had to be cleaned up. Another example was a mine in Yerington, for which ARCO could not get permits until they agreed to cleanup the property. Now the plumes from the water were going out over 2 miles and contaminating wells surrounding the property.
Mr. Dini understood without the legislation the property would probably not get cleaned up unless there was a superfund status, which he thought was defunct with the Federal Government.

Mr. Rabkin did not speak to the issue of the ultimate cost of cleanup. His main concern was private and bank lenders not knowing they were stepping into a problem and then finding themselves in the scenario. The situation was difficult for the lenders, and he was attempting to correct it.

Allen Biaggi, Administrator, Nevada Division of Environmental Protection, introduced Doug Zimmerman, Chief, Bureau of Corrective Actions, and William Frey, Deputy Attorney General, Division of Environmental Protection. Mr. Biaggi offered written testimony in opposition to A.B. 675 (Exhibit N). He noted the division understood the concerns outlined by industry and the difficulty within the situation. However, the division believed A.B. 675 addressed only one component of the concerns at an environmentally contaminated site; that of the liability of a property owner or lender but did not address actual site cleanup. Without addressing the critical cleanup component, the bill forced the state and Federal Government into a role of funding cleanup efforts at some sites with environmental contamination.

Mr. Hettrick understood there were no easy answers to the problems. He referenced Mr. Biaggi’s comment about forcing the state to pay for the cleanup of a site, but the opposite was also true. If the law was not changed, the lender, who had nothing to do with the problem, was forced to pay for the cleanup. It was not fair to either party. He thought the parties needed to get together and make the situation fairer for all.

The bank would only take the property back with immunity, and if the bank did not take the property back with immunity, the property would be in limbo. Property taxes would not be paid and nothing would happen with regard to contamination. Mr. Hettrick thought the situation would be better off by adding immunity if there was some startup for cleanup and agreed with Mr. Rabkin that the buyer was definitely going to buy the property at a reduced price. The buyer was not going to take a risk of paying top dollar for a property and then have to pay for cleanup.

Mr. Biaggi noted page 6, section 18, of S.B. 363 addressed the exact concerns of Mr. Rabkin and Mr. Sande. The senate bill recognized the need for the immunity provisions. He noted a concern with A.B. 675 was immunity could continue on to subsequent purchasers. He was concerned about inducement to ensure cleanup did occur. If everyone continued to get immunity, there would be no incentive for cleanup.

Mr. Beers asked if the bank failed to foreclose, would the property be left in its current state. He inquired as to a means of forcing the bank to take responsibility for cleanup, assuming the owner of the property was unable to do so.

Mr. Frey explained there was no means of forcing a lender to cleanup property. There was no state statute that provided such authority and there was no lender liability even if the lender foreclosed. Lender liability came into existence typically when the lender became involved in the day to day operations of the property owner. Then the actions of the property owner could be imputed back to the lender.

He noted what usually happened was the new purchaser purchased the property at a discount knowing that as an owner they would be obligated to cleanup the property. If the new purchaser had no incentive to cleanup, there would be no discount on the price. The lender would be assured of getting their money back because the price would not be discounted. He explained the new lender would own a piece of property knowing it was contaminated, but such did not matter because they did not have to clean it up. It could be assumed the first owner stopped making payments on the property, and he assumed the state or local government would be "stuck" with the cleanup.

Mr. Beers said the choices were to do nothing with the property and allow the bank to contend with the loan or look into some mechanism to breathe life back into the land hopefully making it economically viable. Hopefully some portion of the economic viability could be used to cleanup the property.

Mr. Frey affirmed Mr. Beers’ statement. There was an incentive for the lender to breathe life back into the property and such was expressed in S.B. 363.

