The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:15 a.m., on Wednesday, May 12, 1999, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Senator Randolph J. Townsend, Chairman

Senator Ann O’Connell, Vice Chairman

Senator Mark Amodei

Senator Dean A. Rhoads

Senator Raymond C. Shaffer

Senator Michael A. (Mike) Schneider

Senator Maggie Carlton

GUEST LEGISLATORS PRESENT:

Assemblyman Tom Collins, Clark County Assembly District No. 1

Assemblyman David E. Goldwater, Clark County Assembly District No. 10

STAFF MEMBERS PRESENT:

Scott Young, Committee Policy Analyst

John L. Meder, Committee Policy Analyst

Ardyss Johns, Committee Secretary

OTHERS PRESENT:

Dale E. Puhl, President, Southwest Escrow Company

Alfredo Alonso, Lobbyist, Title Loans of America

Chairman Townsend opened the hearing with the introduction of Assembly Bill (A.B.) 204.

Samuel P. McMullen, Lobbyist, Nevada State Board of Nursing, and Barrick Goldstrike Mines Inc., presented an information sheet on A.B. 204 summarizing the bill (Exhibit C).

Kathy Apple, R.N., M.S., Executive Director, State Board of Nursing, told the committee the bill was a culmination of 2 years of work by a committee of nursing leaders across Nevada. She said sections 2, 6 and 20 through 23 all had to do with a change in the language related to schools. This was to ensure that nursing schools use standardized curriculum, she stated, and to be consistent with national regulatory standards. She explained the term currently used in statute was "accreditation," which generally is considered a voluntary process. The more correct term of "approval" is a mandatory process and is the official recognition of nursing education programs that meet standards established by the board of nursing.

Ms. Apple said sections 7, 9, 10, 15 and 16 had to do with removing the language "for compensation." She stated those words were part of a 1955 American Nurses Association (ANA) definition of the practice of nursing, and most boards had removed that language years ago. She claimed one of the board’s responsibilities was to ensure ongoing competency; not just competency based on initial licensure. The board accomplishes that in two ways, she explained, with all of the categories it licenses or certifies. She said it mandates a certain number of hours of continuing education and it also sets out a minimum practice standard. For registered nurses and licensed practical nurses, she noted, the board has, in regulation, a statement that says if a nurse has not practiced in 5 years, a refresher course is required before that license is renewed. She stated to that end, to make it easy for nurses in Nevada, the board was instrumental in developing an in-state refresher course.

Ms. Apple explained to the committee the way the board determined whether or not a nurse has practiced was by using that term "for compensation", so if a nurse practiced and got paid, then that counted. She said the board had been approached last year by parish nurses who, she explained, were typically nurses who were retired, but volunteered their services to their church. They were concerned, she explained, that those volunteer hours would not count towards their practice requirement. She stated that even though the board tried to be very liberal with its interpretation of "for compensation," those hours, in fact, would not count. It was decided that the customer of nursing services deserved equal protection under the law whether or not a nurse was paid and to that end, the term "for compensation" was to be removed.

Ms. Apple said section 17 had to do with the board’s fees in relationship to running the nursing assistant program. She told the committee the board of nursing had been regulating the practice of nursing assistant since 1989 with no fee increases in the 10 years since. The board contracts with the Health Division, she explained, to implement the federal law related to nursing assistants. That includes the maintenance of the registry, approval and inspection of training programs, and investigations of allegations of abuse, neglect and misappropriation. She said the federal money provided through that contract is the primary support of the program. The fees collected by the board supplement the program to cover the state requirements, she pointed out, which currently account for approximately 20 percent of the cost of that program. She mentioned that when she moved into the position of executive director and evaluated the fiscal notes for the program, she found that the federal money had decreased over 37 percent during the previous 6 years. In 1995, she claimed, when the budget was debated in Congress, they looked at removing those monies and the nursing board was told not to expect any money whatsoever. Given the unpredictability of the federal support and the decreasing budget over time, she declared, the board would like to be ready to increase fees when needed. Therefore, she stated, the board was asking that the range of all of those fees be expanded so the board could act accordingly to budget shortfalls in the future. She pointed out the board had no plans today to raise fees, but just wanted to be able to do so when necessary.

Mr. McMullen noted the intent in section 17 was also to make sure the certified nursing assistant (CAN) part of licensure administration and disciplinary activities was more self-sufficient onto itself out of those fees, as opposed to having other nurses pay for those costs. This flexibility, he stated, assures the component parts are more self-funding so that no one else is subsidizing them.

Ms. Apple said section 4 of the bill was language for liability that was taken verbatim out of the 1997 Legislature that had been approved for another licensing board. Mr. McMullen pointed out that section clarified the course and scope of good-faith immunity under the statute and under the constitution.

Senator Carlton asked why the board had taken section 8 out of the bill. Ms. Apple stated there were considerable questions from a variety of groups and the board felt that the whole section needed more work. She said the board had a special meeting and voted to remove that section in its entirety and send it back to the law and legislative committee for more work. Mr. McMullen added that the only intent there was to try and update the definition of the practice of nursing, but since that caused a lot of ripple effects, it was decided to leave it with the existing definition.

Chairman Townsend closed the hearing on A.B. 204 and opened the hearing on A.B. 338.

