MINUTES OF THE meeting
of the
ASSEMBLY Committee on Commerce and Labor
Seventy-First Session
March 5, 2001
The Committee on Commerce and Labor was called to order at 3:45 p.m., on Monday, March 5, 2001. Chairman Joe Dini, Jr. presided in Room 4100 of the Legislative Building, Carson City, Nevada. Exhibit A was the Agenda. Exhibit B was the Guest List. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Mr. Joseph Dini, Jr., Chairman
Ms. Barbara Buckley, Vice Chairman
Mr. Morse Arberry Jr.
Mr. Bob Beers
Ms. Dawn Gibbons
Ms. Chris Giunchigliani
Mr. David Goldwater
Mr. Lynn Hettrick
Mr. David Humke
Ms. Sheila Leslie
Mr. Dennis Nolan
Mr. John Oceguera
Mr. David Parks
Mr. Richard D. Perkins
STAFF MEMBERS PRESENT:
Vance Hughey, Committee Policy Analyst
Margaret Judge, Committee Secretary
OTHERS PRESENT:
Frankie Sue Del Papa, Attorney General, State of Nevada
Alice Molasky-Arman, Commissioner of Insurance, Department of Business and Industry, State of Nevada
Howard Goldblatt, Director of Government Affairs, Coalition Against Insurance Fraud
Robert Feldman, Legislative Advocate, Nevada General Insurance Company and Auto General Insurance Company
Joe Guild, Legislative Advocate, State Farm Insurance Company
Jim L. Werbeckes, Government Affairs Representative, Farmer’s Insurance Group
Matthew Sharp, Attorney At Law, Leverty & Associates
Following roll call, Chairman Dini introduced BDR 54-570:
ASSEMBLYMAN PARKS MOVED TO INTRODUCE BDR 54-570.
SECONDED BY ASSEMBLYMAN GOLDWATER.
MOTION WAS CARRIED UNANIMOUSLY.
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Chairman Dini introduced BDR 53-393:
VICE CHAIRWOMAN BUCKLEY MOVED TO INTRODUCE BDR 53-393.
SECONDED BY ASSEMBLYWOMAN GIBBONS.
MOTION WAS CARRIED UNANIMOUSLY.
* * * * * * * *
Chairman Dini advised the committee that A.B. 134 and A.B. 135 would be discussed together. The meeting was then turned over to Vice Chairwoman Buckley. Vice Chairwoman Buckley opened the hearing on A.B. 134 and A.B. 135.
Assembly Bill 134: Makes various changes concerning assessment imposed by commissioner of insurance upon insurers to pay for program to investigate certain violations and fraudulent acts of insurers. (BDR 57-331)
Assembly Bill 135: Makes various changes to provisions governing investigation and prosecution of insurance fraud. (BDR 57-332)
Assemblyman Joe Dini, Jr., Assembly District 38, provided the committee with introductory comments and read a prepared statement supporting A.B. 134 and A.B. 135. Additionally, Mr. Dini indicated A.B. 134 raised more revenue for the insurance fraud program, changed the current fixed assessment on insurers based on amount of business the insurer writes in Nevada, and would do so without requesting any General Fund money. Mr. Dini informed the committee the bill made the assessment more equitable. Insurers who have done more business in the state paid more to fund the program than those insurers who did little business in the state. Mr. Dini explained that A.B. 135 was the second part of the anti-fraud program. A.B. 135 would broaden the current immunity provision of the statute, grant subpoena power to the Attorney General’s office during an investigative stage of an insurance fraud case, and allow for reimbursement of the investigative costs and prosecution at time of sentencing. Mr. Dini emphasized that insurance fraud was big business. Annual costs of insurance fraud to the average household ranged from several hundred dollars up to several thousand dollars. Mr. Dini urged support of A.B. 134 and A.B. 135.
Assemblyman Richard Perkins, Assembly District 23, expressed his support and sponsorship of both A.B. 134 and A.B. 135.
Vice Chairwoman Buckley called Attorney General Frankie Sue Del Papa and the Insurance Commissioner to come forward to testify on A.B. 134 and A.B. 135.