Joseph Johnson, representative of the Toiyabe Chapter of the Sierra Club, noted he was a professional geologist and licensed as a registered geologist in the State of California. He said there was a "catch-22" problem and noted a situation where a small family operation had a contaminate. The family might have high net-worth, but the net-worth was in land. The family had no cash to cleanup the contaminate. The family could not go to the bank for a loan, as the bank would not loan on the property because it was contaminated. He noted S.B. 363 addressed some of those issues. By the time the responsible party was faced with a foreclosure, the party may have zeroed out on the property in net worth. The bank took over, and under A.B. 675, the property was released of any responsibility for cleanup, which left the state with the responsibility. Such was the problem with the bill as it was written.

He noted federal statutes partially addressed the issue on liability to lending institutions. S.B. 363 gave some immunity to those who made cleanup efforts so the value residual in the property went at least partially, or maybe even exclusively, to cleanup. S.B. 363 also allowed for a situation where the property did not have to be cleaned up to absolute purity, but could be cleaned up for a future industrial site. There were also recorded restrictions so it would not cost so much to cleanup the property. A.B. 675 was considered a "get out of jail free" bill that would ultimately transfer cost to the state. The problem was real and needed to be addressed but not the way the bill handled it.

There being no further testimony or additional questions, acting Chairman Dini closed the hearing on A.B. 675 and opened the hearing on A.B. 680.

Alice Molasky-Arman, Commissioner, Division of Insurance, introduced Sharon M. Weaver, Health Insurance Portability and Accountability (HIPPA) Section, Division of Insurance. She noted A.B. 680 was the division’s omnibus bill. She referenced Exhibit O, which was a summary of the bill. Exhibit O also contained two amendments proposed by the division to address a drafting problem, a deletion, and a consolidated list of proposals that were going to be introduced by members of the public or the industry. The proposals were not amendments proposed by the division. Ms. Molasky-Arman reviewed the amendments and did not have a problem with them.

A.B. 680 primarily addressed and strengthened third-party administrator laws and addressed changes in HIPPA, which was enacted in 1997. The division needed amendments to the act in order to conform to federal regulations and statutes.

Section 1 indicated when a licensee voluntarily surrendered their license they could not void or terminate the commissioner’s authority. There had been situations where disciplinary action was initiated and the licensee attempted to terminate or surrender their license. There was an artificial process where the division refused to allow the licensee to surrender their license as they thought it was important to carryout the disciplinary process. It was important to other states, and under federal law, there was a great effort to review the misconduct of certain licensees under the insurance codes.

Section 2 amended Nevada Revised Statutes (NRS) 679B.190, which was the general provision regarding confidential records within the Division of Insurance. The primary purpose of the proposal was to distinguish investigations and those documents related to investigations from documents related to examinations. The provision was in NRS 679B.230 and followed a nationwide standard. The examinations needed to be removed from NRS 679B.190.

Section 3 amended NRS 679B.440, which was a cost stabilization provision. Cost stabilization allowed for a report to the legislature February 1 of every legislative year. The report indicated the state of the casualty market, which included automobile insurance, medical malpractice insurance, and other professional liability insurance. The provision proposed to add worker’s compensation, which was also a casualty line of insurance. The division’s report already referred to worker’s compensation, but the division wanted it included so it was very clear it was also a study the division would be continuing.

Section 4 was related to sections 27 and 29.

Section 5 was intended to exempt a domestic insurer that did no business in another state from reporting risk-based capital to the division. The language in the bill was incorrect and was corrected in Exhibit O, on page 3. The amendment would address a change affecting the division’s intent. Risk-based capital reporting was very expensive and required by all states.

Section 6 began the provisions regarding third-party administrators. The division’s awareness that a change was necessary in third party administrator requirements and provisions was heightened because of L and H Administrators, which was the third party administrator for the state health benefit plan. L and H Administrators was not the first third-party administrator with which the state had problems. The division realized the laws, with respect to reviewing applications, were not sufficiently strong enough, which was why the measures in A.B. 680 were being proposed.

Sections 8 through 11 were definitional.

Section 12 gave the basis for revocation for a third-party administrator license including financial conditions, unfair practices, refusal to be examined, claims delay, or claims refusal. There was also clarification that a $2000 per act or violation fine would be imposed for violation.

