E-Commerce Across State Lines
Insurers consider emerging rules for electronic transactions as customer demand increases.
Over the past year, there have been a number of legislative and regulatory developments relating to e-commerce that directly impact the business of insurance. The majority of these changes provide insurers with the authority to implement e-commerce practices. This new ability is welcome, given that airlines routinely accept electronic boarding passes and banks allow consumers to use personal electronic devices to deposit checks. As demonstrated by other industries, the use of e-commerce presents insurers with opportunities to improve efficiencies, recognize significant cost savings, and satisfy consumer preferences.
Although developed in 1999 by the National Conference of Commissioners on Uniform State Laws, the Uniform Electronic Transactions Act (UETA) took nearly a decade to achieve widespread adoption among the states. It has taken even longer for insurers to leverage the opportunities afforded under that law. UETA provides that a record, signature, or contract may not be denied legal effect solely because it is in electronic format. UETA allows parties to agree to contract or conduct transactions by electronic means. Where the parties have reached such an agreement and a law requires information to be provided, delivered or sent in writing, UETA provides that the requirement is satisfied if the information is transmitted in an electronic record capable of retention by the recipient.
The insurance industry has generally been reluctant to adopt e-commerce practices due, in part, to myriad regulatory requirements found in old insurance laws that often predate computers and the Internet. There are concerns that insurance laws may prohibit electronic delivery of required notices or that insurance regulators may not permit electronic documents to be used when a law requires a notice to be signed or provided in writing. State legislatures and insurance regulators are gradually taking actions that should increase insurers’ confidence in their ability to conduct business electronically. States are encouraging e-commerce practices by enacting laws that expressly permit electronic transactions in insurance and by issuing guidance that promotes the use of electronic transactions.
The authority to electronically transmit information under UETA is not without limits. UETA provides that if another law requires a record to be sent, communicated, or transmitted by a specified method, the delivery method specified must be used. This limitation can pose difficulties for the insurance business, particularly in the context of mailing notices of cancellation, nonrenewal, or renewal options. When state law provides that such notices must be mailed by U.S. first-class mail or another method, the more restrictive state law mandating a specific, non-electronic delivery method prevails. However, some states are working to relax even this restriction.
In January 2012, the Tennessee Division of Insurance issued a bulletin addressing whether electronic delivery of statutorily required notifications to policyholders is permissible. The division’s position is that insurers may use email in lieu of the postal service to notify policyholders of cancellation, nonrenewal, or conditional renewals. The division acknowledged that the United States Postal Service (USPS) provides inherent safeguards that are not always available with email. For example, a policyholder who moves will typically notify USPS of the address change and mail is then forwarded, even if the policyholder forgets to notify the insurance company. That safeguard does not readily exist with email. However, it is also true that a person could change physical residences and retain the same email address. So, perhaps the perceived risks of electronic delivery are not as great as some regulators may fear.
In an effort to ensure such consumer protections remain, the division instructed insurers that choose electronic delivery of statutory notice requirements to provide policyholders with the option to continue to receive hard copy mailings. Insurers also are obligated to make a disclosure to any policyholder opting to receive communications electronically. The disclosure must advise the policyholder to be diligent in updating their email address in the event the address changes. Implicit in this requirement is an acknowledgement that insurers may collect and rely upon email addresses contained in their records.
Over the past few years, other states have enacted laws relating to the issues addressed by Tennessee. For example, Maryland adopted a law in 2011 detailing the circumstances in which notices of cancellation, nonrenewal, premium increases, and reductions in coverage may be delivered electronically. This law requires more detailed disclosures than the state’s version of UETA in order to establish consent and agreement of the parties. Alaska amended its proof of notice law in 2006 to explicitly allow for certain notices of cancellation, nonrenewal, and renewal terms to be transmitted by electronic means if the insurer can obtain an electronic confirmation of receipt by the intended recipient.
In stark contrast, other states have enacted laws prohibiting electronic delivery of cancellation and nonrenewal notices. For instance, a New Hampshire statute addressing cancellation and refusal to renew automobile insurance policies was amended effective January 2011 to specifically preclude electronic delivery as a means for mailing such notices.
Beyond the delivery of written notices, insurers must consider whether the electronic versions of forms and notices have to be filed. Many insurance laws require specific information in applications or forms to be emphasized with bolded text or the use of different font sizes. It follows the logic that text which is statutorily required to be emphasized on paper documents should also be accentuated in electronic versions of the documents. In an advisory memorandum issued earlier this year by the Montana Office of the Commissioner of Securities and Insurance, insurers were notified that they are required to file not only application questions but also screenshots of how those questions appear on the company’s website. Insurers were reminded that information gathered electronically is part of the insurance application and subject to regulatory review. However, not every state requires additional filings for documents provided electronically. In fact, the South Carolina Department of Insurance has taken the position that when the text is the same in both the electronic and paper versions of a document and there are no other material differences, insurers do not have to seek additional approval to use the electronic version.
One significant trend in 2012 has been the adoption of laws that permit a person to show proof of insurance by electronic means. Five states—Arizona, California, Idaho, Louisiana, and Minnesota—enacted laws that allow motorists to establish proof of financial responsibility by using smartphones or other electronic devices to display insurance cards. A regulation also was promulgated in Alabama that permits motorists to electronically display proof of insurance when registering vehicles and during traffic stops.
States also are working to provide insurers with the authority to communicate policy information on their websites. Virginia recently expanded a portion of its insurance code addressing electronic transmission of policies. The amended law, which became effective this past summer, indicates that property and casualty insurance forms and endorsements that do not contain personally identifiable information may be posted to an insurer’s publicly available website in lieu of any other method of delivery as long as certain conditions are satisfied. Those conditions include:
The forms and endorsements must be readily accessible on the insurer’s website.
If the forms or endorsements are no longer in use, they must be stored in an accessible archive portion of the insurer’s website.
The forms and endorsements must be posted in such a manner that they may be printed and downloaded without charge and without the use of any special program or application that is not available to the public without charge.
The insurer must provide notice at the time of issuance of the initial policy forms and any renewal forms of a method by which policyholders may obtain, upon request and without charge, a paper or electronic copy of their policy or contract.
The insurer must give notice, in the same manner in which it customarily communicates with a policyholder, of any changes to forms or endorsements and of the policyholder’s right to obtain, upon request and without charge, a copy of such forms or endorsements.
In addition to regulatory requirements, insurers must consider the admissibility of electronic records and whether courts will accept, for example, an electronic declination of coverage. Because the use of electronic transactions in insurance has been limited, there are only a few reported cases on the issue. So far, courts have recognized and applied UETA as it was intended. In the few insurance-related cases, the courts have upheld electronic signatures and electronic waivers of uninsured/underinsured motorist benefits.
States are likely to continue to adopt laws and provide regulatory guidance that will further encourage the use of e-commerce in insurance. Insurers should closely monitor legislative and regulatory activities in states across the nation. There may be some movement to change old laws that require delivery of certain notices by USPS. Although many insurance regulators have remained silent on the subject, it would be difficult to imagine that, in this day and age, they would object to electronic records and delivery. Insurers that are quick to adapt their business practices in light of these new laws, which provide flexibility in the use of e-commerce, stand to realize significant cost savings and gain a competitive advantage over insurers that are hesitant to embrace the change.
Susan T. Stead and Molly E. Lang are partners in the Insurance Regulation Practice at Nelson Levine de Luca & Hamilton. Stead provides counsel to clients challenged with federal and state issues involving the regulation of the business of insurance, while Lang advises insurance companies on a broad range of compliance and regulatory matters. They can be reached at firstname.lastname@example.org, email@example.com.