Frankie Sue Del Papa, Attorney General for the State of Nevada, testified in support of A.B. 134 and A.B. 135 and expressed her appreciation to both Speaker Perkins and Chairman Dini for their work. Ms. Del Papa indicated that both A.B. 134 and A.B. 135 enhanced the ability of the Attorney General’s office to prosecute insurance fraud in the state. A.B. 134 provides additional funding for the unit and A.B. 135 provides additional tools for the prosecution. Ms. Del Papa asserted that A.B. 134 increased the amount of funding for the Insurance Fraud Unit by increasing the assessment paid by the insurance industry from a fixed $500 to a pro-rata sliding scale which ranged from $500 to $2,000 which depended on the total amounts of premiums written. Exhibit C provided by the Attorney General’s Office included a chart that showed which companies fell in which category. Ms. Del Papa explained to the committee that the Insurance Fraud Unit was entirely funded through the fraud assessment that was collected from insurers. The Insurance Fraud Unit budget reserve had been depleted in order to keep the unit operating. Passage of A.B. 134 would provide a net increase of approximately $117,944, which covered operating expenses for the next two years.
Ms. Del Papa summarized that A.B. 135 expanded the immunity section and added investigative subpoena authority for the Attorney General’s office; provided the Attorney General’s office had primary jurisdiction to prosecute insurance fraud; allowed for reimbursement; and clarified that insurance companies could be victims for purposes of restitution.
Ms. Del Papa provided statistical information to the committee (Exhibit D) which indicated that since FY 1998, the fraud unit had initiated 99 criminal complaints made 108 arrests, had 92 convictions and realized over $2,600,000 in restitutions, fines, costs and forfeitures.
Chairman Dini asked if the committee had questions. Vice Chairwoman Buckley asked Ms. Del Papa why the bill should not be broadened to look at fraud by insurance companies or anyone that was defrauding in the field of insurance. Ms. Del Papa stated it was believed that authority already existed and informed the committee that an effort had been made at all levels to prevent fraud and felt their ability was enhanced to perform their jobs. She received cooperation from many entities in that regard and fraud prevention efforts were a priority for them.
Vice Chairwoman Buckley asked Ms. Del Papa to provide to the committee a breakdown of the office’s resources concerning different types of fraud and investigation.
Alice Molasky-Arman, Commissioner of Insurance, State of Nevada, expressed her full support and joined the Attorney General in support of A.B. 134 and A.B. 135. She discussed the severity of insurance fraud in other states, as well as Nevada. She provided the committee with proposed amendments to A.B. 134 (Exhibit E) which would amend subsection 1 of Section 1 of the bill which clarified the Commissioner maintained the ability to regulate unfair trade practices by members of the insurance industry. A proposal was also submitted to amend subsection 7 of Section 1 to have the requirement that the Commissioner establish a regulation to collect as well as calculate assessment. Assessment was currently overseen by a regulation established at the time of payment, and penalties in the event of nonpayment.
Ms. Molasky-Arman referred to the proposed amendments on A.B. 135 (Exhibit F). In Subsection 1 of Section 10, they were proposing to amend the provision that applied to NRS 679B.159. That statute required that all violations of the insurance code be reported to the Commissioner. The bill had indicated “or to the attorney general.” Ms. Molasky-Arman stated the Attorney General did not want all the violations of Title 57 of the insurance code reported to them. The proposed amendment made that report applicable except in instances of fraud. Ms. Molasky-Arman asked that Section 11 be deleted, and add a new section concerning the confidentiality of records of investigations by the Attorney General. It was requested that Section 12 be deleted because it referenced back to the Commissioner’s public record law. Proposals 5 and 6, which addressed the insurer’s responsibility to report fraud, was recommended to be changed to the Attorney General and the Commissioner. The reason, Ms. Molasky-Arman indicated, was that the Commissioner currently reviews whether insurers were living up to their commitments to report fraud. In closing, Ms. Molasky-Arman stated that insurance fraud was theft.
Assemblyman Goldwater commented that fraud exists in the securities business but there was no active unit searching out fraud. He questioned Ms. Molasky-Arman about A.B. 135, Section 20, concerning changing “believes” to “a reasonable suspicion.” Mr. Goldwater wanted to know if a different legal standard existed. Ms. Del Papa thought the legal standard was comparable. Assemblyman Goldwater asked if there was any indication if passage of the bills would make it more difficult for someone wrongly accused of fraud to take a bad faith claim to have the ability to clear up his name. Ms. Del Papa advised Assemblyman Goldwater that she was not aware of any such cases they had handled. Ms. Del Papa indicated that insurance companies had expressed concern why prosecution did not take place and it was usually based on the lack of information. Facts and intent were not present; therefore, they were unable to prosecute. Ms. Del Papa indicated there were many different ways in which cases came to the Attorney General’s Office.