Section 13 addressed the application process and required certain financial and internal corporate documents that the division would review prior to registering or licensing a third-party administrator. The section also required a business plan and gave greater insight into who was the manager and who was in control of a third-party administrator. With respect to L and H Administrators, the division had no idea that when the third-party administrator was licensed its principal was already under investigation in the state of Illinois. The division did not have the ability to go beyond the corporate articles of incorporation.

Section 14 consisted of grounds for refusal to license a third-party administrator.

Section 15 addressed renewal of a license every 3 years.

Section 16 required the submission of annual financial statements from a third party administrator.

Section 17 added the provision regarding the administration of an internal service fund under NRS 287.010. The chapter currently required that for a health insurance plan of a political subdivision or public entity the commissioner review the third-party administrator contract for reasonableness of fees. There was nothing currently in the statute that related to internal service funds.

Section 18 was technical and deleted certain requirements because of new requirements.

Section 19 amended NRS 683A.0857 to increase the bond required of a third party administrator from $50,000 to $100,000. Such would provide a larger fund for the benefit of any person, including an employer, employee, insurer, or any other person who was harmed by an administrator.

Section 20 amended NRS 683A.086 regarding the written agreement between an insurer and a third party administrator and required notice to the commissioner for termination of services specified under the agreement.

Sections 21 and 22 were primarily cleanup.

Section 23 amended NRS 683A.0877 regarding financial obligations of a third-party administrator. It clarified their role as a fiduciary with respect to the accounts set up for premiums and claims and emphasized the accounts must be segregated.

Section 24 was also cleanup.

Chairman Buckley asked the committee if they desired the Commissioner of Insurance to explain all 69 sections of the bill or open the meeting to specific questions on the sections. The committee indicated they preferred specific questions, and Chairman Buckley referenced section 46, which indicated no member, agent, or employee of the board may be held liable in a civil action. She asked what the purpose of the section was and why the sovereignty immunity cap was not good enough.

Ms. Molasky-Arman explained the section referred to the HIPPA reinsurance board, which was made up of volunteers. The volunteers were members of the industry and the public. She understood they served for no compensation and had no immunity, which was the purpose of the provision.

Chairman Buckley asked what were the duties of a reinsurance board member.

Ms. Molasky-Arman noted board members managed the reinsurance pool and the program for reinsurance. They received the same monies to which state employees were entitled for reimbursement.

Mr. Hettrick referenced Exhibit O, page 9, which said "second liens upon unencumbered real property located in this or another state." He did not know how there could be a second lien on unencumbered real property. He thought the word unencumbered should be removed.

Ms. Molasky-Arman noted the language was proposed by the industry, and she preferred they addressed the issue themselves.

Chairman Buckley asked Ms. Molasky-Arman if she would submit her comments in writing so as to be included in the legislative record.

Ms. Molasky-Arman noted Exhibit P, which was a summary of A.B. 680.

Chairman Buckley noticed the HIPPA rate was reduced, which would help many consumers.

Ms. Weaver explained for individual eligible persons under the HIPPA program, the division was proposing a rate reduction. Through a recent program memorandum, the Federal Government indicated the industry-contemplated rates of a maximum of 200 percent spread off of their most preferred rate. There were abuses showing up to 500 to 600 percent. The division proposed to drop the rates below the 200 percent threshold to get below the referenced federal limit. The net affect would be 162.5 percent from the most preferred rate. In the individual market, the impact was very small. It affected just eligible persons, not everyone who applied.

Bob Crowell, representing Farmers Insurance, referenced Exhibit O, pages 4 and 5 which said, "This does not prohibit a nonresident licensee from being named to the license of a resident agent or resident broker if the nonresident licensee’s primary place of business for transaction insurance is in Nevada and he can verify to the commissioner that his primary residence is within 50 miles of the boundary of the state of Nevada." A Nevada corporation licensed as an agent or broker could not hire a nonresident of Nevada to work for them, which became a problem in areas next to the state line. The new language did not prohibit a nonresident licensee from such if they had the consent of the commissioner and were within 50 miles of the state line. The language was an accommodation for those who lived across the state line.