Matthew Sharp, Lobbyist, Nevada Trial Lawyers’ Association, stated he was in support of A.B. 338, which, he claimed, was a very simple bill. He said it protects homeowners from having their insurance policy cancelled by their homeowner insurer simply because they have a claim that is not their fault. A consumer buys insurance for peace of mind, he declared, and in the event that they have a claim, they turn to their insurance company to pay it. He maintained if a homeowner has a claim due to no fault of his own, he should be able to file a claim without fear of any retribution by the insurance company in the form of cancellation, nonrenewal or a premium increase. He said it was important to note that once a company cancels a policy, the consumer has to report that to their next insurance carrier. That consumer then becomes a bad risk, he explained, and is subject to higher premiums

Mr. Sharp said A.B. 338 amends Nevada Revised Statutes (NRS) 687B.385, which was originally enacted in 1987 and applied to homeowners insurance. In 1997, he claimed, there was an amendment that made that law apply only to the motor vehicle area. He said this bill was amending the law to include homeowners, because the intent of the 1987 bill was to protect the consumer.

Senator O’Connell, referring to line 10 of A.B. 338, asked if there was a definition for "substantial and material." Mr. Sharp said the language came from NRS 687B.320, which governs midterm cancellations, so it is the identical language already existing in the NRS.

James L. Wadhams, Lobbyist, American Insurance Association, U.S. Bank Plaza; and Nevada Association of Life Underwriters, said he was involved in the 1997 amendment. He stated that amendment was directed toward the notion that having a fault-based cancellation requirement on property insurance policies, on which there is no fault, is totally inappropriate. He claimed property insurance is not based upon a finding of fault, but is just a fact.

C. Joseph Guild, Lobbyist, State Farm Insurance Companies, (State Farm) stated he was opposed to A.B. 338 because homeowners’ insurance is not a fault-based situation. He said in situations such as a theft from a vehicle or a washing machine hose breaks, you cannot determine whether or not there was fault. He claimed State Farm had statistics that indicate claimants who had those kinds of losses are much more likely to have more losses, which become more and more severe. It is State Farm’s position, he declared, that they would like to price the rate for those people, based upon the experiences associated with those people. He pointed out that this bill would take away that ability. The bill would also prohibit State Farm from non-renewing of business, he asserted, based on the loss experiences he had just mentioned. He explained it was not a good bill for policyholders because the policyholders without losses would have to pay, through higher premiums, for those who experience losses.

Robert Crowell, Lobbyist, Farmers Insurance Group, said he would address Senator O’Connell’s question regarding the definition of "substantial and material." He stated an amendment to this bill had been proposed on the Assembly side that would have defined substantial and material to say that multiple claims, to which the insured was not at fault, constituted substantial change. He said the multiple-claims language was deleted from the bill and added that he felt two or more claims should be included in the language in A.B. 338. Unfortunately, he continued, the insurance commissioner will tell you that under A.B. 338, as drafted, multiple claims are not grounds for nonrenewal of a policy. He claimed that was what causes a problem for Farmers Insurance Group and for the other insurers.

Senator Carlton related a personal experience she once had with her insurance agent who had vaguely threatened to cancel her homeowner’s insurance after having some problems regarding her family’s dog. She said he alluded to her if there were another problem with the dog, her family would have to make some tough choices. That conversation, she explained, put her daughter in tears for 2 days because she thought the dog was going to have to be destroyed. Senator Carlton told the committee she viewed this bill as a protection for someone like herself who might have had to make that tough choice. She reiterated Mr. Sharp’s statement when she noted if an insurance policy gets cancelled, that person has a black mark on their homeowners’ insurance record for the rest of the time he or she tries to buy a home.

Chairman Townsend wanted to know how long an individual would have to wait to hear from his agent after a claim had been filed, such as for a washing machine overflowing and ruining the carpet.

Jim Werbeckes, Lobbyist, Farmers Insurance Group, replied his company’s policy was to have the adjuster call the claimant within 24 hours.

Chairman Townsend closed the hearing on A.B. 338 and opened the hearing on A.B. 555.

Reynolds T. Cafferata, Attorney, Riordan and McKinzie, told the committee he was representing the Nevada Planned Giving Roundtable and was in support of A.B. 555. He presented the committee with a Summary of Points Regarding Charitable Gift Annuities that included copies of several letters, from various charitable organizations (Exhibit D) in support of A.B. 555.

Chairman Townsend asked Mr. Cafferata if the insurance commissioner had any problem with A.B. 555 to which Mr. Cafferata replied, "No, she does not."

Russel A. Kost III, CFRE, Director of Gift Planning, University of Nevada, Las Vegas, told the committee he was appearing on behalf of the National Society of Fund Raising Executives for Las Vegas, and for the Sierra Nevada chapter. He told the committee the insurance industry had no problem with the bill either.

Mr. Cafferata stated the bill would remove a barrier for Nevada donors and charities to using the charitable gift annuity which, he said was a useful giving technique allowed under the Internal Revenue Code (I.R.C.). A charitable gift annuity allows a donor to make a contribution to charity, he explained, receive a charitable contribution income tax deduction, and receive an annuity from the charity. For example, he continued, a donor might give $10,000 to a charity. The donor would receive an annuity of $770 for life and an income tax deduction of $3,988. The annuity that the donor receives has a market value of less than the donor’s gift to the charity. That is, he explained, in his example, a commercial annuity company would charge approximately $6000 for the annuity. He pointed out that the gift annuity was a charitable donation plan that allowed the donor to receive some income.