Assemblyman Goldwater expressed the necessity for protection of those that were wrongly accused to not create a presumption of guilt. Ms. Del Papa assured Assemblyman Goldwater that the Attorney General’s Office was operated that way and would not try to prosecute innocent people. Ms. Del Papa concluded the average household spends $200 to $300 in higher insurance premiums as a result of the growth and impact of insurance fraud rings in Nevada.
Assemblywoman Giunchigliani asked for clarification if fees were included in the budget for the insurance fraud unit, and was there a request for an increase in fees.
Ms. Del Papa stated that A.B. 134 would take the current $500 flat fee that was paid by every insurance company and roll it to a graduated scale. Ms. Del Papa again referred to the chart in Exhibit C.
Assemblywoman Giunchigliani asked if there was a request for additional staff or would existing staff be devoted to this particular area. Ms. Del Papa indicated there was no request for additional staff.
In responding to Ms. Giunchigliani, Ms. Del Papa confirmed that the Governor had reviewed the budget and was supportive of their proposal.
Ms. Giunchigliani asked Ms. Del Papa if A.B. 135 would have a fiscal impact to the state. Ms. Molasky-Arman indicated they were asked to prepare a fiscal note on A.B. 135, but there was no effect on their agency.
Vice Chairwoman Buckley expressed her concern that people at every level have been defrauded, including insurance companies, victims, and doctors. It was her belief that every one of those should be brought to justice. She emphasized her concern that unequal justice was being created under the law.
Ms. Del Papa fully supported the concept and stressed how difficult it was to get the General Fund money. She told the committee about sacrifices in other areas to keep fraud units afloat and stated, “Bad business is not good for good business in the state of Nevada.” Ms. Del Papa shared Vice Chairwoman Buckley’s concern and expressed her frustration because they were only doing what they were told to do regarding building budgets.
Chairman Dini claimed that gangs that operated in the fraud area were being driven out of California and Arizona after laws were tightened and were being pushed into Nevada. He concluded there would be an onslaught of activity in southern Nevada and recognized the need for strengthening laws in Nevada. He complimented the Insurance Commissioner for doing a great job in policing insurance companies.
Ms. Molasky-Arman described the investigation process, their actions for obtaining restitution, and discussed insurer fraud. She stated in all cases the Insurance Commission referred them to the District Attorney or, depending upon the appropriateness, the Office of the Attorney General.
Assemblyman Beers, in his attempt to gain a clearer picture, reiterated there were no new hires with the bill and the District Attorney would prosecute. Mr. Beers asked if there were more investigators or prosecutors. Ms. Del Papa stated those were prosecutors and would be dependent on the jurisdiction. Embezzlement jurisdiction would typically rest with the District Attorney, and Nevada had a decentralized system that was dependent upon the underlying nature of the crime. An embezzlement case would be sent to the District Attorney’s office. The insurance fraud Ms. Del Papa spoke of included both investigators and prosecutors. Ms. Del Papa claimed that the fee increase would pay for the staff raises.
Assemblyman Beers related the existing structure of revenue had not grown because it was a flat assessment, regardless of the growing premiums. Ms. Del Papa referred to Exhibit C that displayed the current funding structure. Assemblyman Beers commented he would have expected the number of companies would have increased with the growth of the state.
Ms. Molasky-Arman expressed her surprise that the growth of companies remained flat. It was not at the level she expected. Chairman Dini added that some companies had come and gone and there appeared to be a constant turnover. Ms. Molasky-Arman disclosed there were a number of companies that paid no premiums. Certificates of Authority were issued in the event they decided to conduct business in Nevada; otherwise, if they had not done so, they withdrew.
Chairman Dini stated those new fees made both agencies whole. If additional revenues were not found, the fraud unit would end up being ineffective due to the lack of funds. He further expressed A.B. 134 and A.B. 135 served a dual purpose. They strengthened the fraud laws and shored up the budgets for two agencies.
