AIA achieved a top public policy goal, when on July 20, federal Y2K liability reform was signed into law. Key provisions include:

• A 90-day "cure" period before the filing of Y2K liability lawsuits;
• Federal jurisdiction for large class action reforms;
• Proportionate liability reforms; and,
• Caps on punitive damages for small businesses.

There are no anti-insurance provisions in the bill.

The legislation as enacted is available on the AIA website, http:www.aiadc.org, along with a section-by-section analysis.

Given the uncertainty surrounding every aspect of the Year 2000, it is impossible to calculate the financial implications of this legislation. Nonetheless, its passage will reduce the likelihood of groundless Y2K lawsuits, put reasonable limitations on damages, and reign in class action abuses. We also are hopeful that the class action reforms contained in this legislation will be a precedent for broader federal class action reforms which we also are seeking.

At the state level, 17 states have enacted Y2K liability reforms for the private sector: Alaska, Arizona, Colorado, Florida, Hawaii, Illinois, Minnesota, Nebraska, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Virginia, and Washington. More than a dozen others have enacted sovereign immunity laws that provide legal protections to states and municipalities. Together with the federal Y2K reforms, these laws should help to curb frivolous Y2K lawsuits against a wide range of defendants.

On the litigation front, we are tracking virtually every Y2K liability or coverage case that has been filed in state or federal court, and posting all significant court documents in the Year 2000 section of our web site, http://y2k.aiadc.org/. The volume is increasing but has not yet reached torrent levels.

Year
2000

H.R. 10 passed the House of Representatives on July 1. AIA strongly supports the bill as passed. We were able to secure the positive resolution of our key issues such as the definition of insurance and dispute resolution. We also played a lead role in negotiating a bipartisan privacy amendment that was approved on the House floor by a 427-1 vote, thus derailing a more draconian proposal put forth by radical privacy advocates.

Both the House and Senate have named their conferees, and the Conference Committee has held organizational meetings. Little or no substantive progress has occurred on the key points of contention between the House and the Senate: operating subsidiaries versus affiliates, the Community Reinvestment Act, and privacy protections. Again, extensive detail and analysis of both the bills and the disputed provisions is available through the AIA website, http://www.aiadc.org.

The Conference's timing is not yet certain. Proponents of the legislation are pushing for September action, but the press of other business could delay the process until October, or even into next year. Along with our allies in the financial community, we are working to sustain momentum and avoid the resolution of outstanding issues in a way that either would upset the bill's cross-industry balance or bring on a Presidential veto.

The financial services modernization issue has been quiet at the state level during the third quarter.

Financial
Services
Modernization

Federal medical records privacy legislation is stalled in both the Senate and the House, and Congress missed its August 21 deadline for passing legislation pursuant to 1996's HIPAA mandate. This authorizes the Department of Health and Human Services to begin working on regulations, which can be promulgated in March 2000. President Clinton recently announced these regulations would be a top priority of the administration. At the same time, Congress is likely to grant itself an extension, at least until the end of the year.

AIA has been working to secure an effective exclusion from new federal mandates for property/casualty insurance lines (e.g., workers' compensation and automobile insurance). Our argument, which has been well-received by Republican Members and staff, is three-fold:

• These lines are adequately regulated at the state level;
• The third-party nature of the claims requires a different regime than that applicable to the health care system at large; and,
• There is historical precedence for excluding property/casualty insurance lines from federal mandates.

At the request of organized labor, liberal Democrats have urged the inclusion of workers' compensation into the federal system. We will continue to press the issue, as well as try to broaden the exclusion to cover non-occupational disability insurance along with workers' compensation. (The Greenwood bill, which is the main vehicle in the House Commerce Committee, does this.)

At the state level, the NAIC model law has generated some activity. Thus far, we have managed to defeat or amend restrictive proposals in about a half dozen states (California, Connecticut, Colorado, Kansas, Maine, Montana, and North Carolina). We have made substantial improvements in a particularly severe Massachusetts bill that is still pending.

On the international front, negotiations between the U.S. and the EU over the EU privacy directive were to have concluded in June. They are, however, still on-going. AIA is continuing to push to include insurance in the set of safe harbors being advanced by the U.S. Commerce Department. We have encountered some resistance to our "risk management" arguments but are continuing to press for inclusion in this `public safety' safe harbor that remains under discussion between the U.S. and the EU.

Privacy

Our state workers' compensation agenda has been largely defensive, blocking trial bar/organized labor efforts to dismantle past reforms in a number of states. The Northeast, Maine in particular, was an active, and ultimately successful battleground for AIA.

The anticipated California benefit increase bill passed the Legislature in the closing days of the 1999 session. As passed by the Senate last spring, the bill increased system-wide benefits by approximately $2.7 billion annually. Over the summer, Gov. Gray Davis engaged in negotiations with the business community (AIA participated as well). As a result of these sessions, Gov. Davis determined that he would not accept a benefit increase of more than $400 million. After some jockeying in the Assembly during the final week of the session, the Assembly passed a bill with a $2 billion benefit increase, and the Senate concurred. Assuming the Governor does veto the bill, as he has stated, the issue will be revisited in 2000.

Our campaign to repeal or reform second injury funds continues to progress. Vermont and D.C. have repealed their funds.

The change in the funding mechanism for the New York second injury fund from a loss-based assessment to a premium surcharge will have positive accounting implications for most AIA companies (companies no longer will be required to accrue second injury fund losses on their financial statements). Pennsylvania and Indiana made similar changes, but the balance sheet implications are not as dramatic.

Other positive changes, in terms of targeted system reforms, occurred in Colorado, North Carolina, South Dakota, and Tennessee.

At the federal level, AIA is supporting a House-passed bill that prevents OSHA from implementing draft ergonomics standards. The standards would move OSHA's mandate from injury prevention to injury compensation, thus interfering in the state-based workers' compensation system. Senate action is pending.

Anti-Managed Care Proposals:

At the state level, we have successfully fought off anti-managed care proposals that directly or indirectly affect workers' compensation. Over the past several months, we have defeated such restrictions outright, or secured workers' compensation exemptions, in eight states (Arizona, Colorado, Georgia, Illinois, Kansas, Minnesota, Oregon, Vermont).

At the federal level, the managed care debate continues to percolate. Earlier this year, the Senate narrowly approved a Republican bill and beat back Democratic challenges on a number of key amendments, including HMO liability.

The outlook in the House is not as positive, where the debate over two bills will take place in late September or early October. The first, sponsored by Reps. Charlie Norwood (R-GA) and John Dingell (D-MI), is much more far-reaching bill than that passed by the Senate. The bill would subject health plans to economic and non-economic damages in state or federal court, but exempt them from punitive damages if they follow the recommendations of an external review panel. It would leave the definition of "medical necessity" to an external review process (rather than the HMO or the physician).

The second bill, sponsored by Reps. Tom Coburn (R-OK) and John Shadegg (R-AZ), offers watered-down versions of much of Norwood-Dingell, but still well beyond the Senate version.

The narrow Republican control appears to leave the House Leadership with few options. If a managed care bill goes to the House floor, some form of expanded liability is likely to be passed. At this point, the final outcome is impossible to predict.

Workers'
Compensation

As the map on page 13 indicates, commercial lines deregulation bills continue to advance. Three additional states-Louisiana, Missouri and Rhode Island-passed bills this quarter, bringing 1999's total to nine states. The New York measure is still pending. It passed the Senate with a $5,000 premium threshold, but Assembly Leaders and the Governor's office were unable to agree on a compromise prior to the summer recess. The measure may be revived when the legislature returns later this fall.

Looking ahead, we are seeking to lower thresholds for commercial lines deregulation and expand our efforts to personal lines. This will occur both through our government affairs planning process and through AIA cooperation with the CEO Roundtable.

On the guaranty fund front, Colorado and Louisiana have reformed their systems. The Louisiana law is consistent with AIA's model guaranty fund program, while the Colorado law is even more ambitious ($10 million, as opposed to $25 million net worth exclusion).

[Click here for a map w/ state progress]

Regulatory
Reform

The automobile insurance issue has been relatively quiet this quarter.

In New Jersey, the Appellate Court upheld in its entirety the New Jersey Department of Banking and Insurance's adoption of the medical protocols and diagnostic tests under 1998's Automobile Insurance Cost Reduction Act. AIA had participated as an intervenor in the case, arguing that the medical regulations provide the only potentially significant savings in the new auto insurance law, and must be maintained if consumers are to realize any premium reductions. We now are opposing the appellants' petition for certification to the New Jersey Supreme Court.

AIA has defeated restrictions on the use of credit reports in about 10 states, and restrictions on the use of after-market crash parts in a half dozen. Following the legislative defeat of territorial rating restrictions in Connecticut, we are working closely with a legislative study committee working on this issue.

At the federal level, "choice no fault" legislation remains inactive.

Automobile
Insurance

Based on the input we received from the Board of Directors, AIA neither supports nor opposes pending federal catastrophe insurance legislation (H.R. 21), but we have consensus in support of a higher trigger. The House Banking Committee held a hearing on the bill in late July. In the Senate, Senator Stevens (R-AK) has introduced a bill (S. 1361) but has not planned any formal legislative action. The outcome of Hurricane Floyd could change the political environment, and we are closely watching this issue.

After many delays, the tax-deductible Cat Reserve bill finally has been introduced in the House. The bill introduction -- coming as it did after the House and Senate passed their respective tax bills, and without the Committee Chairmen as key sponsors -- is largely a means of promoting discussion of the issue for the long-term.

At the state level, the catastrophe issue remains quiet. Again, Hurricane Floyd may change that environment.

Catastrophe
Issues

In early August, the House Transportation and Infrastructure Committee approved a bipartisan federal Superfund reform bill by a 69-2 margin. The bill includes several modest, but nonetheless beneficial, reforms and does not reinstate the Superfund tax.

Despite the near-unanimous bipartisan support, EPA is opposed to the reforms, claiming that the bill would "delay cleanups, drive up their costs and bring lawyers and litigation back into the system." On the other hand, some Republicans have expressed concern that the bill does not go far enough-and specifically, that it does not include natural resources damages reforms. The measure now is referred to the House Commerce Committee, which has held hearings but has yet to schedule action. Our immediate objective is to have the bill passed in the House this year.

The Senate remains gridlocked. After weeks of trying to forge a consensus bill, Environment Committee Chairman John Chafee was unable to secure Democratic support for his bill, or overcome the opposition of Republicans who sought the addition of natural resource damage reforms.

As a result, Sen. Chafee is awaiting House action.

Given the Senate stalemate, we view the likelihood of a Superfund reform bill this Congress as remote. It is more likely that the appropriations process will become the vehicle for small Superfund fixes. For example, earlier this summer, Majority Leader Lott reintroduced his recyclers' exemption, with Sen. Chafee as a co-sponsor.

As in the past, we remain fully engaged in efforts against reinstatement of the Superfund tax. Despite repeated Democratic efforts to do so, Ways and Means Committee Chairman Bill Archer remains adamant that there will be no reinstatement of the tax in the absence of reform. The Congressional tax bill, which will be vetoed by President Clinton, merges the Superfund and Leaking Underground Storage Tank ("LUST") trust funds. Since the LUST fund has a positive balance, this provides additional funds to the Superfund program without reinstating the Superfund tax. After the President vetoes this bill, it is possible this provision could be included in whatever compromise tax bill emerges in the fall.

At the state level, our major challenge was in Oregon. At the start of the session, we faced with a draconian proposal that would have provided a statutory resolution of virtually the entire gamut of insurance coverage issues relating to environmental pollution cases, all in the policyholder's favor. This proposal posed a very major threat as the practical effect would have been to make virtually all CGL and CMP policies cover pollution of any kind under virtually any circumstances.

Through many iterations of the bill, AIA succeeded in greatly softening these provisions. The bill as passed has two key components:

• It declares that any administrative order issued by state or federal environmental authorities constitutes a "suit" (thereby triggering the duty to defend); and,
• It prohibits insurers from denying coverage for policyholder expenditures pursuant to a written voluntary cleanup agreement solely on the grounds that such expenses constitute voluntary payments (thereby broadening the traditional insurer obligation to pay all sums which the insured is legally obligated to pay).

While this is still not a "good" piece of legislation, it should have only a minor effect on environmental coverage litigation in Oregon and hopefully will not be a precedent elsewhere.

Superfund

The fate of AIA's federal tax agenda is fundamentally tied to the broader tax debate pitting Congress against the White House. Congress' $792 billion tax package contains a number of broad-based tax cuts for individuals, as well as significant corporate tax relief. The bill contains no new direct or indirect taxes on p/c insurers, and it extends Subpart "F" reform for five years. It also contains a provision, supported by AIA, providing favorable tax treatment to the Florida and Texas wind pools.

Unfortunately, the package as passed by the Congress will be vetoed by President Clinton, and Republicans do not have the votes for an override. AIA's provisions, however, could be contained in either a package of tax extenders (which both Chairmen Archer and Roth support) or a small business tax package attached to an increase in the minimum wage. Regardless of the vehicle, our goal is to retain Subpart "F" relief and avoid being the target of new revenue raisers that might be advanced to reduce the overall revenue loss. In this regard, we have laid considerable groundwork by securing support for our positions on the Ways and Means and Finance Committees.

At the state level, the recent reduction in New York's franchise tax cap is a major victory for AIA and this quarter's most significant tax achievement. The bill reduces the franchise tax cap from 2.6% to 2% of gross premium, yielding annual tax savings for the p/c insurance industry as a whole of approximately $150 million. A number of AIA companies will save millions of dollars annually.

Taxes

California's Royal Globe legislation has dominated AIA's tort reform agenda. Following two months of hectic, and at times acrimonious, negotiations among California Governor Gray Davis, Senate Majority Leader John Burton, trial bar leaders, and representatives of the insurance industry, the California Legislature has approved a series of amendments to the Royal Globe bill that initially passed both Houses in July.

The original version of the bill was under a veto threat from Gov. Davis, thus setting in motion an intensive effort to craft an amendment package that was at least minimally acceptable to the key parties. The end result is a marked improvement from the July version of the legislation but does not eliminate the increased costs and litigation risks companies are likely to face.

As amended, the bill applies only to claims involving bodily injury and auto property damage (private passenger and commercial lines), thereby excluding most commercial lines cases where injury or death is not included (all workers' compensation and many professional liability claims also are outside the scope of the legislation).

In addition, a functional definition of "bad faith" was added to the bill text, providing carriers some guidance as to the types of issues that are likely to be raised as evidence of bad faith. The revised bill also provides that the fact that an insurer did not settle a claim is not, on its own, proof of bad faith.

All of the amendments improve the bill to at least some extent. That is the result of our successful opposition to the trial lawyers' attempt to increase administrative penalties as the quid pro quo for the positive changes. We also derailed several cosmetic and meaningless amendments designed to soften industry opposition.

More positively, we defeated bad faith cause of action bills in four other states-Arkansas, Maine, Minnesota, and Vermont. On a proactive basis, Louisiana approved a package of tort reform bills-including limits on damages for future medical monitoring and D&O liability reforms. Structured settlement bills passed in Georgia and North Carolina, and California, bringing our total for this issue to nine states this year.

At the federal level, class action reform advanced through the House Judiciary

Committee on a 16-12 vote, with only one Democrat (Rep. Boucher) supporting the bill. Given the opposition of Congressional Democrats and the White House, it is unlikely to become law this Congress. Looking to the longer term, we are developing an ambitious public affairs program to underscore the broad benefits of this bill.

On the litigation management front, we defeated a Cumis counsel bill in Hawaii that would have required insurers to appoint separate counsel for their policyholders in the event of contested claims. In Louisiana, we defeated an even more onerous measure that would have required insurers to make separate counsel available to policyholders in all instances, not just contested claims. Both bills would have greatly increased defense costs. In Florida, AIA is launching an aggressive public affairs strategy against the state Bar's attempts to limit insurers' litigation management practices.

Tort
Issues