What's New in Cybertalk?

by Jean Gora

January 2000

Note: CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on Resource. 

A Robust Legal Infrastructure for Insurance E-Commerce

The year 2000 is likely to be the year when insurance distribution on the Internet achieves significant growth. There are several important reasons for this. The first and most important is that laws governing electronic contracts and signatures will be in place at both the federal and state levels. The second is that more and more insurers are shifting resources away from their agency distribution systems in order to invest in Internet distribution. This month’s CyberTalk examines the first of these reasons. Next month’s issue examines the second.

One of the big barriers to insurance distribution on the Internet in the United States up to now has been the absence of legal recognition for electronic contracts and electronic signatures. The absence of the necessary legal infrastructure has meant that until now, most insurers have not been comfortable executing complete Internet sales transactions. In most cases they have felt that they had to require paper applications carrying written signatures, and that they had to issue paper policies. The need to transmit paper back and forth between the insurance buyer and the insurer adds days and even weeks to the process of closing an insurance sale. These delays result in lost sales.

Modifying Existing Laws

The challenge has been to modify existing laws pertaining to contracts and signatures. This procedure is cumbersome because, under the McCarran-Ferguson Act, insurance is regulated at the state level in the United States. It is one reason why insurance electronic commerce has appeared to lag behind Internet securities trading and banking. Within the first two years of the Internet’s use for commercial activity, Federal securities and banking regulators issued directives highly favorable to Internet trading and banking.

For the insurance industry, the process has been and remains much more complex. It involves moves by the National Conference of Commissioners on Uniform State Laws (NCCUSL), the National Association of Insurance Commissioners (NAIC), the states themselves, and the Congress of the United States.

The Role of the States

In the U.S., the states regulate most forms of commercial activity as well as insurance. The states themselves have many laws applying to contracts and signatures that influence how the courts interpret state insurance laws. Any modification of these state contract laws to allow electronic contracts and signatures indirectly extends similar powers to insurance contracts. Thus, those who have wanted to adapt state insurance laws to allow electronic commerce have also had a reason to work to adapt state contract laws in general.

When an activity is regulated at the state level, there is the possibility that states will enact incompatible laws that limit interstate commerce. The United States has two ways of dealing with this problem. One way is to have groups of state regulators design uniform model laws, which state legislatures can then adopt as they see fit.

In the area of insurance law, this process takes place through the National Association of Insurance Commissioners. In the area of general commercial laws, it takes place through the National Conference of Commissioners on Uniform State Laws (NCCUSL). Another way the U.S. deals with this problem is through federal preemption of state laws that impede interstate commerce. Thus, even if states fail to enact legislation enabling electronic contracts and signatures, federal preemption of those laws could force the states to recognize them. Over time, the courts would very likely extend these powers to insurance—despite the fact that Congress has dictated that insurance does not represent interstate commerce.

The Work and Its Results

Thus, those who have wanted to foster the growth of insurance electronic commerce in the U.S. have had a variety of forums through which to pursue this objective, and they have used all of them. They have worked within individual states to introduce general state electronic commerce laws and specific laws pertaining to insurance electronic commerce. They have worked with the NAIC to formulate a position on electronic commerce, which the NAIC would then recommend to state insurance regulators. They have worked with NCCUSL to draft general electronic commerce model laws that can be adopted by state legislatures. Finally, they have worked with members of Congress to introduce federal electronic commerce legislation preempting laws in any states that do not adopt their own electronic commerce regulations.

In 1999, many of these activities have borne fruit. The Electronic Commerce and Regulation Working Group of the National Association of Insurance Commissioners has issued a paper—discussed in a previous column—highly favorable to electronic commerce. The National Conference of Commissioners on Uniform State Laws (NCCUSL) has introduced a model law recognizing electronic contracts and signatures, the Uniform Electronic Transactions Act (UETA).

Both the House of Representatives and the Senate have passed bills with similar provisions. These bills await reconciliation of minor differences and then will go to the President in the spring of 2000. Various states, recognizing the importance of these moves, have incorporated them into their own insurance legislation and regulations.

The Impact of UETA

Of these measures, the one that is likely to have the greatest impact on insurance electronic commerce regulation is the Uniform Electronic Transactions Act (UETA), approved by the National Conference of Commissioners on Uniform State Laws. NCCUSL is an organization of more than 300 lawyers, judges, and law professors appointed by the states to draft proposals for uniform model laws. Since its inception in 1892, the group has drafted more than 200 acts, among them such bulwarks of state statutory law as the Uniform Commercial Code. It has a powerful role in influencing state legislation.

Here are some key features of UETA. It is a procedural statute; it does not mandate electronic signatures or records but provides a means to recognize them when they are used. It includes a provision defining an electronic signature as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record." This definition is broad enough to include the standard Web click-through process where the process includes identification of the person. Both a digital signature using encryption technology and a signature used at the end of an e-mail message would be recognized as electronic signatures so long as whoever uses them intends to sign the record.

UETA also assures that writing requirements and signature requirements will not be barriers to electronic transactions. It ensures that contracts and transactions are not denied enforcement because electronic media are used, and that courts accept electronic records into evidence. It avoids having the selection of paper versus electronic media govern the outcome of any disputes or disagreements, and it assures that parties have the freedom to select the medium for their transactions by agreement. Essentially it puts electronic commerce and paper-based commerce on the same legal footing and does not discriminate between different forms of technology.¹

The Electronic Commerce and Regulation Working Group of the NAIC is in the process of revising its earlier paper on electronic commerce to incorporate language and concepts from UETA.

UETA in New York

The impact of UETA is already evident in the state of New York, where the state insurance department issued a circular letter in November 1999 announcing the following:

"Advances in electronic technology are causing businesses, including those in the insurance industry, to integrate various elements of electronic commerce into their operations. In response to the demands of industry and consumers, New York State has enacted the Electronic Signatures and Records Act...which was signed into law on September 28, 1999. The substantive provisions of the Act will become effective on March 26, 2000. The act creates a statutory structure in New York State that supports the use of electronic signatures and electronic records in everyday public and business undertakings. With the enactment of the Act, certain insurance transactions may be conducted entirely through electronic means."

The circular letter goes on to say that the New York state insurance department has taken the position that statutes using the words "writing," "certificate," "memorandum," or the like permit electronic documents. Statutes that require a document to be "signed" permit electronic signatures. Statutes that provide for "delivery," "notice," or the like permit electronic communication.²

Preempting State Laws

In case some states lag on enacting the Uniform Electronic Transaction Act, both the Senate and the House of Representatives have passed bills (S. 761 and H.R. 1714) providing a nationwide legal basis for electronic contracts and signatures, preempting state laws that are incompatible with them. Here are the highlights of the Senate’s bill:

"In any commercial transaction affecting interstate commerce, a contract may not be denied legal effect or enforceability solely because an electronic signature or electronic record was used in its formation."

"Parties to a transaction are permitted to determine the appropriate electronic signature technologies for their transaction, and the means of implementing such technologies."

To be eligible for the above treatment, the electronic record of a contract has to be delivered to all parties in a form that can be retained by them for later reference and can be used by them to prove the terms of the contract.

The bill also includes one provision with far-reaching implications for the insurance industry. It states that electronic records and signatures are permitted when electronic agents are used as intermediaries between parties to the contract. It defines an electronic agent as "a computer program or an electronic or other automated means used to initiate an action or respond to electronic records or performances in whole or in part without review by an individual at the time of the action or response."

The bill goes on to state that, "It is the specific intent of the Congress that this section apply to the business of insurance." This language provides the legal basis for online insurance sites that perform part or all of the insurance sales process, and Congress wants to provide the insurance industry with the legal basis to engage in insurance sales throughout the U.S. without the intervention of human agents.

A Clear Congressional Position

Thus, Congress is not only willing to preempt any state laws that bar electronic commerce; it is specifically willing to extend this preemption to insurance in the area of electronic agents. It is clearly taking a position that limits the scope of the McCarran-Ferguson Act in the area of electronic commerce.

All of these measures should raise the comfort level of insurance companies with Internet insurance distribution significantly. Finally, a robust legal infrastructure is in place or will be soon to support such distribution. This situation plus the dramatic changes now occurring in agency distribution should be a powerful force to propel insurance electronic commerce in the new millennium.
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Notes:
¹ National Conference of Commissioners on Uniform State Laws, "Uniform Act on Electronic Transactions Completed," press release issued August 2, 1999. See www.nccusl.org/pressrel/Eta799.htm.
²State of New York Insurance Department, "The Use of Electronic Signatures and Records in Connection with the Marketing and Sale of Insurance by Means of Electronic Commerce," circular letter number 33 (1999), November 4, 1999.

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