Howard Goldblatt, Director of Government Affairs, Coalition Against Insurance Fraud, explained to the committee his organization was a national broad-based organization of consumer groups, government organizations and insurance companies dedicated to combating all forms of insurance fraud through both education and public advocacy. He disclosed that insurance fraud was the second largest economic crime in the nation. It affected all types of businesses and individuals. The coalition strongly believed it needed to lower the effect of fraud on the cost of insurance paid by consumers. Regardless of how much an insurance company had been defrauded, the end product was consumers paid for it.
Regarding A.B. 134, Mr. Goldblatt stated insurance fraud bureaus around the nation varied in budget size and funding. The most popular form of funding for a fraud bureau was industry assessment. On a previous question, Mr. Goldblatt explained to Vice Chairwoman Buckley that a study was performed by an attorney on victims funding criminal prosecutions. Although insurance companies were assessed and paid into a fund to pay for the existence of a fraud bureau, it was found that the companies had no control or authority, whether that fraud bureau was located in an Attorney General’s office or in the Insurance Department, on deciding or dictating what cases would be investigated. If a company paid the maximum assessment amount of $2,000 under A.B. 134, they had no more authority than anyone else to tell the Attorney General they wanted their case investigated and prosecuted. The bureau decided what cases were investigated.
Mr. Goldblatt responded to Assemblyman Goldwater’s question about innocent victims and indicated under most laws there was immunity in good faith that there is reasonable suspicion. If the company did not have a reasonable suspicion, they could be subject to an unfair claims practice. It would be better to have a fraudulent claim paid than to be sued and lose, because it is cheaper to pay a claim. On the other hand, Mr. Goldblatt said, not every suspicious claim sent to a fraud bureau was investigated or prosecuted.
Continuing, Mr. Goldblatt announced they were finalizing a survey and discovered that a fraud bureau may receive up to 500 cases a year but only 15 to 20 of those were sent on for prosecution. Either the fraud bureau felt there was not sufficient information to go forward or there was no reason to continue with the prosecution. Information sent by an insurance company to a fraud bureau is confidential and not released to anyone. Mr. Goldblatt believed that insurance companies tend to have a “china wall” between claims investigations and their underwriting.
Mr. Goldblatt talked about passing on the cost of the assessment to the consumer with the maximum of $1,500. A fraud tax on a premium notices was due to additional costs that insurance companies were forced to pay because of fraud costs which were passed on to consumers. The problem with funding in Nevada, as Assemblyman Beers pointed out, was that funding was static. Mr. Goldblatt noted that the same funding for the fraud bureau might be perceived for the last four years or the next five years unless the funding mechanism is changed.
Mr. Goldblatt explained the growth in insurance fraud was not because of the “mom and pop” or the “opportunistic” fraud. It was by the fraud rings that transferred across the borders into Nevada. Insurance companies in Nevada, California and Arizona reported that fraud rings that were investigated in Las Vegas had come across the border. The rings go to the areas of least resistance. Because of the lack of resources in Nevada, it was very easy for them to enter Nevada, do a quick hit, make a few hundred thousand dollars, and either stay or move on. Mr. Goldblatt stressed the importance of increasing the assessment with the passage of A.B. 134.
Mr. Goldblatt claimed that A.B. 135 assisted A.B. 134 in that it clarified the effort and support. Mr. Goldblatt suggested language be added which would define an insurance company as a victim that could receive restitution. It would help get at the profit motive of insurance fraud. He saw instances where people had committed millions of dollars worth of insurance fraud, pled guilty or had been willing to pay a civil fine, knowing their profits were sitting offshore in a bank waiting for them until they got out of jail. Mr. Goldblatt emphasized that it was important to define an insurance company as a victim.
Mr. Goldblatt, in conclusion, stated that different states were doing different things, but they were moving forward in a similar effort. Insurance fraud was a crime and, if not stopped at the state borders, would infest resources that affected an ability to do business and develop economic vitality and growth. They believed A.B. 134 and A.B. 135 benefited the state of Nevada.
Assemblyman Goldwater asked Mr. Goldblatt if there was a depository to access people who had been convicted of insurance fraud. Mr. Goldblatt stated there was a property and casualty all-claims database that was used only on the claim side and not used to benefit underwriting.