Mr. Cafferata said Nevada insurance law currently prevents donors and charities from creating gift annuities, and the law’s broad definition of insurance would include a charitable gift annuity. He claimed insurance cannot be issued in this state without a Certificate of Authority from the commissioner of insurance. Because the insurance statutes are drafted for for-profit entities, he explained, a nonprofit likely could not obtain a Certificate of Authority even if it attempted to do so.

Mr. Cafferata claimed A.B. 555 would exempt charities that meet certain requirements and notify the commissioner of insurance of their activities from the need to obtain a Certificate of Authority to enter into gift-annuity agreements with donors. He said the bill is based on model legislation drafted by the National Association of Insurance Commissioners.

Mr. Cafferata told the committee A.B. 555 would allow charities that have been operating for at least 3 years and are tax-exempt charitable organizations, under the I.R.C., to issue gift annuities. He said the bill requires these charities to have a net worth, in the form of liquid assets, of at least $300,000. Prior to issuing any annuities, he explained, the charity must give notice to the commissioner of insurance, and all annuities must satisfy requirements under the I.R.C. for gift annuities.

Mr. Cafferata claimed A.B. 555 protected donors by requiring the annuity agreements to advise a donor that the annuity is not insurance, is not regulated as insurance and is not protected by any insurance guaranty association. He mentioned that under this bill, charities that issue annuities without compliance are subject to a $1,000 fine for each noncomplying annuity. In conclusion, he stated, A.B. 555 is a good bill and clears the way for Nevada donors and charities to take advantage of an important federal tax benefit.

Janice C. Pine, Lobbyist, Saint Mary’s Health Network, said she was in favor of A.B. 555 and looked forward to the opportunities that will come to all of the nonprofit organizations in the state.

Chairman Townsend closed the hearing on A.B. 555 and opened the hearing on A.B. 635.

Mr. Wadhams told the committee A.B. 635 was requested by his law firm of Wadhams and Ackridge, and presented a section-by-section summary of the bill (Exhibit E). To explain what was meant by "captive" insurers, he said in the simplest sense, it was an insurance company that had been set up by a business to insure what might otherwise be considered to be self-insurance of part of their risks. He explained what happens with large corporations is, they have deductibles and co-payments just like an individual has on his homeowner’s insurance. For major corporations, he stated, those deductibles and co-payments would be substantially larger and those corporations would obtain a federal tax benefit by creating, basically, a private insurance company. Not one that sells to the public, but one that is limited for the insurance that they need and they will place that insurance company in a state that has a law like this or a foreign jurisdiction that has a law like this. Mr. Wadhams told the committee they might have heard of many of these in the Cayman Islands, Barbados or Bermuda. He claimed states in the United States were beginning to adopt these laws to attract that capital back into their jurisdictions. Vermont being the most notable, he mentioned, but said there were a few others as well, including Colorado.

Mr. Wadhams explained what these major corporations would then do would be to set up an insurance company called a "captive insurance company." They would pay the premium to their own company who would, in turn, pay the claims within that deductible area of their insurance policies. He claimed they would receive a partial tax benefit for having paid that premium which would be netted against the profitability. It provides an opportunity for the formation of these entities, he explained, and many major corporations already have them in existence in other states or jurisdictions. He said what was hoped by the introduction of this bill was to create an opportunity for those companies to do that here in Nevada. He pointed out that the amenities of Nevada, including the tax-exempt status for income and the desirability of the northern Nevada and southern Nevada areas, might be an excellent place for board meetings and the like, to do this.

Senator O’Connell asked if this bill was modeled after Vermont’s. Mr. Wadhams said it was. Senator O’Connell asked if it was the exact same principal that the committee had done with corporations as far as Delaware was concerned. Mr. Wadhams said it would make Nevada primarily competitive with Vermont. He claimed the Vermont statute had been modified just slightly to get ahead of them as had often been done with Delaware on corporation statutes. He added this was an opportunity to bring additional business into the state.

Mr. Wadhams explained that what this act represented was a summary form of the entire insurance law. He said there were provisions for licensing, for examination and for revocation of the license for not complying with the laws. He drew the committee’s attention to page 5, line 6 in order to identify a couple of changes requested by the insurance commissioner. He stated the reference to NRS should be to NRS 679B.230 through 679B.287 and explained that this was a series of sections relating to examinations. He pointed out the same problem occurred on page 9, line 14 which again should be NRS 689B.230 through 679B.287. Following line 37 on page 9, he noted, therein is needed an additional section saying, "The provisions of NRS 679B.310 through 679B.370 apply." He claimed those were the sections under which the commissioner operated administrative hearings.

Mr. Wadhams mentioned his final proposed amendment to A.B. 635 was on page 10, lines 21 and 22 and presented the committee with a copy of that proposed amendment (Exhibit F).

Alice Molasky-Arman, Commissioner, Division of Insurance, Department of Business and Industry, told the committee she thought A.B. 635 was a very good bill. She said it would put Nevada in a position to compete and attract existing captive insurers from other states.

Senator O’Connell asked Ms. Molasky-Arman since this was potentially such an attractive thing for Nevada to have, why it has taken so long and why do so few other states have it. Ms. Molasky-Arman stated this was attempted almost 20 years ago. Mr. Wadhams added that this was an economic development opportunity. He said Nevada had been fortunate with its economic development organizations and Nevada Development Authority in the south to focus on bringing in bigger blocks of business or bigger businesses. He claimed this was really a relatively small business in terms of employment, but brings with it, capital.