Chairman Buckley said the committee was hesitant to add nongermane amendments to bills because of close committee deadlines. She asked Mr. Crowell from where the amendment came and why it was not in his own bill.

Mr. Crowell said it was under NRS 683A.140, which was germane. He noted there was no section that considered the issue, but the chapter was there. It was not a major piece of legislation, but he did believe it to be germane.

Robert Barengo, representing Western Insurance, introduced Dick L. Rottman, Chief Executive Officer, Western Insurance. He stated Mr. Rottman would explain the amendments in Exhibit O, starting on page 6.

Mr. Rottman said the amendments considered the investment chapter of the insurance code and amounted to several liberalizations in the section of the code. The chapter had not been amended since 1971, and there were some areas where some investment vehicles and concepts had changed over the years. The amendments were an attempt to allow domestic insurers to earn more on their assets.

Chairman Buckley noted she did not like changing major public policy in the last week of deadlines since no one in the public had a chance to comment on the changes. She asked why the last minute nature of the request.

Mr. Rottman said given the constraints and time, such was the best they could do. He noted the changes were not major nor would they impact the public to any extent. He respectfully requested the committee give the amendments consideration, as it would help their business particularly in the area of declining interest rates.

Mr. Barengo explained the general public would not look at the particular section of the insurance code in question because it considered the regulatory codes for domestic insurance companies. The code only applied to how the company invested its assets and not what a company was doing in so far as selling insurance policies. The amendments would not have an effect on the general public.

Mr. Dini said if the company invested and went broke, the policyholder was stuck. He noted the prudent man rule was used for investing in retirement systems and the State Industrial Insurance System, and asked if the amendments followed such a rule. Mr. Dini then noted the increase from
10 percent to 35 percent.

Mr. Rottman explained the amount looked like a large increase, but the way preferred stock issues were put out, if one was not in a position to take a larger share, one would miss out and could not take advantage. When the section of the insurance code was added in 1971, there was no domestic industry and no one paid any attention to what was put in the chapter, including himself as insurance commissioner at the time. Currently there was some liberalization needed. The changes did follow, in his judgment, the prudent man rule.

Mr. Dini referenced page 8 of Exhibit O and asked why "by the Federal Deposit Insurance Corporation" was deleted.

Mr. Rottman explained the deletion was because there were other insuring mechanisms available.

Mr. Barengo noted the Federal Savings and Loan Insurance Corporation.

Matthew Sharp representing Nevada Trial Lawyers Association explained Exhibit O, page 12. He noted the amendment was concurred with the Division of Insurance and was part of the original bill. There were typographical errors and the first stated "Amend section 57, page 38, line 34" instead of line 41. In addition, they would be amending section "57, page 38, after subsection 1, deleting lines 36 through 42 and inserting the language." What the amendment did was provide the insurance company with the ability, under limited circumstances, to obtain a release. It gave the claimant, who had given the insurance company a medical record release, the ability to obtain the medical records the insurance company received.

Mr. Sharp noted section 57, page 39, lines 6 through 10 would be deleted, which was the provision giving the Commissioner of Insurance the authority to contact the state bar.

Section 66 would be deleted, and the medical malpractice-screening panel would be left as it was. Mr. Sharp noted the membership limitations would also be the same.

Chairman Buckley asked if his amendments were to the original bill rather than amendments to the amendments.

Mr. Sharp answered affirmatively.

As there were no additional questions and no further testimony, Chairman Buckley closed the hearing and adjourned the meeting at 7:50 p.m.

RESPECTFULLY SUBMITTED:

Jane Baughman,

Committee Secretary

APPROVED BY:

Assemblywoman Barbara Buckley, Chairman

DATE:

ASSEMBLY AGENDA

for the

Day Monday Date April 5, 1999 Time 3:45 PM Room 3142

Matters continued from a previous meeting.

Committee introductions.

Work session on measures previously considered.