Assemblyman Goldwater voiced his approval of the concept of protecting everyone from the cost of insurance fraud and suggested if they changed the standard in Section 9 the protection would be less. He wanted to make sure the standard would be lessened.
Mr. Goldblatt explained the standard of malice was the best standard and the Coalition’s model bill used the term “actual malice” which was slightly different. The preference was not to have more than one standard and malice was the strongest standard.
Vice Chairwoman Buckley referred to page three of the handout on insurance company fraud (Exhibit G), and asked Mr. Goldblatt what the Coalition’s position was on having fraud units study all types of fraud, regardless of who committed that fraud. Mr. Goldblatt informed Vice Chairwoman Buckley the determining factor was jurisdiction and how well the fraud bureau performed its work. Insurance departments, or the Attorney General’s Office, dealt with claims or consumer fraud against insurance companies more on the claims side. They did not necessarily need a fraud bureau to be involved.
Assemblyman Beers referred to Section 14 of A.B 135, which was on page 5, line 8, through page 6, line 5, and asked if that was taken from the model act and had the model act been proven efficient. Mr. Goldblatt responded that some of the language was similar to the model act and the model act was believed to be efficient. He explained to Assemblyman Beers and the committee that just about every insurance company had some unit within the company that investigated fraud, whether it was connected with the claims department or a separate unit. If the belief existed that fraud had been committed and it was discovered that enough reasonable suspicion existed, then a claim would be paid. A belief may not be strong enough for a company to decide whether fraud had been committed or not. Some states have supported legislation requiring companies, based on size, to have fraud units, but there was no consensus in Nevada that one was needed.
Robert Feldman, President and CEO of Nevada General Insurance Company and Auto Insurance America, distributed handouts to the committee (Exhibit G and Exhibit H). He explained Exhibit H was from the Nevada Insurance Council, which was a nonprofit, informational and educational corporation. Companies of the council insured 95 percent of all automobiles, homes and businesses in the state of Nevada. Nevada ranked second in the nation with 45.1 injury claims out of 100, second to Louisiana where there were 45.4 out of 100 bodily injury claims compared to property damage claims. The national average was 28.7. Northern Nevada had roughly 39 injury claims for every 100 property damage accidents. In southern Nevada there were 60.5 injury claims for every 100 property damage accidents. Mr. Feldman represented that those statistics had a very strong effect on the insurance rate for every family in Nevada.
Exhibit I, which was an article from the “National Underwriter,” showed that a Florida grand jury recommended changes in personal injury protection coverage because of the high cost. Mr. Feldman suggested that Florida was similar to Nevada: a state where there was a highly transient population, a lot of tourists, good climate, and a good place to move to. He referred to a lawsuit Exhibit J with European Health Care in Reno, Nevada, which was staffed with chiropractors that were double billing for services provided, billing people for consultations that were never provided, billing people for treatment that was never provided, and convicted in federal court. Under current laws, Mr. Feldman expressed concern that the insurance and fraud division was under- budgeted and urged the committee to pass A.B. 134 and A.B. 135.
Joe Guild, Legislative Advocate, State Farm Insurance Companies, urged the support of the committee for A.B. 134 and A.B. 135 and informed the committee that State Farm Insurance Companies had its own investigative unit.
Mr. Guild responded to an earlier question from Vice Chairwoman Buckley on why the bill should not apply to insurance companies. He said the answer was in the bill itself and also in those provisions of the Nevada law giving the Insurance Commissioner the authority to investigate insurance company fraud. Section 5 of the bill, continuing to page 2, line 6, made it clear that nothing in the bill prevented, precluded, diminished, or limited in any way the Commissioner from investigating fraud. Mr. Guild indicated that State Farm whole-heartedly endorsed the bills and thanked the Chairman and the Speaker of the House for bringing this to the Legislature’s attention.
Jim L. Werbeckes, Government Affairs Representative, representing Farmers Insurance Group, testified in support of A.B. 134 and A.B. 135 and commented that fraud was committed by a few but was paid by all. He requested support of the bill. He offered a handout Exhibit K (Original is on file in the Research Library), which represented a fifteen month Dateline investigation on June 23, 2000, which uncovered thousands of documents, cracked computer codes, talked to dozens of sources, and discovered a little known practice that could leave someone unprotected. This investigation was about automobile insurance and the coverage of injuries caused by accidents. Exhibit L explained that legislation of fraud must cut both ways to include insurance company fraud as well. The insurance industry had strongly advocated for the imposition of strict penalties against consumers which exposed questionable review practices of companies. Exhibit M reviewed various lawsuits from some of the major insurance companies.
Matthew Sharp, Attorney at Law, testified on behalf of the Nevada Trial Lawyers in support of A.B. 134 as written. The Trial Lawyers opposed A.B. 135 but would support it with proposed amendments (Exhibit N). Insurance fraud should include fraud by a consumer as well as fraud by an insurance company and their proposed amendments. Section 9 of Exhibit N was a restatement of what was in the law in 1993. Mr. Sharp pointed out in order for A.B. 135 to be consistent with the funding bill, an amendment was needed to include insurance fraud as acts by insurance companies. Section 9 significantly changes the risk or protections that a consumer has from false reports. Section 9 adds the term “suspected” rather than what the current law reads, “fraudulent.”
Mr. Sharp emphasized that an insurance company was only liable for reporting false insurance claims to the Insurance Commissioner if, in fact, it is done with malice. Malice involved a conscious state of mind that one knows when one is engaging in a wrongful act. He submitted that existing laws sufficiently protect insurance companies from reporting fraud claims, while at the same time protecting the consumer who has been innocently reported. Section 9 allows an organization established to detect and prevent insurance fraud some immunity. Mr. Sharp said that issue was of particular concern to him because he was not sure what “an organization established to detect and prevent insurance fraud” meant. Clients had experience with the National Insurance Crime Bureau (NICB) which was an entity created by insurance companies to assist in the investigation of insurance crimes. One of the red flags that the NICB encouraged insurance companies to look at for potential fraud was the fact that somebody was employed by an insurance company. Mr. Sharp pointed out that we need “insurance fraud” to include acts by insurance companies. If they were falsely reported to the NICB and subsequently applied for insurance, their rate would be increased because of insurance fraud. He commented on existing laws and how they protected consumers from insurance fraud by insurance companies. The motive was monetary in nature and when a person created a false insurance company and bilked people out of millions of dollars, went before the Insurance Commissioner and lost his license, that was not really his loss. There had to be some criminal implication. The very purpose of having regulation for insurance companies was to protect the consumer.
Ms. Giunchigliani asked if Mr. Sharp reviewed and opposed the amendments to A.B. 134 (Exhibit E) because the amendments were not consistent with the enabling statute. Mr. Sharp provided a copy of NRS 679B.153 (Exhibit 0) and NRS 686A.291 (Exhibit P), which discussed insurance trade practices.
Ms. Giunchigliani clarified in the definition for insurance fraud, Mr. Sharp’s recommendation was to add “fraud also committed by an insurance company as well.” Mr. Sharp explained the intent of what he drafted was to eliminate the fraud in the insurance business because it reflected poorly upon his profession. He was certain that insurance companies would like the same thing because bad insurance companies reflected badly upon their profession as well.
Commenting on A.B. 134, Assemblyman Hettrick said if the word “insurers” was struck and “parties to insurance claims” inserted it would make more sense. He did not believe that A.B. 134 was strictly to investigate violations and fraudulent acts of insurers. The title should address parties to insurance claims, and then it would be any party that was fraudulently acting. Mr. Sharp agreed language needed to be added that would include “parties of insurance claims and insurers.” Mr. Sharp believed the intent of the enabling statute had to be to include insurance companies within any fraud control program and declared the Insurance Commissioner still had the right and primary jurisdiction to regulate insurance companies from an administrative and civil prospective.
Mr. Hettrick recommended the need for more input from the Attorney General and Insurance Commissioner reiterating that the title of A.B. 134 needed to be changed.
Chairman Dini indicated A.B. 134 was going to be placed in a subcommittee which would be appointed at the next meeting. With no further testimony, the meeting was adjourned at 5:50 p.m.
RESPECTFULLY SUBMITTED:
Margaret Judge
Committee Secretary
APPROVED BY:
Assemblyman Joe Dini, Jr., Chairman
DATE: