TRANSPORTATION COMMITTEE

The Transportation Committee was assigned four studies. Section 1 of Senate Bill No. 2262 directed a study of the motor vehicle no-fault, underinsured motorist, and uninsured motorist insurance systems. Section 5 of Senate Bill No. 2358 directed a study of the sale and lease of railroad rights of way. Senate Concurrent Resolution No. 4011 directed the study of alternative methods for recording and discharging a lien on a motor vehicle. Senate Concurrent Resolution No. 4030 directed a study of the requirements for the registration and licensing of snowmobile and all-terrain vehicle dealers. This study was expanded by directive of the Legislative Council chairman to include the requirements for licensing motorcycle and low-speed vehicle dealers.

Committee members were Senators David P. O'Connell (Chairman), Duane Mutch, Dave Nething, and Tom Seymour and Representatives Craig Headland, Joyce Kingsbury, William E. Kretschmar, Dan J. Ruby, Dorvan Solberg, Elwood Thorpe, Robin Weisz, and Ray H. Wikenheiser.

The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2004. The Council accepted the report for submission to the 59th Legislative Assembly.

MOTOR VEHICLE INSURANCE STUDY

Senate Bill No. 2262 was introduced to exclude motorcycles from uninsured and underinsured motorist coverage unless the claim is made on a motorcycle that is described in the policy. An insured with an underinsured or uninsured motorist policy may recover if the insured suffers bodily injury or death caused by an uninsured or underinsured motorcycle. This may occur when a child covered under a parent's uninsured or underinsured motor vehicle policy is injured while riding a friend's uninsured or underinsured motorcycle. The result may be an insurer paying for bodily injury claims incurred on a motorcycle when the insurance company does not insure motorcycles.

Liability Insurance

Under North Dakota Century Code (NDCC) Section 39-08-20, a person may not drive a motor vehicle in this state without liability insurance in the amount required by Chapter 39-16.1. The owner of a vehicle is responsible for acquiring liability insurance. In addition, a driver must provide proof of insurance upon request by a law enforcement officer.

North Dakota Century Code Chapter 39-16.1, "Proof of Financial Responsibility for the Future," works in concert with Chapter 39-16, "Financial Responsibility of Owners and Operators." The purpose of these two chapters is to protect innocent victims of motor vehicle accidents from financial disaster. Both chapters are for a motor vehicle owner who has already had an accident or has been convicted of certain traffic offenses. The sanctions imposed by Chapter 39-16 are intended to guarantee financial responsibility for a first accident. In contrast, the sanctions imposed by Chapter 39-16.1 are designed to establish proof of financial responsibility for future accidents. The minimum limits for liability insurance in Section 39-16.1-11 are $25,000 per person and $50,000 per accident for bodily injury and $25,000 per accident for property damage.

Uninsured and Underinsured Motorist Insurance

The main provisions of law relating to uninsured and underinsured are contained in seven sections codified as NDCC Sections 26.1-40-15.1 through 26.1-40-15.7. These sections were enacted in 1989 in response to the Legislative Assembly making underinsured motorist coverage mandatory in 1987. There has been one substantive change to the law since 1989 and that change was relatively minor.

In general, uninsured motorist coverage is for bodily injury protection for the insured if the other party causing the injury does not have liability insurance. Underinsured motorist coverage is bodily injury protection for the insured if the other party causing the injury had liability coverage less than the amount of the insured person's underinsured motorist coverage.

Uninsured and underinsured motorist coverages are mandatory. Under NDCC Section 26.1-40-15.2, a liability insurance policy may not be issued unless uninsured motorist coverage is provided in the amount of $25,000 per person per accident subject to a limit of $50,000 per accident. The insurer can limit uninsured coverage to $100,000 per person and $300,000 per accident and to usual combinations of limits normally used in the insurance business. Section 26.1-40-15.3 requires underinsured motorist coverage at the limits equal to the limits of uninsured motorist coverage.

Uninsured and underinsured motorist coverages are separate coverages. However, the concepts are closely related.

The first step for an insured to be covered under an uninsured motorist policy is if the insured suffers bodily injury or death caused by an uninsured vehicle. An uninsured motor vehicle is a vehicle that does not have liability insurance or is a vehicle that has liability insurance that does not provide coverage. The first step for an insured to be covered under an underinsured motorist policy is if the insured suffers bodily injury or death caused by an underinsured vehicle. An underinsured vehicle is a vehicle that has liability insurance in effect, but the limits of the liability insurance are less than the limits of the underinsured policy of the injured insured or less than the liability insurance after being reduced by payments to other persons.

"Motor vehicle," in relation to uninsured motor vehicle and underinsured motor vehicle, includes a vehicle with two or more load-bearing wheels which is registered, designed primarily for highway operation, and is powered other than by muscular power and includes an attached trailer, but does not include a vehicle weighing more than 20,000 pounds.

There are a number of situations in which a person is not covered under an uninsured or underinsured motorist policy. North Dakota Century Code Section 26.1-40-15.1(4) excludes these vehicles from the definition of uninsured motor vehicle and underinsured motor vehicle:

• A motor vehicle insured under the liability coverage of the same policy of which the uninsured motorist or underinsured motorist coverage is a part. This prevents an insured from recovering under both the liability coverage and the uninsured or underinsured motorist coverage of the same policy.
• A motor vehicle owned by the government.
• A motor vehicle located for use as a residence or premises.
• A motor vehicle operated by any person who is specifically excluded from coverage in the policy.
• With respect to uninsured motorist coverage, a self-insured motor vehicle is not an uninsured motor vehicle.

North Dakota Century Code Section 26.1-40-15.6 excludes these situations from uninsured and underinsured coverages:

• If the vehicle is regularly used by the insured or family and is not described in the policy,
• If the vehicle is operated without permission of the owner,
• For noneconomic loss that would have been covered if the owner or operator responsible for the loss had no-fault insurance,
• For noncompensatory damages,
• If the statute of limitations has expired,
• Until bodily injury liability policies have been exhausted,
• If the insured makes an agreement that adversely affects the rights of the insurer without the insurer's prior knowledge and consent,
• If the insured failed to report the accident to law enforcement as soon as practicable, or
• If a person operates a motor vehicle in which the individual is specifically excluded in the policy.

If a person has a policy, has an accident with a motor vehicle defined as uninsured or underinsured, and has not been statutorily excluded from coverage, the maximum liability under both uninsured and underinsured motorist coverages is the lower of the amount of compensatory damages established but not recovered or policy limits.

There are three approaches to addressing when underinsured motorist coverages pay benefits when there is another source of recovery:

• The excess approach,
• The difference in limits approach, and
• The modified difference in limits approach.

The excess approach has underinsured motorist benefits apply in addition to any other recovery up to the policy limits. The difference in limits approach has underinsured motorist benefits apply to the extent of the difference between the policy limits and the amount recovered.

The third approach is the modified difference in limits approach, which was used in this state before 1989. The modified difference in limits approach has underinsured motorist benefits apply in the same manner as the difference in limits approach, except an insured with policy limits less than the policy limits of the underinsured motor vehicle can recover if several individuals are injured by the underinsured motor vehicle and the accident limits were reduced or exhausted below the insured's policy limits. This state now has a difference in limits definitional trigger. If the definition is met, then coverage is on an excess basis, which is inclusive of the modified difference in limits approach.

Since 1989 a number of bills have failed to pass which relate to uninsured and underinsured motorist coverage. Most of these bills related to the approach used to determine when benefits apply when there is an equal amount of liability insurance and attempted to change this state's law to a true excess approach. The main argument against the excess approach in 1989 was that insurance companies would be subject to a potential claim for underinsured motorist coverage in every accident. Because of this potential coverage, the insurer will have to open a claim file, do an investigation, and make a determination as to the insurer's exposure for every accident. This is in contrast with the difference in limits approach, in which the insurer only has exposure for underinsured motorist coverage when liability limits are less than the underinsured motorist coverage.

Other States

At least 13 states and the District of Columbia have mandatory uninsured motorist laws. These states are Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, New York, North Dakota, Rhode Island, South Carolina, South Dakota, Vermont, and Wisconsin. Of the states with mandatory uninsured motorist laws, underinsured motorist coverage is optional in Massachusetts, New Jersey, New York, South Carolina, and Wisconsin.

No-Fault Insurance

Background

The focus on no-fault insurance began in 1968. In 1968 Congress directed the United States Department of Transportation to conduct a study and to report its findings and recommendations to the President and Congress. The study concluded that the existing system ill served the accident victim, the insuring public, and society at large. Further, it was concluded that the present system was inefficient, grossly expensive, incomplete, and slow. It allocated benefits poorly and very unevenly, discouraged the use of rehabilitative techniques, and overburdened the courts and the legal system. Based upon the Department of Transportation study, the Nixon Administration recommended the states adopt a first-party, no-fault compensation system for automobile accident victims.

Generally, "no-fault automobile insurance" refers to a type of automobile insurance under which claims for personal injury are made against a claimant's own insurance company rather than against the insurer of the party at fault. An owner with no-fault insurance is considered a secured person. As a secured person, the owner may not be sued or sue for noneconomic loss (pain and suffering) unless there is serious bodily injury. In this state, serious bodily injury, among other things, includes medical expenses in excess of $2,500. In addition, the secured person may not be sued or sue for loss to the extent economic loss is paid or will be paid by the no-fault insurance. To be sued or sue for noneconomic loss, the serious bodily injury threshold must be met; as opposed to being sued for economic loss for which the only requirement to be sued or sue is that the loss is not covered by no-fault insurance.

After a Legislative Council study of no-fault insurance during the 1971-72 interim, the 1973 Legislative Assembly defeated a bill to establish a no-fault automobile insurance system. However, in 1975 the North Dakota Legislative Assembly enacted House Bill No. 1214, the North Dakota Auto Accident Reparations Act. This bill provided for a no-fault automobile insurance system. This no-fault automobile insurance law became effective on January 1, 1976, and remains in effect with amendments today. North Dakota Century Code Chapter 26.1-41 is entitled "Auto Accident Reparations," and this chapter comprises most of the state's no-fault automobile insurance law.

What and Who Is Covered

Under NDCC Section 26.1-41-01, a basic no-fault insurer is required to pay basic no-fault benefits not to exceed $30,000, without regard to fault, for economic loss resulting from accidental bodily injury. Basic no-fault benefits do not apply to damage to personal property, such as an automobile.

Basic no-fault benefits include payments for medical expenses, work loss, replacement services, and death benefits. Medical expenses are covered for necessary remedial treatment and care at reasonable charges. Work loss has a limit of 85 percent of loss of income up to a maximum of $150 per week. Survivors may receive income loss not to exceed $150 per week in case of death. Replacement services are for the actual expense of the loss of services of the injured person in the household. These payments are limited to up to $15 per day. Death benefits for funeral expenses are limited to $3,500.

Under NDCC Section 26.1-41-06, the insurer is required to pay for the economic loss that results from accidental bodily injury sustained by:

• The owner, or any relative of the owner, of a motor vehicle while occupying any motor vehicle or while a pedestrian as a result of being struck by a motor vehicle or motorcycle,
• Any other person while occupying the secured motor vehicle, or
• Any pedestrian as a result of being struck by the secured motor vehicle.

Under NDCC Section 26.1-41-07, there are certain circumstances under which an otherwise eligible injured person is not entitled to no-fault benefits, including if the injured person intentionally caused injury and if the injured person was not in lawful possession of the motor vehicle.

Which Policy Pays

Under NDCC Section 26.1-41-13, a basic no-fault insurer has the primary obligation for economic loss from bodily injury unless there is workers' compensation coverage. Under Section 26.1-41-13(3), the basic no-fault insurer pays for the first $10,000 of medical expenses and the medical insurer pays the remainder. This coordination of benefits is designed to ensure that there is not a double payment. If there are multiple no-fault policies, the occupant's vehicle coverage has priority over the injured passenger's coverage, followed by the assigned claims plan. The assigned claims plan pays no-fault benefits to an individual not otherwise excluded by law or on the financial inability of the basic no-fault insurer. Generally, an insurer does not have the right of subrogation, only arbitration against the adverse insured for limited amounts.

How Is What Is Paid Determined

Under NDCC Section 26.1-41-11, an insurer may require the insured person to have a physician of the insurer's choice examine the insured person. These examinations are called independent medical examinations by the insurer. Generally, the examinations are used to determine if the injury claimed was caused by the accident or was a preexisting or subsequent condition.

During the 2001-02 interim, the Budget Committee on Health Care received a report from the Insurance Commissioner on independent medical examinations which suggested that if the Legislative Assembly chooses to make a change in this area, it may wish to authorize an alternative dispute mechanism rather than the formal legal process, especially for smaller claims.

Selected Case Law From North Dakota

In McGarry v. Skolgey, 275 N.W.2d 321 (N.D. 1979), the Supreme Court of North Dakota stated that "[t]he mere attempt to intelligently recite the basics of no-fault ends up as a grammatical monster." The court also stated:

This case leads us to understand why some courts have found it necessary, when encountering difficulties with no-fault cases, to use such descriptive words as "resist reconciliation," "positive repugnancy," "irreconcilable inconsistencies," and "the legislature should revisit the subject."

In Weber v. State Farm Mutual Automobile Insurance Company, 284 N.W.2d 299 (N.D. 1979), Mr. Weber, the owner of a four-door pickup, was hunting with his wife and two friends. Upon spotting some deer, Mr. Gabby, who was in the rear passenger side seat, exited the vehicle while loading his rifle. As he closed the bolt of the gun, the gun discharged. The bullet struck and killed Mr. Weber. Ms. Weber made a claim against State Farm for death benefits under no-fault coverage. State Farm denied the claim, arguing that there was no causal connection between the operation of the motor vehicle and the accident. The Supreme Court of North Dakota stated one of the purposes of the no-fault law is to avoid protracted litigation over issues of fault or causation. The court reasoned that because no-fault benefits are paid for an accidental bodily injury sustained by the owner of a motor vehicle or any relative of the owner while occupying any motor vehicle, the claim should not have been denied because Mr. Weber was occupying a motor vehicle.

In State Farm Automobile Insurance Company v. Gabel, 539 N.W.2d 290 (N.D. 1995), Mr. Gabel suffered a fatal aneurysm while driving his pickup and collided with a building. The Supreme Court of North Dakota denied no-fault benefits because the death was not the result of an accident and did not arise out of the use of a motor vehicle.

In Olmstead v. Miller, 383 N.W.2d 817 (N.D. 1986), while driving a vehicle, Mr. Miller crashed into the Olmstead's anchored trailer home. Because coverage under the no-fault insurance law extends to accidental bodily injury sustained by a person while a pedestrian as a result of being struck by a motor vehicle, the issue was raised whether no-fault insurance is applicable in these circumstances. Under NDCC Section 26-41-03(13), a pedestrian is defined as "any person not occupying any vehicle designed to be driven or drawn by power other than muscular power." The court found that although the Olmsteads were pedestrians, under the plain meaning of this section, the court did not believe the legislature intended the term to encompass all persons injured by a motor vehicle regardless of the circumstances under which the injuries occurred.

A final case is included in this review because there is a specific urging of the Legislative Assembly to address this issue. In Calavera v. Vix, 356 N.W.2d 901 (N.D. 1984), the Supreme Court of North Dakota held that the determination of medical expenses needed to meet the serious injury threshold is not limited by the statute of limitations of six years. Justice Gierke, concurring, urged the Legislative Assembly to examine the open-ended nature of no-fault coverage and consider placing a limit on the time within which the medical expenses must be incurred in order for the injury to be considered a serious injury. The Legislative Assembly has not addressed this issue.

From these cases, a number of lessons may be learned. First, no-fault law is complex and results in using apparently conflicting rationale to determine cases. Second, no-fault does not apply every time any injury occurs in relation to a motor vehicle. A person must be occupying a motor vehicle and the injury must arise out of the operation of a motor vehicle. An injury arising out of the operation of a motor vehicle includes when a vehicle is not moving or the accident is something other than a crash but does not include injuries by chance which happen in a motor vehicle and are not related to the operation of a motor vehicle. Finally, although the definition of pedestrian includes any person not in a motor vehicle, the definition really means something else that has not been defined, unless a person is in a home, then the person is not a pedestrian.

Legislative History

The 1975 law placed the cap for no-fault benefits at $15,000. The cap for work loss or survivors' benefits was $150 per week because that amount was the average wage per week in this state. Death benefits for funeral expenses were limited to $1,000. Replacement services were limited to $15 per day. The threshold to sue for noneconomic loss because of serious injury based on medical expenses was set at $1,000.

House Bill No. 1510 (1977) created the amount of no-fault medical expenses a no-fault insurer may coordinate with a health insurer in the amount of $5,000. Before the passage of House Bill No. 1510, if an individual had medical expenses in excess of $15,000, depending on the coordination of benefits, the first $15,000 might be paid by the no-fault insurer and the excess paid by the health care insurer. However, this did not leave any money left under the no-fault benefits for work loss, replacement services, or death benefits. The bill allowed the no-fault carrier to subrogate against the health care insurer after the first $5,000 of no-fault benefits were paid, thereby leaving more benefits for items other than medical expenses.

Senate Bill No. 2061 (1981) included health maintenance organizations to the health care insurers in the coordination of benefits provision.

House Bill No. 1195 (1983) prohibited the stacking of insurance coverage as it pertains to uninsured motorist coverage and no-fault benefits. Benefits are available only to the extent of the applicable basic no-fault benefits provided to an injured person, and benefits from one source cannot be added to the benefits from another source.

House Bill No. 1528 (1985) increased the maximum level for basic no-fault benefits from $15,000 to $30,000 and optional excess no-fault benefits for motor vehicle insurance from $40,000 to $80,000. The bill increased the threshold amount defining serious injury from $1,000 to $2,500 of medical expenses. The stated reason for the bill was that $15,000 was not large enough to cover serious accidents. In those accidents, if an individual does not have medical insurance, the individual must pay the balance above the no-fault limits.

The reason for the increase in the medical expenses threshold was to balance the increased benefit with the removal of more of the right to sue because of the increase in basic no-fault benefits to $30,000.

Senate Bill No. 2413 (1987) provided that a basic no-fault insurer may coordinate any benefits it is obligated to pay for medical expenses as a result of accidental bodily injury in excess of $5,000. The bill clarified the coordination of benefits happened after the first $5,000 in medical expenses.

House Bill No. 1467 (1989) increased the time for filing a no-fault insurance claim in an action to recover further benefits for a loss in which the basic or optional excess no-fault benefits have been paid from two to four years after the last payment of benefits. The time for filing was increased in an action for benefits for survivors' income loss and replacement services loss and funeral expenses for one to two years after the death or from four to six years after the accident from which the death results, whichever is earlier. The time for filing was increased in an action to recover further survivors' income loss or replacement services loss benefits from two to six years after the last payment for benefits. The bill increased the time for filing if basic or optional excess no-fault benefits have been paid for loss suffered by an injured person before death and action to recover survivors' income loss or replacement services loss benefits from one to two years after death or from four to six years after the last benefits are paid, whichever is earlier.

Senate Bill No. 2089 (1991) clarified the exclusion of basic no-fault insurers from the prohibition from coordinating benefits without providing the purchaser with an equitable reduction or savings in cost. In addition, the bill allowed a basic no-fault insurer to recover all no-fault benefits, not solely basic no-fault benefits, from another no-fault insurer when tort law would require recovery.

Senate Bill No. 2555 (1991) increased the funeral expense benefit from $1,000 to $3,500. The increased benefit was expected to cost approximately 22 cents per vehicle per year.

Senate Bill No. 2376 (1999) limited the recoverable damages of a person who is in a motor vehicle accident and does not have liability insurance if that person has at least two convictions of operating a motor vehicle without liability insurance. In other words, a person with no-fault insurance may not be assessed damages for pain and suffering in favor of a person who has at least two convictions of operating a motor vehicle without liability insurance.

Senate Bill No. 2275 (2003) increased the amount of no-fault medical expenses a no-fault insurer may coordinate with a health insurer from in excess of $5,000 to $10,000. In short, the no-fault insurer pays the first $10,000 of medical expenses and the health care insurer pays medical expenses after $10,000. Generally, health insurers were for the increase because with the threshold at $5,000, medical insurance had to pay more medical expenses as inflation caused more expenses to exceed the threshold. Generally, no-fault insurers were against the increase because the increase lowered the amount of no-fault benefits available for benefits that are not medical expenses, including work loss and replacement services benefits.

House Bill No. 1190 (2003) removed the expiration date on the statute that prohibits a person who has two convictions for driving without liability insurance and was driving without liability insurance from receiving noneconomic loss for serious injury in an action against the insured. In addition, the bill lowered the previous convictions requirement from two to one.

No-Fault Insurance in Other States

Saskatchewan has had no-fault insurance since 1946 and Puerto Rico has had no-fault insurance since 1968. The first state to adopt the modified no-fault insurance system was Massachusetts in the early 1970s. In the 1970s no-fault laws were enacted in 16 states. Since that time, five of those states repealed no-fault laws--Colorado, Connecticut, Georgia, Nevada, and Pennsylvania. Although Pennsylvania repealed its law in 1984, it adopted a new law in 1990.

Theoretically there are three ways to classify no-fault insurance:

• Absolute no-fault.
• Modified no-fault.
• Choice no-fault.

Absolute no-fault is coverage in which a driver relinquishes the right to sue for pain and suffering in exchange for coverage for all economic losses. No state has this form of no-fault. The state with the closest form to absolute no-fault is Michigan. Michigan has unlimited coverage and it is very difficult to sue for noneconomic losses.

Modified no-fault is coverage in which first-party benefits are provided regardless of fault and the right to sue for pain and suffering is permitted only after meeting a statutorily defined threshold. Some states use a dollar threshold and some states use a verbal threshold. Every state with a no-fault law is a modified no-fault state. These states are Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah.

Of the states that are modified no-fault states, three are choice no-fault states. Under this system, a driver may choose to be included in the modified no-fault system or the tort system. States with this form of no-fault coverage are New Jersey, Pennsylvania, and Kentucky.

"Add-on" insurance is expanded first-party coverage that has first-party, no-fault benefits for medical expenses and lost wages but does not restrict lawsuits for pain and suffering. Although this type of insurance is closely related to no-fault, it is not no-fault--the coverage is added on to the existing tort liability system. The nine add-on states are Arkansas, Delaware, Maryland, Oregon, South Carolina, South Dakota, Texas, Virginia, and Washington.

The remaining 29 states are tort liability states. An individual injured in a motor vehicle accident must collect payment from the at-fault driver, if any, and must be able to prove negligence. However, some vehicle owners purchase medical payments coverage to provide personal injury protection.

The most recent state to convert to a tort system, after being in a no-fault system, is Colorado. Colorado's no-fault insurance statutes sunsetted on July 1, 2003. During the 2003 legislative session, the General Assembly of Colorado considered a number of bills to reform the no-fault insurance system. The most viable options appeared to have died after intense lobbying efforts by trial lawyers and health care providers. The Governor also indicated he would not sign any legislation extending no-fault unless there were significant savings attached to the legislation. These actions resulted in the application of the sunset clause and a return to the tort system.

In A History and Overview of Colorado Law for Automobile Insurance Coverage by Paul D. Godec, September 2003, Mr. Godec lists a number of consequences of the change from the no-fault to the tort system in Colorado. These consequences include:

• Health insurance benefits will increase because health insurance will cover more of the medical expenses following accidents.
• Medical facilities will more likely aggressively pursue liens and reimbursements for services through tort litigation. In addition, emergency facilities experiencing financial difficulties will face more difficulties because of the lower certainty of reimbursement.
• Individuals who suffer injury as a result of an at-fault driver will have to pay for medical expenses with the hope of recovering in later litigation. This may result in an injured party not obtaining certain medical services until the resolution of the litigation.
• At-fault drivers will be left to pay for their own medical expenses and the change will make it more likely an injured driver will become a defendant in a tort action.

Testimony and Discussion

Uninsured and Underinsured Motorist Coverage

The committee was informed of a situation in which a child who was away at college rode as a passenger on another person's motorcycle that was uninsured. The parents of the child did not want the child covered under their uninsured motorist coverage on their automobile.

The committee was informed the Legislative Assembly intended to include this situation within uninsured or underinsured motorist coverage because of the high probability of great injury. On the other hand, testimony indicated that it is unfair to include in the rates for automobile policies costs associated with the operation of motorcycles.

Testimony indicated that motorcycles are more likely not to be insured than other vehicles. This is because a high proportion of youth ride motorcycles and motorcycles are a seasonal vehicle for which a person may forget to reinstate insurance.

Committee discussion included that insurance companies know this situation may arise and can adjust premiums accordingly. In addition, committee discussion included that it is a different issue if a child is part of a household from whether the child should or should not be covered because the situation is unfair to an insurance company.

The committee considered a bill draft that excluded motorcycles from uninsured and underinsured motorist coverage of an automobile policy. The bill draft provided that uninsured and underinsured motorist coverages would not apply to an insured while operating or occupying a motorcycle and motorcycle coverage was not included in the policy for which the claim is made. The bill draft created parity in that an automobile policy would cover an individual in any automobile and a motorcycle policy would cover an individual on any motorcycle.

Supporters of the bill draft pointed out the bill draft was similar to Senate Bill No. 2262 (2003) as introduced, which was introduced to address increases in motor vehicle insurance premiums. It was argued that the committee should remove the language limiting a motorcycle to a vehicle having a seat or saddle.

Opponents of the bill draft argued the bill draft may financially affect health insurance companies because these companies have subrogation rights against uninsured and underinsured motorist coverage. In particular, health insurance companies will still have the right of subrogation and would still be able to go after the assets of the insured.

Although no testimony was provided on the premium savings customers would realize if the bill draft were enacted, it was argued that the bill draft may prevent a cost increase. It was argued that the problem to be solved by the bill draft is not that great a problem in relation to the damage the change could cause.

Committee discussion included that the reason people have insurance is to pass the cost of a particular risk to an insurance company. Most people assume they are covered in most situations. With respect to the cited situation, most parents would want their child covered under the automobile insurance policy. The committee was informed that insurance customers want coverage for any situation in which they may be injured but do not want to pay premiums for something on which they do not expect coverage.

Committee members expressed concern as to how people would insure for this situation if the bill draft were enacted.

No-Fault Insurance

The committee received testimony from various automobile insurance companies and associations representing insurance companies. The committee was informed that mandatory no-fault insurance needs to be repealed or have major changes made to it so that automobile rates can be lowered. The committee was informed that customers want a good portion of the insurance premium returned as benefits.

The committee was informed the major problem with no-fault insurance is that it is mandatory. Because the insurance is mandatory, it was argued the automobile insurance companies are unable to implement cost-containment measures. Removing the mandatory nature would reduce the opportunity for abuse and would give insurance companies the ability to address problems.

The committee was informed that no-fault benefits are broader than most health insurance benefits and the insured does not have any out-of-pocket expenses. Because of the lack of cost-containment measures, there is an incentive for the insured and the health care provider to attribute any injury to a motor vehicle accident and to get as much treatment as possible. Under no-fault insurance, an insured could receive some items and services not ordinarily covered by health insurance. For example, a lady received a prescription for a "new bed" to remedy her injured back and she bought a bed that cost in excess of $1,000. There is an incentive to continue treatment as long as possible. It is typical for benefits to be paid for months and years. With chiropractic care, medical expenses have been incurred for five or six years. In addition, the lack of a mandatory fee schedule encourages a health care provider to raise fees for services covered by no-fault insurance.

The committee was informed that it is expensive to administer no-fault insurance in comparison to health insurance. Health insurance covers treatment regardless of cause and no-fault requires a review of the cause of the injury. Each bill needs to be reviewed to determine if the injury was caused by the accident, if the treatment is medically necessary, and to determine if the individual has met the maximum medical improvement. In addition, each bill must be reviewed because of inadvertent billings--medical facilities do not differentiate on a billing whether the item was for an automobile accident or for something else. In addition, it was argued that there are some intentional billing problems that happen when a health care provider sends a bill to the automobile insurer to see if the bill will be paid.

The committee was informed that out of each $1 of no-fault premium, approximately 35 cents goes for administration and approximately 25 cents is attributable to the lack of cost-containment. Health insurance has approximately an eight cent administrative cost for each dollar of premium.

The committee was informed liability insurance is the most important kind of motor vehicle insurance because it protects innocent third parties. In the recent past, the percentage of individuals which have maximum limits on their liability insurance has decreased from 25 to 17 percent. It was argued that customers have lowered their liability insurance coverage to manage the cost of insurance. If no-fault insurance were repealed, customers would have more insurance dollars to spend on liability insurance. In addition, it was argued that uninsured motorists may buy insurance if they only had to purchase liability insurance.

The committee received testimony on permissive medical coverage for automobile insurance instead of mandatory no-fault. There would be options for the purchase of first-party medical coverage. Customers would be able to choose the amount of medical coverage they wanted based on need, instead of having a mandated amount. Before 1975 insureds purchased medical coverage instead of no-fault. In 1975 the average policy for medical coverage for automobile insurance was $5 per year. The committee was informed that medical coverage insurance allows insurance companies to control losses through cost-containment measures. However, the committee was informed that medical coverage option would have higher rates for comparable coverage because there would be a smaller pool of insureds.

Permissive medical coverage is used in South Dakota. However, one insurance company requires $2,500 in medical coverage for automobile insurance customers in South Dakota. The insurance is required because it prevents a lawsuit against the insured by a passenger in the insured's car when the passenger does not have health care insurance.

Committee discussion included that insurance companies are the insurance experts and should be allowed some latitude in tailoring an insurance product that is appealing to the consumer. One solution would be to mandate a limited no-fault coverage and allow additional coverage. To the contrary, it was argued that making minor adjustments to the no-fault law does not directly address the issue of whether no-fault insurance should be mandated. Committee discussion included that simplifying the no-fault law would open the law to legal arguments. It was argued that the way the law is written is fairly well-settled.

The committee received testimony on changes that would not require legislative action. Insurance companies could institute cost-containment measures on their own initiative. The committee was informed that it is impractical for automobile insurance to have preferred providers. Because no-fault insurance is mandated, automobile insurers do not have any leverage in negotiating preferred provider agreements. The committee was informed that a substantial share of the market is required for preferred provider agreements to work. There are approximately 85 companies that sell no-fault insurance in the state. Antitrust laws prevent automobile insurance companies from working together to set payment rates for medical care.

The committee was informed that an automobile insurer would not benefit from entering an agreement with a health care insurer for the administration of no-fault benefits. If there were an agreement, the cost of administration would be similar because of the more stringent review required for no-fault bills than health care bills.

The committee received testimony on the effect if no-fault insurance were repealed. Since the repeal of no-fault insurance in Colorado, premiums dropped 27 percent for required coverages and 15 percent for all insurance, including comprehensive and collision.

Arguments in favor of the repeal of no-fault insurance included that no-fault benefits few drivers. A very small portion of North Dakotans are injured in automobile accidents, but every driver has to pay for no-fault. In 2002 there were approximately 700,000 vehicles in North Dakota, 465,271 drivers, and approximately 4,883 people injured in automobile accidents.

The committee was informed that although one of the reasons for the adoption of no-fault was reduced litigation, litigation has not been reduced. A contrary argument, however, is that although North Dakota had increased tort filings from 1992 through 2001, being one of the few states with an increase, this state had the lowest number of tort filings nationally. Approximately 540 tort cases go to court each year. In addition, this state has the lowest percentage of automobile cases as compared to any other state.

The main argument against the repeal of no-fault is that a repeal will result in a shift in cost to health insurance, which will result in people not being able to afford health insurance. In response, it was argued that South Dakota does not have mandatory no-fault insurance and has an almost identical percentage of individuals covered by health insurance as this state.

The committee considered a bill draft that repealed no-fault automobile insurance. Committee discussion included opposition to the repeal of no-fault automobile insurance. Committee discussion included that the repeal of no-fault automobile insurance would not be acceptable but modifications to no-fault automobile insurance would garner more support.

The committee considered a bill draft that modified no-fault insurance. Testimony in support of the bill draft pointed out that the most important changes are the changes with the most financial impact and the changes to bring coverage closer to the use of an automobile as an automobile.

The bill draft provided these modifications to the no-fault law:

• The vehicle the insured is in had to be in motion or the injury had to be caused by another vehicle to receive benefits. Testimony indicated that if no-fault coverage required a vehicle to be moving there would be sizable savings.
• Work loss, replacement services loss, survivors' income loss, and survivors' replacement services loss were removed as benefits. Testimony indicated that the removal of work loss and replacement services would not shift costs to health care insurance.
• Charges had to be usual and customary and incurred for reasonable and necessary treatment.
• Usual and customary charges were those on the Workforce Safety and Insurance fee schedule. Testimony indicated that use of that fee schedule would not be an effective means to prevent people from attributing medical problems to a car accident.
• There was a deductible of $250. Testimony indicated that a $250 deductible would not have a major financial impact.
• Chiropractic care, massage therapy, acupunc-ture, and physical therapy were limited to $500 or, in the alternative, charges for chiropractic care, massage therapy, and acupuncture were not medical expenses. Testimony indicated that if coverage for chiropractic care and massage therapy were removed from no-fault benefits, the expense ratio would drop approximately in half. The committee was informed that limiting chiropractic care and massage therapy to $500 with a $250 deductible would help because there would not be as much at stake so insurance companies would not oppose the charges as much and administrative costs would decrease. In opposition to these arguments, the committee was informed that chiropractic care is effective health care and is cost-effective. The committee was informed the State Board of Chiropractic Examiners is aggressively disciplining fraud and abusive providers.
• Charges for nonprescription drugs and experimental and medically unproven treatments were not covered. Testimony indicated that nonprescription drug coverage is expensive to administer because it is difficult to determine if the drugs are for the patient and as a result of the accident.
• Occupying a motor vehicle did not include getting in or out of the vehicle, but being in or upon the vehicle. It was argued that "or upon" should be removed because it leaves a gray area that courts could read expansively. It was argued that a person should be in the cab to have coverage under no-fault insurance--coverage for a person in the back of a pickup should be removed because public policy should not support encouraging people to ride in the back of pickups. In addition, a person injured on a trailer should not be covered--trailers are unsafe and do not have safety belts. Committee discussion included that if "or upon" is removed, the definition for motor vehicle should be changed to not include a trailer so there is consistency.
• Operation of a motor vehicle did not include maintenance or loading and unloading. Testimony indicated that no-fault currently covers an individual who is fixing a flat tire or making repairs under a motor vehicle and is injured when the vehicle falls on the individual. A person hit by another car while changing a flat tire would still be covered under the bill draft because that person would be considered a pedestrian.
• The threshold for serious injury was raised to $4,000 or, in the alternative, diagnostic testing was excluded from "serious injury." Testimony indicated that raising the threshold to $4,000 may or may not have an impact; however, removing diagnostic services from determining the threshold would have a great impact. Raising the threshold to sue for noneconomic loss from $2,500 to $4,000 may encourage people to have more unnecessary diagnostic testing. On the other hand, removing diagnostic services would remove the incentive for an individual to have many tests done which increases medical expenses so that the individual can initiate a civil action.
• Bills were required to be submitted to the insurance company within 45 days. Testimony indicated that certain providers do not bill for months or years, as opposed to a no-fault insurance company that must pay claims within 30 days. It was argued that the claim period of 45 days should be at least 90 days because it regularly takes 60 to 90 days to bill an insurance company.
• Failure to appear for an independent medical examination without good cause resulted in damages plus fees and costs. Testimony indicated there is only one tool insurance companies have to keep down costs--the independent medical examination. Insurers use independent medical examinations in under 3 percent of claims. The independent medical examination is costly and contentious. The committee was informed that people not showing up for independent medical examinations is a growing problem and there needs to be a penalty to address this problem. The committee was informed that some attorneys use the strategy of having clients not show up so that insurance companies have twice the cost as a means of punishing insurance companies for using this tool. Most doctors do not do independent medical examinations because they may be witnesses in a lawsuit.
• The reasonable charge by health care providers for making copies of records was set at $20 for the first 25 pages and 25 cents for each additional copy. Setting the cost at $20 for 25 pages was an attempt to arrive at a reasonable amount. It was argued that copies should not be a profit center for health care providers. On the other hand, it was argued that $20 for 25 pages may not be adequate, considering postage and other costs of administration.
• The statute of limitations was changed from two years to one year for the first claim for benefits and four years to two years when benefits have been provided. The reason for the limitations is to make sure that costs are related to the accident. Once a person makes a claim, that person can continue to make the claim.
• Equitable allocation of loss between insurance companies and subrogation provisions was repealed. North Dakota Century Code Section 26.1-41-17 relates to equitable allocation among insurance companies. If one individual drives a car and causes an accident with another car, the individual in the other car goes to that individual's insurance company to collect no-fault benefits. After that, the insurance company can proceed against the first individual's insurance company for equitable allocation. Under this procedure, insurance companies recover as much as they pay over time. This reimbursement system drives up the cost of administration with no benefit to insurers. Testimony indicated that the insurance companies widely agree as to removal of equitable allocation. Section 26.1-41-16 relates to the right of subrogation. This section includes individuals who do not have insurance in violation of the law and, for example, a construction company that leaves a hole in the road. The person who did not buy insurance would be relieved from liability if Section 26.1-41-16 is repealed. Testimony opposed the repeal of Section 26.1-41-16 because the ability to subrogate or not subrogate will not affect a customer's premium because a customer's premium is increased if the customer is at fault.

As a result of testimony on the original bill draft, the committee revised the bill draft:

• To remove language that would have changed coverage for chiropractic care, acupuncture, and massage therapy.
• To include injury sustained while maintaining a motor vehicle or while unloading or loading while occupying the vehicle. Committee discussion included a fear of what would happen by removing the language in some fact scenarios. Because the committee did not know of the complete effect of the change, it was argued that no change should be made at the present time.
• To leave the threshold for serious injuries at $2,500 but exclude diagnostic testing from determining that amount.
• To change the time that services are required to be billed from 45 to 90 days.
• To remove NDCC Section 26.1-41-16 on subrogation from the repealer clause.

The revised bill draft does not address the following concerns that were raised:

• Whether an individual should continue to be covered while upon a vehicle or on a trailer.
• Whether no-fault benefits should be lowered--North Dakota is one of six states with limits over $10,000 with a $30,000 limit.
• Whether there should be a clear guideline for discontinuing benefits following a specified lapse in treatment.
• Whether there should be a verbal threshold for serious injury.

Recommendation

The committee recommends Senate Bill No. 2047 to modify no-fault automobile insurance as described in this report.

RAILROAD RIGHT OF WAY STUDY - BACKGROUND MEMORANDUM

Senate Bill No. 2358, Section 5, required the Legislative Council to study the sale and lease of railroad rights of way. Sections 1 through 4 provide for limited indemnity provisions in contracts between railroads and grain and potato warehouses. The study appears to have resulted from the contentious nature of Senate Bill No. 2358 and from House Bill No. 1291, which provide for a priority and procedure for the sale of railroad right of way on a line that has discontinued service.

Railroad Right of Way

Because the bill specifies that railroad right-of-way property is in question, it should be noted that not all property owned by railroads is included within the study. Railroad right of way is the land on which railroad track is located and varies in width but is generally a width of 200 feet. As an example, some of the land owned by the Burlington Northern Railroad Santa Fe Company was originally granted by the United States to the Northern Pacific Railroad Company by Congress in the Northern Pacific Act (Act of July 1, 1864, ch. 216, 13 Stat. 365 et seq.). The Northern Pacific Act gave the Northern Pacific Railroad Company the power to construct a continuous railroad from Lake Superior to Puget Sound. The Northern Pacific Act granted the railroad two different kinds of property. The railroad was granted a 200-foot-wide right of way along the entire length of the railroad. In addition, the railroad was granted every alternate section of public land on each side of the railroad line. The alternate section land grants are not railroad right of way.

In addition to the federal land grants to railroads, the state of North Dakota provided grants of land to railroads to encourage building of both main line and branch line railroads within the state. In 1893 North Dakota granted rights of way to railroads over state-owned land to build railroad lines. The rights of way granted were 100 feet wide, or 200 feet wide if necessary for construction, and at places where railroad stations were located the right of way was 300 feet wide and 1,600 feet long. The 1893 law provided that if any railway company appropriating public lands under the law abandoned the use of the lands for railway purposes, the lands abandoned would revert to the state.

In 2002 there were more than 3,700 miles of railway lines in North Dakota, a reduction from approximately 5,000 miles in 1979. Approximately two-thirds of the railway lines are branch lines. Railroads obtained most of the right of way for branch lines through purchase and condemnation.

One of the difficulties in discussing railroad right of way is the lack of uniformity and the usage of the term "right of way." A right of way in the legal sense as it relates to railroads is a mere easement for railroad purposes in the land of others. The general meaning of the term in railroad parlance signifies a possessory interest in land in which track is constructed. In addition to the property right, right of way is used to describe the strip of land used by a railroad as the word highway is used to define the strip of land on which people operate motor vehicles. Under the previous example, sometimes right of way is the ditch or both the ditch and the road.

Right of way is not defined under the North Dakota Century Code for the purposes of railroad right of way, and the use of the term appears to take on different meanings as required by the subject matter. Whatever property right is in the right of way is defined by the instrument through which the railroad received the property. Whether this be by federal charter, state charter, condemnation, or purchase, that document or grant of authority determines the legal interest of the railroad which may range from a license to fee simple ownership.

Statutory Framework

Grain and Potato Warehouses on Right of Way

North Dakota Century Code Chapter 60-06, originally enacted in 1890, provides that any person may erect and operate a grain or potato warehouse or elevator on railroad right of way upon compliance with the chapter. Upon application and payment of what the applicant deems reasonable compensation, the applicant is immediately entitled to erect the warehouse or elevator. In case the amount tendered in payment is not accepted, provisions exist for district courts to determine the proper payment. In addition, under Section 60-06-06.1 any party may petition the Public Service Commission to determine rights governed under Chapter 60-06. The right to elect to use the right of way under Chapter 60-06 also applies to renewal of leases. Chapter 60-06 has never been the subject of a North Dakota Supreme Court decision, so the constitutionality of that chapter is not assured.

During the 1987-88 interim, the Legislative Council's Business Committee studied railway right-of-way tenants. Representatives of the Soo Line Railroad and the Burlington Northern Railroad opposed any expansion of NDCC Chapter 60-06 beyond coverage of businesses handling grain or potatoes. They said grain and potato businesses require railroad access, but in other commercial ventures the need for railroad access does not exist. It was pointed out that legal considerations involving the freedom to make contracts, prohibition of laws impairing the obligation of contracts, the right to equal protection of the laws, prohibition of unreasonable restrictions on the use of private property, the exercise of the police power in regulation of business, prohibition of impairment of vested rights of corporate stockholders, the right to due process, and the right to compensation under eminent domain laws are all potential legal arguments that could be made against granting increased rights to tenants on railroad right-of-way property.

In 2003 the Legislative Assembly enacted Senate Bill No. 2358. Senate Bill No. 2358 created NDCC Section 49-16-01.1, which as a general rule prohibits a railroad from including within an agreement with a public grain or potato warehouse provisions for indemnification--reimbursement--of the railroad for damages caused by the railroad or for insurance to answer for damages caused by the railroad. The bill created an exception to the general rule by allowing a railroad to require commercial general liability insurance of not more than $2 million per occurrence and not more than $4 million for multiple occurrences for damages. A railroad may require indemnification in defense of the railroad or damages up to $2 million per occurrence arising out of the use or occupancy of the property. The bill also amended Section 60-06-06.1 to prohibit the Public Service Commission from considering the value of leaseholders' improvements in determining a reasonable lease rate or selling price. The bill also amended Section 60-06-15 by providing that the chapter applies to the sale of existing leaseholders on railroad rights of way.

The legislative history of the bill illuminates some of the arguments by the railroads. In summary, the railroads' argument was that railroads are engaged in an inherently dangerous activity. There are going to be accidents and derailments during this activity. Railroads have a right of way as a barrier between the railroad and other people so as not to injure other people when there are accidents. If a person wants to locate a business on the right of way, that business should indemnify the railroad for the bad things that happen around an inherently dangerous activity. If the business does not like the indemnity conditions in a contract, the business does not have to agree and can locate in a safer area.

The legislative history also illuminates some of the arguments of warehouses against indemnity provisions. In summary, the main argument of the warehouses was that the provisions were unfair because the provisions were suddenly imposed in renewals and were not negotiable. Because warehouses have invested large amounts of money in buildings and infrastructure, warehouses cannot reject the provisions and move without incurring a great financial loss. In addition, if a warehouse did move, it would most likely want to move next to the railroad for the transportation services. This places warehouses in a very weak bargaining position.

Sale of Abandoned Right of Way

Under NDCC Chapter 49-09, the state regulates the acquisition and transferring of railroad property. Under Section 49-09-04.2, before August 1, 2003, when service is discontinued and the property is offered for sale, the property must first be offered for public purposes. Along abandoned rail lines, the lessee operators of grain and potato warehouses located on the right of way must be given the next option to acquire the property. Next, adjoining agricultural landowners are given the option to acquire the property adjoining the landowner's land.

House Bill No. 1291 (2003) made major changes to NDCC Section 49-09-04.2 effective August 1, 2003. When service is discontinued and offered, the property must be offered to the present owner or operator-lessee of fixed assets located on the property followed by a person owning land contiguous to the right of way on opposite sides of the right of way. Next, the property must be offered to a person representing a reasonable plan for public recreational use of the abandoned property followed by the adjoining landowner if the land is assessed for tax purposes as agricultural land. The bill required the railroad to provide notice to owners and operator-lessees of fixed assets of the railroad's intent to dispose of railroad right of way. The sale price of abandoned railroad property was required to be equitable. If a railroad complies with the priorities and notice requirements and five years have passed since abandonment or since service was discontinued, the railroad may deed the right of way to the county if the property is accepted by the county.

Under NDCC Section 49-09-04.3, a railway abandoning a rail line is to remove and clear railroad property and control noxious weeds on the right of way. Under Section 49-09-10.2, each carrier or other entity intending to acquire an operating railroad's right of way is required to file notice with the commission.

Jurisdiction Over Railroads

Under the commerce clause, Congress has the power to "regulate commerce with foreign nations, and among the several states, and with Indian tribes." Under the necessary and proper clause, Congress can "make all laws which shall be necessary and proper for carrying into execution" the commerce clause. The commerce clause is broad in scope and regulation under the clause may address any activity, even if entirely intrastate, that taken with other like acts affects commerce in other states. The necessary and proper clause is broad in scope and extends the commerce clause to anything appropriately related to railroads. In short, Congress has the power to regulate anything relating to railroads.

Economic Regulation

Under the Interstate Commerce Act of 1887, freight railroads became the first industry in the United States to become subject to comprehensive federal economic regulation. Railroads were regulated by the federal government through the Interstate Commerce Commission for the next 93 years. In 1980 Congress passed the Staggers Rail Act. The Staggers Rail Act deregulated the railroad industry, but not completely. The Interstate Commerce Commission retained authority to set maximum rates or take certain other actions if railroads were found to have abused market power or engaged in anticompetitive behavior. In addition, the Interstate Commerce Commission had jurisdiction over railroad line abandonments. With the passage of the Interstate Commerce Commission Termination Act of 1995, the Surface Transportation Board succeeded the Interstate Commerce Commission as the federal agency with jurisdiction over railroads. Under 49 U.S.C. § 10501(b), the Surface Transportation Board has exclusive jurisdiction over:

• transportation by rail carriers, and remedies . . . with respect to rates, classifications, rules . . ., practices, routes, services, and facilities of such carriers; and
• the construction, acquisition, operation, abandonment, discontinuance of a spur, industrial, team, switching, or side tracks, or facilities, even if the tracks are located, or intended to be located, entirely in one State, . . . [T]he remedies . . . with respect to regulation of rail transportation are exclusive and preempt the remedies as provided under Federal or State law. (emphasis supplied)

Transportation is defined as including property, facility, instrumentality, or equipment of any kind related to the movement of passengers or property, or both, by rail and services related to that movement, including receipt, delivery storage, handling, and interchange of passengers and property. Rail carrier is defined as a person providing common carrier railroad transportation for compensation. Railroad is defined to include a switch, spur, track, terminal, terminal facility and freight depot, yard, and ground, used or necessary for transportation.

In exercise of commerce power, Congress has preempted most economic regulation of railroads. There are three forms of preemption--express, field, and conflict. Express preemption is when Congress explicitly preempts state law. Field preemption is when congressional regulation of a field is so pervasive or the federal interest so dominant that the intent to preempt can be inferred. Conflict preemption is when a state law stands as an obstacle to the purpose of a federal statute. When the preemption is explicit, the first step is to look at the plain meaning of the statute. However, there is a presumption against the federal government supplanting the historic state police powers unless preemption is the clear and manifest purpose of Congress.

In addition to having exclusive jurisdiction over "transportation by rail carriers," the broadly inclusive phrase "regulation of rail transportation" evidences congressional intent to preclude state remedies for violation of any state laws or rules regulating rail transportation. As stated in CSX Transportation, Inc. v. Georgia Public Service Commission, 944 F. Supp. 1573 (N.D.Ga. 1996), "[i]t is difficult to imagine a broader statement of Congress's intent to preempt state regulatory authority over railroad operations." In Burlington Northern Santa Fe Corporation v. Anderson, 959 F. Supp. 1288 (D. Mont. 1997), the court stated the "federal scheme of economic regulation and deregulation is intended to address and encompass all such regulation and to be completely exclusive." In City of Auburn v. U.S. Government, 154 F.3d 1025 (1998), cert. denied, 119 S. Ct. 2367 (1999), the Ninth Circuit Court of Appeals concluded noneconomic regulation can turn into economic regulation if the carrier is prevented from constructing, acquiring, operating, abandoning, or discontinuing a line.

Although case law shows a trend toward an expansive reading of the Interstate Commerce Commission Termination Act, there has to be a line at which the reach of the Act ends or the states could not have any laws because all laws, even if remotely, tangently related to railroads, have an economic effect on railroads. That line has not been clearly defined in case law.

A trickle of recent cases has found no preemption in areas that are tangental or remote. In Florida East Coast Railway Company v. City of West Palm Beach, 266 F.3d 1324 (2001), the Eleventh Circuit Court of Appeals found that city regulation by zoning and occupational licensing of a lessee of railway property which was engaged in the business of a distribution center involving unloading railcars was allowed. The court found a presumption against preemption that dictates if 49 U.S.C. § 10501(b) "can be read sensibly not to have a pre-emptive effect, the presumption controls." In addition, state tort and property law claims relating to negligence and nuisance for the railroad's construction of an earthen berm that caused damage though water damage was not preempted. The United States District Court in Rushing v. Kansas City Southern Railway Company, 194 F. Supp. 2d 493 (S.D. Miss. 2001), held the economic effect of the railroad paying damages and removing the berm was not the type of economic regulation addressed by the Interstate Commerce Commission Termination Act.

Safety Regulation

The federal regulation of railway safety is accomplished through the Federal Railway Safety Act. In the Act, Congress has expressly provided for state regulation of railroad safety. Under 49 U.S.C. § 20106, national uniformity is provided as follows:

Laws, regulations, and orders related to railroad safety and laws, regulations, and orders related to railroad security shall be nationally uniform to the extent practicable. A State may adopt or continue in force a law, regulation, or order related to railroad safety or security until the Secretary of Transportation (with respect to railroad safety matters), or the Secretary of Homeland Security (with respect to railroad security matters), prescribes a regulation or issues an order covering the subject matter of the State requirement. A State may adopt or continue in force an additional or more stringent law, regulation, or order related to railroad safety or security when the law, regulation, or order--

1. is necessary to eliminate or reduce an essentially local safety or security hazard;
2. is not incompatible with a law, regulation, or order of the United States Government; and
3. does not unreasonably burden interstate commerce.

In addition, under 49 U.S.C. § 20113, a state may enforce federal safety regulations in certain circumstances if the state is certified to investigate railroads for violations under 49 U.S.C. § 20105.

In CSX Transportation, Inc. v. Easterwood, 113 S. Ct. 1732 (1993), the United States Supreme Court found that language under the Federal Railroad Safety Act preempted the state common-law duty to operate a train at a safe speed. The Court said that federal regulation of speed limits should be understood as "covering the subject matter" of the state law. Under Burlington Northern and Santa Fe Railway Company v. Doyle, 186 F.3d 790 (1999), the Seventh Circuit Court of Appeals opined that even nonregulation can be regulation preempting state regulation. This happens when the Federal Railroad Administration has examined and determined that there is no need for regulation.

Congress has provided for specific regulation of different aspects of railway safety under 49 U.S.C. §§ 20131 through 20153, and the Federal Railroad Administration has made many rules relating to these areas of railroad safety. There are statutes or rules relating to noise omissions, whistles, locomotive boiler inspections, and safety as to cars and the coupling of cars, among other things. Whether a certain state action is preempted depends upon the type of regulation. For example, locomotive boiler inspection and car safety are preempted through field preemption. In other areas, there may be no rule or rules that allow cooperation between state and federal authorities. Any state regulation of safety requires a review of federal law and Federal Railroad Administration rules to determine if the regulation is preempted or allowed and, if allowed, in what measure. The courts give great weight to an agency delegated with authority over an area to determine whether a state law should be preempted.

In CSX Transportation, Inc. v. City of Plymouth, 283 F.3d 812 (2002), a statute similar to NDCC Section 49-11-19 was reviewed to determine if the state regulation was preempted by federal regulation. The Michigan statute prohibited trains from continuously blocking grade crossings for more than five minutes. There were two exceptions to the prohibition--if the train is continuously moving in one direction, then the train can block a grade crossing for up to seven minutes and if the train stopped because of an accident, mechanical failure, or unsafe condition. Federal regulation provides for the regulation of speed, length, and brake testing. The Sixth Circuit Court of Appeals found that these regulations preempted Michigan's law because the amount of time a moving train spends at a grade crossing is mathematically a function of the length of the train and the speed the train is traveling. As such, the federal regulations substantially subsume the subject matter of the state statute.

Testimony and Discussion

Operation and Effect of Recent Changes in Law

Because Senate Bill No. 2358 (2003) and House Bill No. 1291 (2003) did not take effect until August 1, 2003, it was too early to determine the effect of the bills. However, the new laws did not result in any preemptive action by the railroads before the effective date of the laws. In addition, Senate Bill No. 2358 applies solely to new leases and renewals of leases so the bill will have a very limited effect in the near future.

The committee was informed that because of Senate Bill No. 2358, it will be more difficult to manage liabilities on leased property. The committee was informed that the railroad will have to look at leases more closely to see if the risks of leasing can be covered by the insurance and indemnity provisions allowed by state law. The committee was informed that the law may limit the railroad to offer leases only to small entities for which the limits in the law will adequately cover the risks engaged in by a small entity. In addition, a large entity may have to pay higher prices to make the lease of railroad right of way profitable.

The committee was informed that a portion of Senate Bill No. 2358 was codified in NDCC Section 49-16-01.1(3)(a)(1), which sets limits for commercial general liability insurance that a railroad can require of a grain elevator at $2 million per occurrence and $4 million for multiple occurrences. This coverage is for damage caused by the sole or concurrent fault of the railroad, its employees, agents, and contractors. It was argued that the word "sole" should be removed and that damages should be shared in relation to responsibility.

The committee was informed that under House Bill No. 1291, the sale price of abandoned railroad property must be equitable and that the language expresses a legislative intent that the sale price be comparable to the value of the surrounding property. The committee was informed that the railroads support the change in the law relating to the priority of sale of abandoned property.

Insurance and Indemnity Provisions

The committee received testimony against insurance and indemnity provisions in contracts with railroad companies. An elevator needs the services of its lessor, the railroad. Although elevators do ship some product in state by truck, elevators use the railroad to ship in excess of 80 percent of all shipped product. It was argued that if the farmers in this state moved much more grain by truck, it would severely impact roads.

The committee was informed that even more so than other industries, railroads have a social responsibility to pay for and protect the public from the railroad's negligence. Railroads obtained right of way as a form of government-supported economic development. It was argued that it is against public policy for a railroad to be able to contract away a liability on a public-supported industry. In addition, contracting away liability reduces the incentive for a railroad to be safe and removes the ability of the insurer to take risk reduction efforts in cooperation with the insured.

The committee received testimony from the two major railroads in this state--the Burlington Northern Sante Fe (BNSF) Railway Company and the Canadian Pacific (CP) Railway Company. The Soo Line Railroad Company is a wholly owned subsidiary of the Canadian Pacific Railway.

The committee was informed that CP obtained most of its property in this state in fee title and through negotiation, not condemnation or grant. Therefore, the railroad does not owe a higher duty than other industries. In addition, the railroad obtained the property for transportation purposes, not leasing purposes. In short, any duties would relate to transportation, not leasing.

The committee was informed that railroads do not have an unfair advantage in bargaining with lessees. Although a railroad is a local monopoly, each railroad has competition statewide with other railroads and short lines. A railroad does not have a monopoly on real estate. Most leases have nothing to do with the provision of shipping services by a railroad. In addition, an elevator does not have to be located on railroad property. An elevator can be located on a spur track or siding owned by the elevator.

The committee was informed insurance and indemnity provisions are not new or unique. Some leases have had the same terms for over 100 years. The provisions in ground leases are standard provisions and lease provisions for elevators are the same as for other commercial ventures. In fact, the state of North Dakota uses similar provisions in ground leases with other entities.

The committee was informed the insurance and indemnity provisions are needed to manage risk. The provisions protect the lessor from the liability that would not be there but for the lessee. In general, leases indemnify a railroad for everything except gross negligence or willful misconduct. Public policy dictates that the liability burden be on a lessee because the lessee is in control of the property and is in the best position to keep it in safe condition. In addition, a railroad cannot obtain insurance for all the different kinds of risks posed by all the different kinds of tenants. The increased cost of insurance for being located next to a railroad should be incremental to the lessee, unless the lessee does not have enough insurance in the first place.

The committee was informed that without insurance or indemnity provisions the railroads would have to manage the risk by raising rates, requiring damage deposits, or other actions. Some states have regulated railroad lease rates and these states have required higher rents so that rates do not subsidize rents. The committee received testimony from BNSF on leases in this state. The average lease rate is $1,709 per year. The lowest lease rate is $25 and the highest lease rate is $17,000. The average lease rate for 168 elevators is $2,337 per year. The railroad pays approximately $10 million per year for property management services.

The committee was informed there are many costs associated with leasing property. For instance, sometimes lessees abandon property and the railroad must expend substantial sums in demolition. In addition, environmental investigation and cleanup for a site abandoned by a lessee can result in a sizable cost to the railroad. A lessee in Belfield left the railroad with $150,000 in demolition costs after the lessee paid $3,000 per year in rent. Burlington Northern Santa Fe has been informed of approximately $10 million more in liability for future abandoned property.

Committee discussion included the landlord-tenant relationship between a railroad and lessees is different from most landlord-tenant relationships. It was argued that even though a railroad says the railroad should be able to transfer risk like an ordinary landlord does with a tenant, a railroad is different from most landlords because most landlords do not engage in high-risk activities.

Federal Employers Liability Act Endorsements

Railroad employees are covered by the Federal Employers Liability Act (FELA) rather than workers' compensation. The system created under FELA is a tort-based system and a railroad is liable for the amount proved in court. A FELA insurance endorsement is required of a lessee.

The committee was informed that FELA endorsement protects the lessee. If an employee is injured on a lessee's property, the employee will most likely sue the railroad and the railroad would most likely bring the lessee into the action if the lessee was negligent. If the lessee and the railroad are both at fault, the FELA endorsement pays for the negligence and prevents the lessee and railroad from fighting each other as well as fighting the employee.

Availability of Insurance

The committee was informed by an insurance provider that in reference to insurance purchased for property under a railroad property lease agreement, it is an incorrect assumption that the insurance contract will cover the indemnification of railroads for their negligent acts. In addition, an insurance company will not insure an unnamed third party for that party's negligent acts. Insurance insures the insured for negligent acts.

The committee was informed there are only three companies that sell insurance to grain elevators. The committee was informed that insurance companies are not willing to provide coverage for what is being asked for in leases. For example, commercial general liability policies have an absolute exclusion for pollution and leases require the lessee to indemnify the railroad for pollution. Although some companies provide limited premises pollutant cleanup, the coverage is limited and very expensive.

The committee was informed there is not a private company that provides an endorsement for FELA claims. The committee was informed there may be some confusion because the insurance industry has been issuing policies based on old leases and has not reviewed the new leases to see if there have been changes. The committee was informed that once the industry reviews the new leases, the industry probably will not provide coverage. The committee was informed the average grain elevator cannot find an insurance company to issue a Federal Employers Liability Act endorsement. However, BNSF's risk management department contends FELA endorsements are available in the marketplace.

Licenses

The committee was informed some utility providers have concerns with licenses to use railroad right of way, including the length of time it takes to acquire a permit, the fees charged for a permit, insurance requirements, and the arbitrary addition of new conditions without notice.

The committee was informed by BNSF that the typical rate for a licensee to use railroad right of way for utility purposes is a one-time fee of $2,500. This amount has recently been reduced to $750 for not-for-profit companies and governmental entities. Each permit must be accompanied by a railroad protective liability insurance policy that costs between $2,000 and $2,500 and may cover solely one day's work. The railroad asks for railroad protection insurance if there is going to be demolition or construction conducted by the lessee close to the track. The committee was informed that BNSF provides an umbrella policy that could be purchased for much less than a railroad protective policy.

Sales

The committee was informed that the sale of leased property is lessee-driven; however, the railroad is under no obligation to sell. In the sale of noncorridor property, lessees are usually given the first opportunity to buy property to which they hold the lease. The sale price is based upon the market value of the land, subject to a minimum. The minimum for CP is $10,000 for the sale of property, subject to a recommendation for a lower amount by an area manager. Most sales in rural areas are at the minimum. A sale price of 10 times the annual lease rate is a rule of thumb for the sale of railroad property. The normal variance is from 8 to 12 times. Generally, the railroad's preference is not to sell corridor property. The operating corridor of the railroad is 50 feet on each side of the track. If the right of way is sold, it does not include the operating corridor, which is covered by an easement.

The committee was informed it is imperative that lessees be able to purchase land from the railroads, otherwise the property will become dilapidated. The sale of property increases the property value and hence taxes and provides for new jobs.

Switches

The committee received testimony on the allocation of switching costs to elevators. The railroad has been requiring the shipper to pay for maintenance of the switches. These bills are between $500 to $1,000 per month. Shippers pay for maintenance costs and do not argue over that payment because the shipper is reliant on the railroad.

Recently, CP has stated that a shipper will have to pay for the entire switch. Burlington Northern does not charge for switches. The cost of a switch is approximately $100,000. Most elevators require two switches for accessing the main track. A switch is on the main line and suffers wear and tear from trains operating on the main line. The elevator owns the siding. The committee was informed that an elevator was told by CP that if the elevator does not pay for the switch going to the elevator, CP will bypass the elevator. It was argued that it is unfair for CP to charge for switches because CP controls the switches as to when they are replaced or maintained and creates the most wear and tear on the switch.

Under the contracts with the elevators, CP may bill for the switches. The Canadian Pacific position is that the customer is contractually responsible for the switches. In response to the concerns of grain elevators, CP has developed a new program to bill for switches over a period of years at $6,000 per year per switch.

Committee discussion included that the entity that provides the wear and tear on a switch should pay for the switch. It was argued that it will be impossible for small shippers to pay for switches.

Regulation of switches and the cost of maintenance, however, appears to be preempted by the Interstate Commerce Commission Termination Act.

Conclusion

The committee makes no recommendation with respect to its study of the sale and lease of railroad right of way.

ALTERNATIVE FOR MOTOR VEHICLE LIEN FILING STUDY

Senate Concurrent Resolution No. 4011 directed a study of the alternative methods for recording and discharging a lien on a motor vehicle. The resolution states the reasons for the study include problems with a lien on a motor vehicle not being properly recorded or discharged and the availability of new technologies to simplify the procedures and requirements relating to recording and discharging a motor vehicle lien. The main problem discussed in the testimony related to this study arises when a lending institution releases a lien on a motor vehicle and mails it to the owner and the owner has moved or the owner receives the title with the lien release and thereafter loses the title. Although either situation may be remedied, a later sale of the motor vehicle may be delayed.

Legislative Framework

North Dakota Century Code Chapter 39-05 provides for title registration for vehicles. There is a different procedure under Chapter 39-04 for vehicle registration. A title registration is done to show ownership, while vehicle registration is done to license the vehicle for operation on the public highways in this state.

Generally, the owner of a vehicle is required to obtain a certificate of title for that vehicle. A vehicle that is not titled may not be registered. A vehicle that is not registered may not be driven on the highways of this state.

The study focused on liens in the title registration process. There are different instances for which a lien, sometimes called a security interest, may be noted on the face of a title. The most common instance is when a buyer purchases a new or used motor vehicle with borrowed money for which the buyer gives a lien on the vehicle as collateral for the loan by the person that loaned the money. Another instance is when the owner of a vehicle uses a motor vehicle as collateral for a loan made for a purpose other than buying the vehicle. Another instance occurs when a storage or repairman's lien is placed on a vehicle for unpaid storage or repair bills. In every instance, the person with the first lien has or should have the title.

The instances in which a lien may be removed from the title are threefold. In the first instance, the loan is paid off and the owner retains the motor vehicle, i.e., the lien or security interest is satisfied and there is no transfer of the vehicle. In the second instance, the lien is satisfied as part of a transfer of a motor vehicle to a dealer as a trade-in on another vehicle. In the third instance, the motor vehicle is sold and as part of that sale the proceeds are used to satisfy the lien so that the buyer has clear title.

Section 39-05-05 provides for the application for a certificate of title. An applicant for a certificate of title must provide among other information a statement of the applicant's title and other liens and encumbrances on the vehicle along with the names and addresses of any lienholders in the order of their priority with the dates of the security agreements to the Department of Transportation. If a new vehicle is purchased from a dealer, the applicant is required to submit a certificate of origin with a statement of the transfer by the dealer and any lien retained by the dealer or other lienholder before the department issues a certificate of title. The lienholder is considered the legal title owner, and the department sends the title to the lienholder.

Section 39-05-09 provides for the contents of a certificate of title. A certificate of title must contain, among other things, a statement of the owner's title, of all liens and encumbrances upon the vehicle, and whether possession of the certificate of title is held by the owner or lienholder. The reverse side of the certificate contains a space for the notation of liens and encumbrances on the vehicle at the time of a transfer. The amount of the lien is not required to be placed on the certificate of title, and the department is to deliver the certificate of title to the owner or first lienholder.

Under Section 39-05-09.1, if a certificate of title is lost or destroyed, the first lienholder or, if none, the owner, is to apply for a duplicate title. The title is mailed to the first lienholder named on the title or, if none, to the owner.

Section 39-05-16.1 provides for the release of a security interest. This section requires the lienholder upon the satisfaction of a security interest to execute a release. The release must be issued within 10 days after demand and in any event within 30 days. The lienholder is to deliver the certificate of title and release to the next lienholder or, if none, to the owner. If the next lienholder receives the title and release, the lienholder is to deliver the title and release to the department. The delivery must occur within 10 days after demand and in any event within 30 days. The department then issues and delivers the title to the first lienholder on the title. If the owner receives the title and release, the owner is to deliver the title and release to the department within 30 days. The department then issues a new certificate of title and delivers it to the owner.

Section 39-05-16.1 also provides for the procedure of releasing a security interest when the lienholder does not have possession of the title, e.g., the possession of the title lies with another lienholder. In this instance, the lienholder whose security interest is satisfied is to execute a release and deliver the release to the owner. The lienholder in possession of the title upon receipt of the release is to deliver the release and the title to the department. The department then issues a new certificate to the lienholder.

Section 39-05-17 provides for the transfer of a title. The owner of a motor vehicle who sells the vehicle endorses an assignment and warranty of title on the back of the certificate of title and verifies whether there are liens or encumbrances on the vehicle. The owner is to deliver the certificate of title to the purchaser if title passes to the purchaser. If the title does not pass to the purchaser, the lienholder endorses a statement that the lienholder holds a lien and sends the title to the department with the application of the purchaser for a new certificate of title showing the name of the owner and lienholder, which is returned by the department to the lienholder who retains the title until the terms of the lien are satisfied by the purchaser. After showing the lien has been satisfied, the lienholder is to deliver the certificate of title to the purchaser. The purchaser is required to present the title to the department within 30 days, and the department is required to issue a new certificate of title. If there is another lienholder, the department is required to deliver the title to the lienholder with priority.

Under Section 39-05-17.1, when a vehicle is sold, the seller is to deliver the certificate of title within 15 days to the buyer, unless the vehicle is subject to any liens, then the title must be delivered to the first lienholder.

Under Section 39-05-17.3, a transaction does not create a security interest because an agreement provides that the rental price may be adjusted by reference to the amount realized upon sale.

Testimony and Discussion

The committee was informed by a representative of the Department of Transportation that the department has investigated electronic filing of liens and could allow financial institutions to voluntarily engage in the electronic filing of liens but cannot mandate the filing of electronic liens.

The committee reviewed a bill draft that authorized an electronic lien notification procedure. Testimony in support of the bill draft indicated the initial attachment of the lien would follow the same procedure as it does presently--a paper application procedure. The department is investigating placing automobile dealers online so dealers can access the department's computer system and enter liens.

The committee was informed the Department of Transportation envisions lockbox companies would handle lien transactions for financial institutions. The financial institution would not need to possess the certificate of title. On removal of the lien, the lender would send notice to the lockbox company and the lockbox company would notify the Department of Transportation. The Department of Transportation would send the title to the owner.

There is great potential for lockbox companies to market this service to large financial institutions. The costs would be borne by the lockbox company and passed on to the lender. The reason for a lockbox company and for not having the department provide this service to every lienholder is the cost to the department.

The committee was informed of benefits offered by an electronic lien notification system. There is a benefit to an owner of a motor vehicle. Presently, the title with the lien release is mailed from the financial institution to the owner of the vehicle. Most owners do not file the certificate of title with the Department of Transportation, thereby removing the lien from the title, because of the cost. This failure to file creates a problem if the owner loses the title and then tries to sell the vehicle. The electronic lien notification procedure would remove any attendant delay in obtaining a replacement title. Under the electronic lien notification system the owner would be mailed a title with the lien already removed. In short, the benefit to a customer under the electronic lien notification system as compared to the present system is when the customer loses the title with a signed lien release.

The committee was informed the most benefited party would be financial institutions. Under the electronic lien notification system there is a reduction in storage and document tracking for vehicle titles and other benefits, including the reduction of forms, less mailing costs, and better customer service. There would be other savings as well. When there were floods in Grand Forks, one bank lost over 5,000 titles and had to have duplicates issued to the bank. Under an electronic lien procedure, the bank would have lost nothing.

There would be a small savings to the department in postage and handling. The committee was informed an electronic lien notification procedure would not affect automobile dealers.

The committee was informed large lenders support electronic liens and would pay for the cost of filing liens electronically. The largest lenders are out-of-state auto dealer lenders, for example, GMAC and Chrysler Financial, and after these lenders, the next largest lenders in state are US Bank, Capital Credit Union, and the military credit union. The committee received letters from the Nissan Motor Acceptance Corporation, US Bank, and Chase Auto Finance in support of the creation of an electronic lien notification procedure as well as testimony from Capital Credit Union. The committee was informed that whether the electronic lien notification procedure is useful to a financial institution will depend upon the procedures adopted by the department. The committee was informed that the department will work with lenders to provide the most cost-effective and desirable procedure.

Recommendation

The committee recommends House Bill No. 1044 to create an electronic lien notification procedure for motor vehicles.

SNOWMOBILE, ALL-TERRAIN VEHICLE, MOTORCYCLE, AND LOW-SPEED VEHICLE DEALERS STUDY

Senate Concurrent Resolution No. 4030 directed a study of the requirements for the registration and licensing of snowmobiles and all-terrain vehicle dealers. The resolution states this state does not have licensing requirements for snowmobile and all-terrain vehicle dealers but has requirements for other vehicle dealers. The resolution states there have been problems with snowmobile and all-terrain vehicle dealers who have failed to deliver certificates of title or remit fees collected on behalf of customers. The testimony on the resolution indicated there have been dealers that have gone out of business and have not returned deposits on equipment paid for by customers or have not delivered titles on equipment on which customers have already paid fees and taxes.

The Legislative Council chairman authorized the expansion of this study to include the licensing of motorcycle and low-speed vehicle dealers based on the reasons presented by the Department of Transportation. Representatives from the Department of Transportation presented several reasons in support of the study expansion. First, licensing would provide consumer protection. In particular, if dealers are bonded, protection would be provided to customers who have paid fees or payments to a dealer without receiving documents or delivery when that dealer goes out of business. Second, low-speed vehicle dealers were combined with snowmobile and all-terrain vehicle dealers in a recent Attorney General's letter opinion 2003-L-29 not allowing the department any regulatory authority over the dealers of these vehicles. Third, certain motorcycle dealers have requested more regulation similar to the regulation over new and used motor vehicles. In addition, any bill draft resulting in the licensing of snowmobile or all-terrain vehicle dealers would most likely be based on the present licensing of motorcycle dealers; hence, any changes in the motorcycle dealers' law should be made at the same time to promote consistency in the law.

Licensing of Motor Vehicle Dealers

Motorcycle dealers are licensed under NDCC Chapter 39-22.3. Under Section 39-22.3-01, a person in the business of buying, selling, or exchanging motorcycles must have a motorcycle dealer license. The motorcycle dealer license fee is $25 per year and includes one dealer plate. Additional dealer plates may be obtained for $10 each. Under Section 39-22.3-06, all fees for the licensing of dealers are deposited in the highway tax distribution fund. Money in the highway tax distribution fund is divided among cities, counties, and the state highway fund.

Under Sections 39-22.3-02 and 39-22.3-03, a prospective dealer must pay $50 and apply on a form provided by the department and provide proof that the applicant has and will continue to maintain an established place of business. The central place of business must be within the state. An established place of business is a building at which the permanent business of bartering, trading, and selling motorcycles; the repair, maintenance, and servicing of motorcycles; and the storage of parts and accessories for motorcycles will be carried out in good faith. The term does not include a residence or temporary quarters. If the established place of business is made of more than one building, each building may not be located beyond 1,000 feet from any other building.

Under Section 39-22.3-05, the license applicant is required to furnish a surety bond that must be filed with the director of the Department of Transportation before issuance of a license. The bond must run to the state of North Dakota in the amount of $10,000. The bond must be conditioned on the faithful compliance of the applicant with all statutes and indemnify any person having a motorcycle transaction with the dealer from any loss or damage occasioned by the failure of the dealer to comply with these statutes.

Under Section 39-22.3-04, the director may deny an application or suspend, revoke, or cancel a license for any material misstatement in the application; for willful failure to comply with Chapter 39-22.3 or any rule; for violating any law relating to the sale, distribution, or financing of a motorcycle; for ceasing to have an established place of business; or knowingly permitting a salesman to sell a motorcycle for someone else other than the dealer or assign any benefit to another dealer.

Under Section 39-22.3-12, any person violating a provision of Chapter 39-22.3 for which another penalty is not specifically provided is guilty of a Class B misdemeanor.

Licensing of Snowmobile and All-Terrain Vehicle Dealers

Although there are specific licensing requirements for motor vehicle dealers under NDCC Chapter 39-22, trailer dealers under Chapter 39-22.1, and motorcycle dealers under Chapter 39-22.3, there are no specific dealer licensing requirements for snowmobile, all-terrain, or low-speed vehicle dealers. In an Attorney General's letter opinion 2003-L-29, the Attorney General stated there is no statutory authority for the Department of Transportation to license dealers of these kinds of vehicles nor adopt rules for licensing snowmobile, all-terrain, or low-speed vehicle dealers.

Snowmobile and all-terrain vehicle dealers do have certain duties and privileges. A snowmobile dealer may receive dealer registration numbers to be used on snowmobiles owned by the dealership. Under NDCC Section 39-24-03, a snowmobile dealer is entitled to be issued registration numbers distinctively marked as that dealer's registration numbers upon the payment of the appropriate fee. Under Section 39-29-03, an all-terrain vehicle dealer has the same privilege. Under Section 39-29-01.1, an all-terrain vehicle dealer has a duty to collect a $5 safety fee from each buyer and send the fee to the Parks and Recreation Department for deposit in the all-terrain vehicle fund for the purpose of all-terrain vehicle safety education and promotion. In addition, snowmobile and all-terrain vehicle dealers are required to follow the procedures for title registration under Chapter 39-05 which impose duties, including a dealer's duty to make specific inquiry as to the buyer's street address, city, and county, or township and county of residence and to have a separate certificate of title or other documentary evidence of the dealer's right to the possession of every vehicle in the dealer's possession.

Licensing of Low-Speed Vehicle Dealers

The registration of low-speed vehicles began with the passage of House Bill No. 1216 (1999). A low-speed vehicle is a four-wheel vehicle that is able to attain a speed of 20 miles per hour and not more than 25 miles per hour on a paved surface and does not exceed 1,500 pounds. In particular, a low-speed vehicle is an electric car made by Global Electric Motorcars, LLC, a DaimlerChrysler Company located in Fargo, the vehicles of which are known by the name GEM.

Testimony on the bill stated the bill "will assist this firm in marketing its product in our state and will also place us on the cutting edge among states . . . . In other words, the bill would allow the cars to be test driven in this state and would allow these cars to be purchased and used in this state."

House Bill No. 1216 was codified as NDCC Chapter 39-29.1. Section 39-29.1-04 relates to low-speed vehicle dealers. This section allows a dealer to apply for and receive registration numbers for use on vehicles owned by the dealer for a $20 fee. This section specifically exempts low-speed vehicle dealers from obtaining a motor vehicle dealer's license.

Testimony and Discussion

Low-Speed Vehicle, Snowmobile, and All-Terrain Vehicle Dealers

The committee reviewed a bill draft that would have licensed low-speed vehicle dealers. The bill draft imposed the requirements for trailer dealers on low-speed vehicle dealers. These requirements included a license, bond, insurance, and a place of business in this state. In addition, trailer dealers are allowed to purchase a rider on an automobile dealer's bond to be bonded to sell trailers. This allowance was included in the bill draft on low-speed vehicle dealers. There are 10 licensed dealers of low-speed vehicles. All low-speed vehicle dealers have some other dealership, except for Global Electric Motorcars, a company that manufactures low-speed vehicles in this state and sells directly from the factory.

The committee was informed by a low-speed vehicle manufacturer in this state that imposing no additional requirements on already licensed auto dealers that sell low-speed vehicles is appropriate.

The committee considered revisions to the bill draft which would have created a licensing procedure for low-speed vehicle dealers. The license was changed from a yearly license expiring on December 31 to a license that expires on March 31 of each odd-numbered year. A provision for additional dealer plates was included and the plates would be available for $20 each per license period. The language allowing a low-speed vehicle dealer to be bonded through a rider on the bond of an automobile dealer was removed because these types of riders are not offered in the marketplace and if a rider were offered in the marketplace, it would be allowed as long as it complied with the statutory requirements for the bond. All fees collected under the licensing structure would be deposited in the state's highway fund.

Committee discussion included that there is not any problem with low-speed vehicle dealers and hence a questionable need for the licensing of low-speed vehicle dealers. In addition, there is not a need to license low-speed vehicle dealers because most are already dealers of some other vehicle and low-speed vehicles will never be sold in great quantities in North Dakota because of the weather.

The committee considered a bill draft that would have regulated snowmobile dealers and a bill draft that would have regulated all-terrain vehicle dealers in the manner provided in the bill draft for the regulation of low-speed vehicle dealers. Each of the bill drafts were very similar except for the fees charged for the license application and for additional decals or plates. These fees matched what a person would pay when registering a snowmobile, all-terrain vehicle, or low-speed vehicle.

To all these bill drafts, the committee extended the time for a dealer to submit state fees, taxes, and applications collected on behalf of a customer to the Department of Transportation from 15 to 30 days and allowed the director to waive a violation for good cause if the time taken by the dealer exceeded 30 days. This change was also made to the motorcycle bill draft discussed later.

Committee discussion included opposition to the bill drafts because of the need for multiple bonds if a person has multiple dealerships. It was argued that the law should provide flexibility so that a person with multiple dealerships could purchase one bond. Committee discussion included that the ability to purchase one bond is up to bonding companies and testimony received was to the effect that bonding companies do not sell one bond for multiple dealers. To the contrary, the committee was informed by a dealer that that dealer purchases bonds with riders for other vehicles sold.

The committee was informed that the bond form provided by the Department of Transportation for insurers to complete is specific to each type of dealership. The department could structure the form so that a bonding company could check off the appropriate vehicles that are covered under the bond as is allowed in the law relating to trailer dealers.

The committee revised the bill drafts relating to low-speed vehicle dealers, snowmobile dealers, all-terrain vehicle dealers, and motorcycle dealers to allow a dealer to purchase a rider on a dealer's bond for other types of dealerships.

Motorcycle Dealers

The committee considered a bill draft that would have related to the licensing of motorcycle dealers. The bill draft was in response to a request of the North Dakota Motorcycle Dealers Association. There are 72 motorcycle dealers in this state, and about 35 dealers are part of the North Dakota Motorcycle Dealers Association. The bill draft imposed most of the requirements of new and used automobile dealers on motorcycle dealers.

The bill draft contained provisions that paralleled the automobile dealer licensing law, including a sign requirement, a square-footage requirement, a separate license for new and used motorcycle dealers requirement, a four sales per year requirement, an administrative fee instead of a criminal penalty, authority for the department to limit the number of dealer plates, a normal business hours requirement, a telephone requirement, a heated and lighted place of business that is comfortable for customers requirement, and standard office equipment requirement. The purpose of these requirements was to make it easier to differentiate between legitimate and illegitimate dealers.

The committee considered revisions to the bill draft which were recommended by the Department of Transportation. The changes removed previous provisions on in-transit and demonstration plates and provided for the fees from the chapter to be deposited in the state highway fund for reasons of administrative convenience.

The committee was informed that the bill draft would address some small dealers not collecting the appropriate taxes and consumer protection issues related to the products some dealers sell. Some dealers abuse the license by using it to avoid fees and excise taxes on private vehicles. These dealers do not purchase motorcycles to sell, but to ride. The committee reviewed pictures of licensed motorcycle dealers that operate out of homes, unrelated businesses, and nondescript warehouses. Supporters of the bill draft emphasized they were not after anyone