Mr. Wadhams directed the committee’s attention to page 3, lines 2 and 3 and said he hoped this would give the committee additional comfort. He claimed this law prohibits such captives from engaging in motor vehicle or homeowner’s insurance, and added, this is not for personal lines, but typically done in a business setting.

Mr. McMullen told the committee he wanted to go on record as supporting A.B. 635 based on the understanding that it does not affect the existing captive insurer.

Donald L. Drake, President, Baker and Drake Inc., d.b.a. Deluxe Yellow Star Cab Company, said his industry had used secondary lines of insurance for many years and had very successful experience with captives. He stated that in 1948 the Public Service Commission of Nevada (PSCN) set the requirements for self-insurance programs. He claimed the PSCN maintained those regulations until 1987 when a far more extensive self-funded program was passed by the Legislature and was now under the Department of Motor Vehicles and Public Safety (DMV&PS). He explained that it was felt the DMV&PS had a high level of expertise in that area. He maintained it was ridiculous to allow the PSCN to have any authority in an insurance program because of the absence of any expertise in that area. He told the committee that while he was very much in favor of A.B. 635, he felt that section 34.5 should be eliminated.

A copy of a letter from Reinsurance Association of America (RAA) dated May 6, 1999 and addressed to Senator Townsend (Exhibit G), was presented to the committee. It offered the same amendment that had been presented to the committee by Mr. Wadhams (Exhibit F).

Chairman Townsend closed the hearing on A.B. 635 and told the committee they would now revisit A.B. 338, which had been discussed earlier in the day.

Assemblyman Tom Collins, Clark County Assembly District No. 1, furnished a copy of NRS 687B.385 (Exhibit H) as it had existed until 1997 when part of it was removed. He said A.B. 338 puts part but not all of it back. Due to the coming of three-way insurance and some other issues, he explained, this would not include workers’ compensation or commercial. He claimed it would just be a consumer bill to protect the homeowner who, through no fault of his own, has a catastrophe happen and their insurance should cover it. He said it would act as a reminder to the insurance company that they collect a fee to provide a service to the consumer and they should continue to provide that service and not hold harmful the consumer when they are not at fault.

Sam Sorich, Lobbyist, National Association of Independent Insurers, said his member companies were responsible for approximately 30 percent of the homeowners’ insurance premiums written in Nevada. He stated he was opposed to A.B. 338 for four reasons. First, he explained, it seemed to be based on the idea that there is a widespread nonrenewal of homeowner’s insurance in Nevada. The fact was, he claimed, that there was no evidence that there was a lack of availability of homeowner’s insurance in this state and no evidence of any widespread nonrenewal of that insurance. He noted one of the member companies was Allstate who was among the leading writers of homeowner’s insurance in Nevada. Experience showed that over the last 3 years, Allstate averaged approximately a 99.3 renewal rate on their homeowners’ business here. Clearly, he continued, some homeowner’s insurance policyholders are probably being non-renewed, but those policyholders are finding coverage with other insurance companies.

Mr. Sorich told the committee his second concern was the fear that this bill would cause some market problems. Companies are willing to extend coverage to homeowners today, he stressed, because they have the assurance that they can modify their underwriting and pricing strategy. If this bill were enacted, and companies were locked in to the underwriting decisions they made at the prices that they use, he claimed, they would be reluctant to extend coverage to homeowners today. He maintained that would hurt the competitiveness of the market and perhaps even the availability of homeowner’s insurance.

Mr. Sorich asserted the bill would use the concept of fault on homeowners’ policies. He claimed that while that concept fits with automobile insurance, which is based on liability and a fault concept, it does not fit with homeowners’ insurance, which is a first-party, no-fault coverage. He claimed that homeowners’ insurance companies largely do not ever make an assessment of who was at fault when they pay a claim. The claim is simply paid on a first-party, no-fault basis.

Fourth and most importantly, Mr. Sorich stated, the bill would be unconstitutional if enacted, because it conflicts with the due process and takings clauses of the United States and Nevada Constitutions. It would require an insurance company to continue to renew a policy at no increase in premium no matter how many claims the insured has filed, so long as the insured was not at fault. His conclusion that the bill was probably unconstitutional, he noted, was supported by a ruling that was handed down by a U.S. Magistrate Judge in 1996 in the Safeco versus Reinkemeyer case. The issue before that Magistrate, he claimed, was the same as the one presented in A.B. 338. That issue, he explained, was whether or not to impose a requirement on a homeowner’s insurer that the insurance company must continue to renew a policy at the same original premium regardless of how many not-at-fault claims were filed. He asserted the magistrate ruled that he believed such a requirement was unconstitutional. For those reasons, he concluded, A.B. 338 should be rejected.

Senator Rhoads pointed out that the magistrate’s ruling was only a report and recommendation and wanted to know what the judge’s final decision had been in that case. Mr. Sorich replied that the issue had not finally been litigated, but added, the reasoning in the magistrate’s recommendation, he felt, was sound.

Mr. Sharp told the committee he wanted to rebut a couple of points because the Reinkemeyer case, of which Mr. Sorich spoke was represented by Mr. Sharp’s law firm. Explaining the case to the committee, he said, for 10 years an insurance company operating in Nevada consciously decided to violate the laws with knowledge that they were doing so. He claimed on a wholesale basis, that company disregarded the existing cancellation laws. The magistrate’s ruling referred to by Mr. Sorich, he stated, was never adopted in any form by the district judge or the court of appeals. The Nevada Supreme Court issued an opinion, as a recommendation to the ninth circuit, he explained, regarding the fact that homeowner's insurance is subject to cancellation provisions. He noted that the ninth circuit adopted the Nevada Supreme Court’s opinion in its totality. More importantly, he continued, in that case a couple things were discovered in regard to premium increase. He said A.B. 338 does not prohibit premium increases across the board, and claimed that is how insurance companies base the rates for homeowners. Mr. Sharp mentioned Safeco was asked, in this particular case, to name one instance where they did not increase a premium because of this law or were withheld from increasing premiums because people file claims. He declared Safeco’s answer was that they did not increase premiums simply because you file a claim, but rather did a pool system so that premium increases were reflected across the board.

Chairman Townsend closed the hearing on A.B. 338 and opened the hearing on A.B. 680.

Chairman Townsend asked if, in Ms. Molasky-Arman’s opinion, A.B. 680 was related to three-way insurance. Ms. Molasky-Arman replied that it was not, for the most part, related to three-way workers’ compensation. Chairman Townsend wanted to know what would happen to the State of Nevada if this bill was not passed. Ms. Molasky-Arman said the proposal had two primary items. One was to create strengthening in the requirements for licensing and oversight of third-party administrators. Some weaknesses in the laws, she claimed, had harmed the State of Nevada. The other primary theme, she stated, was amendment of certain Health Insurance Portability and Accountability Act of 1996 (HIPAA) sections. She noted that she had learned from the Health Care Financing Administration (HCFA) that some of those sections needed to be changed in order to harmonize with the federal laws. She told the committee there were other provisions in the bill which she believed were important, but added, they were stand-alone provisions such as the ability to license a nonresident surplus-loans broker. She felt the current law was probably unconstitutional in that it prohibits nonresidents from being licensed. The Congress has already identified these kinds of provisions as being discriminatory, she claimed, and noted that most states have changed them.

Chairman Townsend asked Ms. Molasky-Arman to give the committee the results of the crisis that occurred with regard to the state employees’ health care benefit program and the third-party administrator. He wanted to know what the results had been from a disciplinary point of view and if this bill related to that in tightening the provisions.

Ms. Molasky-Arman stated that the bill specifically related to the problem experienced with L and H Administrators (L & H). She said it was learned that Nevada’s laws were not as strong as some jurisdictions and so the division had gone out and searched the laws of every jurisdiction. In part, she explained, the Division of Insurance used the National Association of Insurance Commissioners’ (NAIC) laws of Arizona. She told the committee it was her belief that L & H should have been shut down at least 6 months before they actually had been shut down. She said the division had initiated an examination of L & H, who did not comply with the examination, or produce documents. The division took them to court where they violated the court order. When injunctions were obtained against them, she continued, L & H still refused to open and produce some of their records. Ms. Molasky-Arman declared that case was currently within the district court system because of the violation of the court orders.

Ms. Molasky-Arman asserted that in that case, she learned that the principal of L & H had been charged in the State of Illinois, by the U. S. Attorney’s Office, with embezzlement from self-funded insurance plans. She added that person had been acquitted, but that there were other cases pending against him.

Chairman Townsend asked if the committee on benefits was the group who chose L & H and if so, wanted to know if that committee had used the expertise of the Division of Insurance in order to find out potentially what they could have found out. Ms. Molasky-Arman said the first time L & H had been discussed was in January 1997. When the committee on benefits approved the contract, she stated, L & H had purchased Core Source. She said she believed there was an assignment to L & H and a document was signed by the Committee on Benefits that accepted L & H as a third-party administrator.

Ms. Molasky-Arman stated there was a provision in NRS 287.010 that requires that under any public entity’s self-funded plan, the plan be submitted to the commissioner at least for the review of the reasonableness of the administrative fees. She claimed there had been some discussion as to whether that applied to the state plan or not. She maintained it had been the position of the Committee on Benefits that that did not apply to them and it only applied to other political subdivisions.

Chairman Townsend asked what could be placed in the bill that might help the Division of Insurance with that problem. Ms. Molasky-Arman said there needs to be clarification in NRS 287.010 that it applies to the self-funded benefit plan of the state or its employees. She said even the deputies attorney general, among the various agencies involved, did not agree on the interpretation of that. Chairman Townsend said it was important to note that the Division of Insurance should have jurisdiction and that a political subdivision includes the state.

Ms. Molasky-Arman presented the committee with a summary of each section of A.B. 680 prepared by the Division of Insurance (Exhibit I). She then reviewed the summary with the committee section by section. When section 30 was mentioned, Chairman Townsend asked what problem lead to adding "rebate" as a prohibited act.

James Jeppson, Chief Insurance Assistant, Division of Insurance, Department of Business and Industry, told the committee there was a section in NRS 686A.130 which states that a title insurer cannot return any portion of the premium to a customer or a representative of real property. He said there was an opinion of the attorney general’s office, unrelated to the Division of Insurance, concerning a real estate transaction, that a rebate by a title insurer could be acceptable. He stated the division felt that conflicted with its statute and wanted it clarified, resulting in section 30 adding "rebates" specifically to that prohibition.

Ms. Molasky-Arman told the committee that section 33 began the provisions related to HIPAA and asked Sharen M. Weaver who she stated was the HIPAA manager, to summarize those provisions.

Sharen M. Weaver, Manager, Health Insurance Portability and Accountability Section, Division of Insurance, Department of Business and Industry, told the committee the HIPAA sections of the bill started at section 33 and continued through section 56. She stated that for the most part these sections were bringing Nevada’s law further into compliance with the federal HIPAA law. She said most of the changes were minor and touched briefly on the substantive ones she claimed would be of most interest to the committee. Referring to section 34, subsection 2, she said the division wanted to offer eligible persons another option to purchase a guaranteed-issue policy. These were the people, typically, she explained, who came off of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), then went to an insurer. Ms. Weaver stated:

Chairman Townsend asked what Ms. Weaver meant by "producer." Ms. Weaver replied such as an agent or a broker, and added, the salesman of health insurance. She continued:

Chairman Townsend asked to what board Ms. Weaver was referring. She answered the board for the Nevada Program of Reinsurance for Small Employers and Eligible Persons.

Mr. Sharp told the committee that section 57 was a result of a compromise with Nationwide Insurance and the Nevada Trial Lawyers’ Association to clarify the requirements with respect to producing medical records in personal injury claims.

Ms. Molasky-Arman said section 60 eliminates the responsibility of the division to notify the health maintenance organization (HMO) of a potential violation and allows them to correct the violation before any sanction is imposed. She claimed that does not exist for any other kind of insurer.

Fred L. Hillerby, Lobbyist, Nevada Association of Health Plans, presented a proposed amendment to A.B. 680 (Exhibit J) and referred the committee to page 36, section 54. He said that section had a provision in it that arose because of some confusion relative to the U.S. Department of Health and Human Services, which is one of the three federal agencies that have jurisdiction over HIPAA. Placed in that section some time ago, he claimed, was a provision stating if a person commits fraud to gain insurance, they can be cancelled. He pointed out that this section 54 took away that provision. Therefore, he noted, that section should be deleted. He claimed he had spoken with the commissioner of insurance regarding this, and there was no opposition to deleting that section.

Mr. Hillerby told the committee the intent of the second proposed amendment was to remove the minimum administrative penalty the commissioner could levy. He said there were clearly some instances when a fine is in order but added that this is the only place in the statutes where there was a minimum. He claimed penalties could be assessed up to $2500 without giving the HMOs the opportunity to remedy the defect in its operations that gave rise to the penalty citation.

Mr. Wadhams submitted a proposed amendment to A.B. 680 (Exhibit K) and told the committee it would effect the surplus-lines statutes found in section 27, on page 17. He stated the amendment added an additional basis for the commissioner to approve an insurance exchange. He said it was a fairly technical piece and added, it does not delete the existing requirement, but gives another basis of consideration for the commissioner. He pointed out, on the second page of Exhibit K, an enhancement to the commissioner’s power, allowing her to either require a larger trust fund or a larger surplus to policyholders.

Senator O’Connell asked about Mr. Wadhams’ reference to page 17. He stated the predicate for this was section 27 and said, as the committee would note, it was technically an amendment to NRS 685A.120. He claimed that what he was trying to identify for the committee’s benefit, was that surplus lines had been addressed in this bill. He pointed out that this was an amendment not to that same section of the surplus lines law, but noted it was a surplus lines amendment.

Robert R. Barengo, Lobbyist, A and H Insurance, and Nevada Consumer Finance Association, presented proposed amendments (Exhibit L) which, he said, had been presented to the Assembly commerce and labor committee who chose not to process them. He noted he was asking to amend five specific sections of NRS chapter 682A, which is the chapter for investment for domestic insurers. He referred the committee to Exhibit L and claimed those particular sections had not been amended since 1971. He said the first proposed amendment would increase the amount of investment in preferred or guaranteed stock, from 10 percent to 35 percent. The second proposal asked that the investment in common stocks be increased from 25 percent to 35 percent. The third asked to add two new categories to the section regarding investments in stock and subsidiaries. The fourth proposed amendment would just change the 25 percent to 35 percent to coincide with the second proposed amendment. The last proposal, he declared, would take out the last six words of NRS 682A.190, "by the Federal Deposit Insurance Corporation." The reason for this, he claimed, was because there are other kinds of insurance including Federal Deposit Insurance Corporation (FDIC) and Federal Savings and Loan Insurance Corporation (FSLIC). And in the case of credit unions, thrifts and savings and loans, he concluded, there was private insurance.

Senator O’Connell wanted to know why the Assembly refused to accept these amendments. Mr. Barengo replied that the Assembly did not refuse but just failed to act on these particular amendments.

Mr. Sharp told the committee that his proposed amendment (Exhibit M) had to do with bail. He said currently someone who issues bail insurance cannot own an insurance agency in the state unless they have a resident insurance agent. He said what he is proposing to do is to allow a bail insurance company to own an insurance agency or to operate their own insurance agency without having to have a resident agent. He claimed this just makes sense from a public perspective and added that it was limited to bail only.

John M. Moore, Lobbyist, National Association of Bail Insurance Companies, said he was in concurrence with Mr. Sharp’s testimony.

Chairman Townsend acknowledged to the committee that the amendments asked for in a very complex bill were rather large as well as the additional issue regarding the jurisdiction of the insurance division over the state plan. He asked Scott Young, Committee Policy Analyst, Research Division, Legislative Counsel Bureau, to get the amendment drafted as soon as possible in order to allow the committee to vote on it by Friday, May 14, 1999.

Mr. Young asked if the commissioner of insurance was in agreement with all of the amendments that had been proposed and the answer was yes. Chairman Townsend closed the hearing on A.B. 680 and directed the committee’s attention to Senate Bill (S.B.) 241.

Chairman Townsend said Amendment No. 725 had been received from the Assembly that added a new section to S.B. 241 to read, "This section and sections 2 through 5 of this act become effective upon passage and approval. 2. Section 1 of this act becomes effective on July 1, 1999."

* * * * *

Chairman Townsend drew attention to Amendment No. 735 to S.B. 177.

SENATE BILL 177: Makes various changes concerning manufactured buildings. (BDR 40-625)

Mr. Young told the committee the amendment would delete line 8 which he said would essentially restore the ability of the local entities to review not only the aesthetics, but the architectural issue involved with manufactured housing.

Chairman Townsend opened the hearing on A.B. 64.

Senator O’Connell said, for the record, "My son is a mortgage banker and so I will not be voting or participating in the discussion on this bill."

Chairman Townsend told the committee that sections 2 through 8 were definitions. He said section 8 was the definition of "mortgage company," and asked Mr. Barengo if that had been in the statute previously. Mr. Barengo stated what used to be called "mortgage company" included everyone; mortgage bankers, mortgage brokers and mortgage agents. He said now the mortgage company applies only to the mortgage broker, who is someone who loans their own money. He explained that the remainder of the bill deals with either a mortgage broker or a mortgage agent and requires them to do certain things.

Chairman Townsend asked if the term "mortgage banker" was being abandoned. Mr. Barengo said that was correct. He added that A.B. 64 creates a new chapter specifically for mortgage companies.

L. Scott Walshaw, Commissioner, Division of Financial Institutions, Department of Business and Industry, in reply, stated A.B. 64 paralleled what the Division of Financial Institutions proposed in their legislation. He said the basis of it was to create a separate chapter to license people that the division, by definition, call mortgage companies.

Chairman Townsend asked for some specific examples of who those people were. Mr. Walshaw replied the way the bill is written, it only applied to the kind of firms such as Mr. Barengo’s clients; Household Finance, Norwest, Beneficial, etc. He said those companies were currently licensed under NRS chapter 645B and were now being moved from licensing under one chapter to licensing under another. Chairman Townsend wanted to know what public purpose that would serve.

Mr. Walshaw said the intent was to create this chapter and craft it to the needs of those particular types of operations rather than trying to use one chapter to cover a variety of different types of operations. He mentioned that the State of Arizona had done something very similar, but noted that Arizona took it one step further. He suggested the committee take that additional step which created a third category for licensure that would apply to so-called commercial loan brokers, of which Nevada has a number currently licensed under NRS 645B.

Chairman Townsend wanted to know what the commercial loan broker did that was different from the others. Mr. Walshaw said the commercial loan broker engages in relatively large transactions where the lenders he is representing are large insurance companies or institutional lenders, not private parties. For example, he explained, the commercial loan broker would arrange financing for a commercial shopping center or a supermarket, etc.

Chairman Townsend directed the committee’s attention to section 39. Mr. Barengo stated that section was a restatement of the existing law found in NRS chapter 645B.

Referring to section 40, Mr. Walshaw told the committee that NRS chapter 627 of this bill dealt with an amendment to construction control bonds that are administered by the State Contractors’ Board. Mr. Barengo stated while that was true, this was referring to a construction control account and the committee and subcommittee in the Assembly mistakenly wanted to make sure that the bonds for construction and control accounts were adequate. He said those committees were separating the fact that a mortgage broker who handles your money, cannot at the same time handle a construction control account.

Chairman Townsend asked if there were any representatives of construction control present.

Henry R. Butler, Owner, Butler Mortgage Company Inc., said the bill makes sure the construction control had a bonding requirement that is separate from the mortgage broker. He explained that the construction control was the party who assumes responsibility for disbursing the construction monies on behalf of the lender to the borrower and his contract. The construction control, he acknowledged, has a fairly heavy burden in that he has the duty of receiving the money, safekeeping it and then disbursing it while making sure the work is being done in accordance with the construction contract. He claimed the way the current statutes were enforced and operated, they only require that a construction control post a bond in a minimum amount of $20,000. Mr. Butler said the contractor’s licensing board has to keep that bond. In summary, he stated the bill was totally inadequate to address the needs of construction control, which, he asserted, should be handled separately from the mortgage brokers. He declared it should be enforced separately and should have a well thought through set of limitations and liabilities. He said to take it piecemeal will take something that is already chopped up and not enforced and make it even worse.

Mr. Butler claimed the financial institutions division did not like anything to do with construction control and the contractor’s licensing board does not know what to do with them because they have not been funded, and they do not have any statutes telling them what to do. He suggested sending the issue to a study group for a solution.

Chairman Townsend asserted there had been a study group for the last 18 months and this committee would now deal with it one way or the other. He asked Mr. Butler if he thought the contractors’ board believed they did not have control over construction control companies. Mr. Butler said he did not believe the contractors’ board ever exercised whatever discretion they may have.

Mr. Barengo stated section 40, which talked about a surety bond or what may be done in lieu of a surety bond. He said the operative language in section 41 was where it says the surety bond deposit with the contractors’ board will go from $20,000 to $250,000. Someone who is doing construction control accounting, he claimed, must first have a sizeable investment. He stated section 41 also states who may do construction control accounting, and who may not.

Douglas E. Walther, Senior Deputy Attorney General, Office of the Attorney General, said the construction control law was pretty much a self-help law. He claimed the only connection the construction control law had with the contractors’ board is that that is where the bond is placed. He said the contractors’ board had no additional regulatory control over construction control companies who are not licensed or regulated in any other way. The intent, he asserted, was to enable the parties in a construction control arrangement to make a private claim on the bond. He stated the only other things in that chapter were specific provisions that the construction control agent is to follow in dispersing and holding the funds. He told the committee there was very little government involvement in enforcing that chapter.

Chairman Townsend said there were two issues, one being the disclosure requirement, and a prohibition against one company being able to have parties involved in another company. The other, he asserted, was raising the limit of the surety bond from $20,000 to $250,000. He asked Assemblyman Goldwater where that specific amount had originated.

Assemblyman David E. Goldwater, Clark County Assembly District No. 10, replied that the amount was relatively arbitrary.

Mr. Wadhams stated that at that level of a surety bond, the surety company itself, was much more involved than they would be on a $20,000 bond. He claimed a $20,000 bond and raising that amount increases some private regulation.

Mr. Butler claimed one of the purposes of A.B. 64 was to make it unlawful for people who own both a mortgage company and a construction control company to use the construction control company to disperse their own funds. He said if the bonding limit is raised on construction controls to a level that actually puts teeth in the bond rather than the nominal $20,000, that self-regulation would obviate the need for having restraints on whether a mortgage company can act as a construction control.

Assemblyman Goldwater told the committee the construction control industry was not regulated. He claimed they operate on their own. He said what this bill is protecting against is not the sophisticated investor who understands the relationship between a mortgage investment company and construction control. Instead, he insisted, this is protecting someone like "your grandmother" who answered an ad in the paper for 13 percent. Someone, he said, who does not understand what that relationship means and does not realize the potential conflict of interest. He claimed the Assembly committee felt it was incumbent upon the Legislature to prohibit that conflict of interest in the interest of protecting the citizens.

Chairman Townsend asked Assemblyman Goldwater what he felt benefited the consumer more, the prohibition or increasing the surety bond. Assemblyman Goldwater replied that without a doubt, it would be the prohibition.

Mr. Butler stated that the way the prohibition was worded, it prohibited a licensee or a relative of the licensee but did not prohibit someone who is a business associate of the licensee. He gave, as an example, two partners, one owning the construction control company and the other owning the mortgage company, both working hand in hand. He claimed there were a thousand ways around the prohibition. He told the committee they could not legislate morality. He said in construction financing, the loans are relatively large and said there were not many average grandmas who put up hundreds of thousands of dollars to finance a construction project. He declared the consumers who will be most affected, were probably not where the bill is targeted.

Assemblyman Goldwater stated he wholeheartedly disagreed. He said while he agreed that you could never legislate morality, you can prohibit those gross conflicts of interest. He claimed the subcommittee did not go fully on the end of the continuum of regulation of the mortgage investment industry. He maintained the subcommittee relied on the natural checks in the system like the title and escrow process and the construction control process. Things that exist in the free market and in this industry, he stressed, that naturally regulate it, and that offer checks and balances. Where there was a weakness in one check, the subcommittee tried to prop that up.

Chairman Townsend directed the committee’s attention to section 42 and asked if there was anyone present who represented escrow agents.

Dale E. Puhl, President, Southwest Escrow Company, told the committee he was a 42-year veteran of the escrow and title insurance wars. He said his particular problem with section 42 was the arbitrary increase in the surety bond from $50,000 to $250,000. He claimed all escrow companies are very small when compared to a title insurance company that has escrow operations. He stated the increase to $250,000 would cause a great deal of damage to the ability of a small company to operate. He said the cost of a bond that size would be $12,500 annually which amounts to a 500 percent increase.

Chairman Townsend asked Mr. Puhl approximately how many dollars where put through his business in a year. Mr. Puhl replied it would be in the neighborhood of $600,000 gross. He claimed a lot of people do not understand independent escrow companies.

Assemblyman Goldwater stated that since the $250,000 was an arbitrary figure it was negotiable depending on what the committee wanted to do.

Mr. Puhl claimed that after meeting with Commissioner Walshaw between 3 and 4 years ago, the amount had been raised from $25,000 to $50,000. Mr. Puhl said he would not have a problem with a stepped-up amendment wherein the amount could be raised to $250,000 over a 5-year period.

Chairman Townsend moved on to section 43 where, he claimed, the only changes were of a housekeeping nature.

Alfredo Alonso, Lobbyist, Title Loans of America, pointed out that what section 10, subsection 10 does, also needed to be done in section 44, exempting companies that are also builders.

Chairman Townsend noted sections 46 through 55 were definitional only. He stated sections 56 and 57 break out mortgage agent, mortgage broker and mortgage company.

Chairman Townsend told the committee they would again address A.B. 64 at 9:30 a.m. on May 13, beginning with section 69 of the bill.

There being no further business, the meeting was adjourned at 10:50 a.m.

RESPECTFULLY SUBMITTED:

Ardyss Johns,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

DATE: