E-Commerce: Is the Insurance Industry Really Ready for Electronic Transactions?

Electronic transactions have been implemented in online banking, trading, credit card usage, airline transactions, medical records and federal court dockets. Despite this, and despite recent legislative and regulatory developments facilitating its use, the insurance industry lags other major consumer sectors in adopting e-commerce transactions. Those insurers who have implemented such practices, however, are doing so not to gain a competitive advantage, but rather to remain relevant in the marketplace and satisfy consumer expectations.

According to a 2011 J.D. Power & Associates study, an estimated 70 million Millennials (ages 13-30) are entering the insurance marketplace. They are tech-savvy and “rapidly re-shaping service expectations and delivery.” For the insurance industry, the benefits of ecommerce transcend consumer preferences. Indeed, electronic transactions facilitate business and create efficiencies and significant cost savings. For example, an insurer with 400,000 insureds could reduce its costs by nearly $3 million annually if it transmitted its annual privacy notices and policies to its customers electronically, rather than in paper form. The insurance industry’s sluggish transition to electronic transactions, however, is due in large measure to its unique regulatory status. Electronic transactions were first made possible in 1999, when the National Conference of Commissioners on Uniform State Laws approved the Uniform Electronic Transactions Act (UETA). UETA provides that a record, signature, or contract may not be denied legal effect solely because it is in electronic format. Where parties agree to contract or conduct transactions by electronic means, even if a law requires that information be provided, delivered or sent in writing, under UETA, the writing requirement is satisfied if the information is transmitted in an electronic record that the recipient can retain. Following UETA, in 2000, Congress enacted the Electronic Signatures in Global and National Commerce Act (E-SIGN), which permits the use of an electronic record when the law requires information in writing if detailed disclosures and an affirmative consumer agreement are found. Although E-SIGN applies to the “business of insurance” generally, it excludes application to the cancellation or termination of health or life insurance benefits, but preempts state laws that vary from UETA.

It took nearly a decade to achieve widespread adoption of UETA among the states, and even longer for insurers to adopt e-commerce practices due in part to regulatory requirements in old insurance laws creating barriers to electronic insurance transactions. In addition, the status quo may appear safer to some insurers, fearing that the issue would raise questions and concerns among regulators, consumers, interested parties and the media, and consequences could be severe if the transition to electronic transactions proved unsuccessful.

Another contributing factor was the limitation inherent in UETA concerning the delivery and filing of certain notices and other key transaction documents that uniquely affect the insurance industry by precluding electronic signatures when the agreement between the parties requires that notices or other communications be sent by a specified method, such as by U.S. mail.

Delivery Issues Affecting Electronic Insurance Transactions

Under UETA, if another law requires that a record be sent, communicated, or transmitted by a specified method, that delivery method must be used. Because many old state insurance laws require that notices of cancellation, nonrenewal, or renewal be mailed by U.S. first-class mail or other specific non-electronic method, those required non-electronic delivery methods prevail over UETA. This limitation raises barriers and may create disincentives to electronic insurance transactions. Some state legislatures and regulators have been working to relax this restriction, enacting laws that expressly permit electronic transactions and issuing guidelines that promote its use. In January 2012, the Tennessee Division of Insurance issued a bulletin advising that insurers may use email in lieu of the U.S. postal service (USPS) to provide policyholders with statutorily required notice of cancellations, non-renewals, and conditional renewals.1 The Division acknowledged that the USPS provides safeguards not always available with email. For example, a policyholder who moves will typically notify USPS of an address change, resulting in mail being forwarded, even if the policyholder fails to notify the insurance company. The Division, however, also noted that policyholders that change their physical residence may retain the same email address, reducing this perceived risk of electronic delivery.

To ensure that consumers remain protected, the Tennessee Insurance Division instructed insurers choosing to deliver statutorily required notices by electronic means to offer policyholders the option to continue to receive hard copy mailings. Insurers must also advise those that opt to receive electronic communications to update their email address in the event of an address change. Implicit in this requirement is the acknowledgement that insurers may collect and rely upon email addresses contained in their records.

Other similar state laws include a 2011 Maryland law that details the circumstances in which notices of cancellation, nonrenewal, premium increases, and coverage reductions may be delivered electronically. 2 This law requires more detailed disclosures than the state’s version of UETA to establish consent and agreement of the parties to electronic transactions. Furthermore, a 2006 Alaska amendment to its proof of notice law explicitly allows for certain notices of cancellation, nonrenewal, and renewal to be transmitted electronically if the insurer can obtain an electronic confirmation of receipt by the intended recipient.3 Other states that have adopted new laws or issued bulletins enabling electronic transactions include the following:

• New York: Nothing in the insurance law or regulations prohibits an insurance company from issuing and delivering an insurance policy to an insured via the internet if the insured has consented to receiving electronic documents. The electronic documents must conform to applicable substantive and formatting requirements of the insurance law and any other applicable laws. N.Y. Ins. Dep’t General Counsel Opinion No. 09-01-01 (Jan. 6, 2009). Moreover, an electronic signature may be used by a person in lieu of a handwritten signature. The use of an electronic signature shall have the same validity and effect as the use of a signature affixed by hand. N.Y. Tech. Law  § 304(2).

• West Virginia: UM/UIM forms no longer have to be delivered by hand or by U.S. mail and do not have to be filled out in the insured’s handwriting despite statute and prior guidance. Informational Letter 135B (2010).

• Idaho, Michigan and Virginia: Permit certain property and casualty forms and endorsements that do not contain personally identifiable information to be posted to an insurer’s publically available website in lieu of any other method of delivery, provided certain conditions are met, including separate notice to email address. Mich. Comp. Laws  § 500.2248; Va. Code Ann.  § 38.2-325.

• Virginia: Notices of cancellation and non-renewal may be delivered electronically when certain conditions are satisfied. Va. Code Ann.  § 38.2- 325 (effective July 1, 2013).

• Kentucky and Tennessee: Notices may be sent electronically to the policyholder’s email address on file with the insurer with appropriate disclosures, agreements, and a hard copy option. Kentucky Dep’t of Ins. Advisory Opin. 2013-1 (Feb. 19, 2013); Tenn. Div. of Ins. Bulletin (Jan. 26, 2013).

• Texas: Authorizes electronic transactions and creates minimum standards for electronic transactions for regulated industry entities doing business with consumers involving personal and commercial P&C, life and health insurance. Tex. Ins. Code, Chap. 35, §§ 35.003 and 35.004 effective September 1, 2013.

In addition, similar bills are pending in Hawaii (HB 127; SB 496), Alaska (HB 175 and SB 52), Florida (HB 157; HB 223; SB-262), Washington (SB 5008), and other states.

On the other hand, some states have enacted laws prohibiting electronic delivery of cancellation and nonrenewal notices. A New Hampshire statute was amended, effective January 2011, to expressly preclude electronic delivery of notices cancelling or refusing to renew automobile insurance policies.4 California regulators take the position that UETA does not apply to cancellations or nonrenewals of automobile insurance.5

Filing and Formatting Issues Affecting Electronic Insurance Transactions

In addition to delivery issues, state law requirements regarding the formatting of insurance forms and notices have also created barriers to electronic transactions. Because many state insurance laws require specific information in insurance applications or forms to be bolded or to use a different font size, logic dictates that document provisions that are statutorily required to be accentuated in paper documents should also be accentuated in an electronic version. A 2013 advisory memorandum issued by the Montana Office of the Commissioner of Securities and Insurance notified insurers that, in addition to filing application questions, they must also file screenshots of those questions that appear on the company’s website and that any information gathered electronically is subject to regulatory review as part of the insurance application. Not every state requires additional filings for documents provided electronically. For example, the South Carolina Department of Insurance has taken the position that, when the text in both electronic and paper versions is the same and there are no other material differences, insurers need not seek additional approval to use the electronic version. Those states that have created an additional filing requirement for electronic notices and other electronic insurance-related documents have created a disincentive to electronic transactions.

Admissibility Issues Arising Out Of Electronic Insurance Transactions

Outstanding uncertainty regarding the admissibility of electronic records raises additional impediments to insurer adoption of electronic transactions. Because the use of electronic transactions in insurance has been limited, there are only a few reported cases on whether courts will admit such electronic transaction documents as (i.e., an electronic declination of coverage). So far, courts have recognized and applied UETA as it was intended. In the few insurance related cases to date, courts have upheld electronic signatures and electronic waivers of uninsured/underinsured motorist benefits.6

Use of Electronic Transmissions to Provide Information to Policyholders

While barriers to electronic insurance transactions continue to exist, more and more insurers are using e-commerce to communicate information to their policyholders and others.

A significant trend since 2012 is 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 was also promulgated in Alabama that permits motorists to electronically display proof of insurance when registering vehicles and during traffic stops.

States are also working to provide insurers with the authority to communicate policy information on their websites. An amendment to the Virginia insurance code, effective 2013, permits policies, property and casualty insurance forms and endorsements that do not contain personally identifiable information to be posted to an insurer’s publicly available website in lieu of any other method of delivery as long as inter alia the following conditions are satisfied:

• The forms and endorsements are readily accessible on the insurer’s website.

• Forms or endorsements that are no longer in use are stored in an accessible archive within the insurer’s website.

• Forms and endorsements can be printed and downloaded by the public without charge and without the use of any special program or application.

• When an insurer issues an initial or renewal policy form, it provides notice of a method by which policyholders may obtain, upon request and without charge, a paper or electronic copy of their policy or contract.

• An insurer gives notice of any changes to forms or endorsements and the policyholder’s right to obtain, upon request and without charge, a copy of such forms or endorsements in the same manner in which it customarily communicates with a policyholder.

CONCLUSION

States will likely continue to adopt laws and provide regulatory guidance that will further encourage the use of electronic transactions by the insurance industry. Because the laws and regulations regarding e-commerce are shifting rapidly, insurers should closely monitor legislative and regulatory activities in states across the nation. There will likely be continued movement to change old laws that require delivery of certain notices by U.S. mail. To date, regulators have been generally supportive of attempts to eliminate outdated delivery methods. Insurers quick to adapt their business practices following adoption of new state laws that facilitate their use of ecommerce stand to realize significant cost savings and gain a competitive advantage over insurers that hesitate to embrace the change.

1 Tenn. Div. of Ins. Bulletin ( Jan. 26, 2012).

2 Maryland Ins. Law § 27-601.2.

3 Alaska Ins. Code § 21.36.26.

4 N.H. Rev. Stat. 417-A.5.

5 Cal. Civ. Code 1633.3.

6 See e.g., GEICO General Ins. Co. v. Hampel, 2011 WL 7944751 (S.D. Fla. 2011); Zulkiewski v. American General Life Insurance Co., 2012 Mich. App. LEXIS 1086 (Mich. Ct. App. June 12, 2012) (unpublished)