BILL ANALYSIS Ó SENATE INSURANCE COMMITTEE Senator Ronald Calderon, Chair SB 251 (Calderon) Hearing Date: April 24, 2013 As Amended: April 17, 2013 Fiscal: No Urgency: No SUMMARY: Would authorize an insurer, with the consent of the policy owner, to transmit electronically, in lieu of mail, the offer of renewal required for personal auto, real and personal property, and liability insurance policies; the notice of conditional renewal for commercial insurance policies, and the offer of renewal and certain disclosures related to earthquake insurance so long as the insurer complies specified the provisions of the Uniform Electronic Transactions Act and additional procedures and standards as provided. DIGEST Existing law 1. Uniform Electronic Transactions Act (Civil Code Sections 1633.1 et seq.) A. Authorizes any written notice required to be given or mailed to any person by an insurer relating to any insurance on risks or on operations in this state, unless excepted by subdivision (c) of Section 1633.3 of the Civil Code, to be provided by electronic transmission if each party has agreed to conduct the transaction by electronic means, as provided; and B. Excepts from its provisions authorizing electronic delivery the offer of renewal required by Insurance Code Sections 663 for personal automobile insurance and 678 for personal liability and property insurance; the notice of conditional renewal of certain types of commercial insurance required by Insurance Section 678.1; and the offer of coverage or renewal for earthquake insurance or any related disclosure required by Insurance Section 10086. 1. Earthquake Coverage Offer of Renewal and Notice of Change in SB 251 (Calderon), Page 2 Terms and Conditions (Ins. Code § 10086) A. Prohibits residential property insurer's insurers from issuing or delivering property insurance without offering earthquake coverage prior to, concurrent with, or within 60 days following the issuance or renewal of a residential property insurance policy; B. Requires that If the offer of earthquake coverage is mailed to the named insured or applicant, it is required to be mailed to the mailing address shown on the policy of residential property insurance or on the application; C. Authorizes an earthquake insurer, at any renewal, to modify the terms and conditions of an existing policy, rider, or endorsement, and that if the insurer modifies the terms and conditions of an existing policy, rider, or endorsement, the insurer is required to provide the insured with the renewal notice in a stand-alone disclosure document stating the changes in the terms and conditions of the insured's existing policy, rider, or endorsement; and D. Provides that, if an offer of earthquake coverage is not accepted, the insurer or any affiliated insurer is required to offer earthquake coverage every other year. 1. Personal Automobile Insurance (Ins. Code § 663) A. Requires that before expiration of personal automobile insurance policy, an insurer shall deliver to or mail to the named insured, at the address shown on the policy, either a written or verbal offer of renewal of the policy at least 20 days before expiration or a written notice of nonrenewal of the policy at least 30 days before expiration; and B. Provides that in the event that an insurer fails to give the named insured either an offer of renewal or notice of nonrenewal, the existing policy, with no change in its terms and conditions, shall remain in effect for 30 days from the date that either the offer to renew or the notice of nonrenewal is delivered or mailed to the named insured. 1. Personal Liability, and Real and Personal Property Coverage (Ins. Code § 678) SB 251 (Calderon), Page 3 A. Requires that at least 45 days prior to policy expiration of insurance covering loss or damage to specified real or personal property or covering personal legal liability, an insurer shall deliver to the named insured or mail to the named insured at the address shown in the policy, either of the following an offer of renewal of the policy stating any reduction of limits or elimination of coverage or a notice of nonrenewal of the policy; and B. Provides that in the event an insurer fails to give the named insured either an offer of renewal or notice of nonrenewal: i. The existing policy, with no change in its terms and conditions, shall remain in effect for 45 days from the date that either the offer to renew or the notice of nonrenewal is delivered or mailed to the named insured; and ii. A notice to that effect shall be provided by the insurer to the named insured with the policy or the notice of renewal or nonrenewal. 1. Commercial Property Coverage (Ins. Code § 678.1) A. Requires that unless an insurer delivers or mails a notice of nonrenewal on a policy of commercial property insurance, the insurer, at least 60 days, but not more than 120 days, in advance of the end of the policy period, shall: i. Give notice of nonrenewal, and the reasons for the nonrenewal, if the insurer intends not to renew the policy; or ii. Give notice that the insurer intends to condition renewal upon reduction of limits, elimination of coverages, increase in deductibles, or increase of more than 25 percent in the rate upon which the premium is based. SB 251 (Calderon), Page 4 A. If an insurer fails to give timely notice of the nonrenewal or conditional renewal, the policy of insurance shall be continued, with no change in its terms or conditions, for a period of 60 days after the insurer gives the notice. This bill 1. Would authorize an insurer to send electronically offers of renewal and conditional renewal for automobile and specified property insurance so long as the insurer complies with certain requirements in addition to those specified in UETA; 2. Would authorize an insurer to send the renewal notice required to be made every other year and certain disclosures related earthquake insurance to be sent electronically, so long as the insurer complies with certain requirements in addition to those specified in UETA; 3. Would also delete obsolete cross-references and make conforming changes. COMMENTS 1. Purpose of the Bill . According to the author, California adopted its version of the Uniform Electronic Transactions Act (UETA) in 1999, just after its adoption by the National Conference of Commissioners on Uniform State Laws. UETA grants electronic signatures and records legal equality with paper and ink documents. California, however, excluded many documents, including some insurance documents. This had the practical effect denying consumers the option to choose to receive electronic versions of documents related to home, auto, commercial and earthquake policies that must otherwise be sent by postal service. Although technology has greatly improved and many consumers have come to rely on electronic transmission, several insurance documents remain exempted from UETA, potentially harming consumers whose circumstances are better served through electronic communications. Forcing consumer to rely on the postal service unfairly discriminates against consumers that travel or change addresses frequently, or who SB 251 (Calderon), Page 5 live in areas with scarce postal services. The author states that by authorizing the electronic transmission of certain insurance documents, SB 251 provides consumers greater access to the portability and convenience of electronic documents; this bill represents another step forward in conforming California law to national and interstate policy, eliminating unnecessary paper consumption, and providing consumers greater choice in managing their personal records and transactions. 2. Background Documents Affected by SB 251. This bill would allow an insurer to send certain documents, as specified, electronically in lieu of mailing, so long as the requirements of UETA and this bill are met. Earthquake Insurance. This bill would allow insurers to send the biennial offers and other disclosure electronically in lieu of mailing with the consent of the policy owner of the residential property insurance. i. Biennial Offers of Coverage. Most residential insurance policies do not cover earthquake coverage. In order to encourage consumers to purchase earthquake damage protection, all residential property insurance companies must offer earthquake coverage at the inception of a residential property policy either directly or through the California Earthquake Authority (Ins. Code § 10083). The initial offer may be sent electronically (AB 328 (C. Calderon), Chapter 433, Statutes 2009 - this bill contains a clarification to that effect), but existing law requires that the insurer mail a subsequent offer every other year to consumers who did not accept the initial offer. (Ins. Code § 10086(b).) ii. California Earthquake Authority Disclosure. If coverage is purchased, but provided through the California Earthquake Authority, additional disclosure language is required to inform the purchasing consumer that the CEA is not covered by the California Insurance Guaranty Association (CIGA) and that if the CEA becomes insolvent or unable to make claims, the policyholder may be subject to an additional charge of up to 20% of SB 251 (Calderon), Page 6 the premium. (Ins. Code § 10086(a)(3).) iii. Disclosure of Modified Terms and Conditions for Earthquake Insurance. When an insurer offers a renewal of earthquake coverage, but has modified the terms and conditions of the policy, the insurer must provide the consumer with a standalone disclosure document stating the changes in the terms and conditions relative to the existing policy. (Ins. Code § 10086(a)(2).) Offers of Renewal . Property, liability, or casualty coverage typically expires at the end of the term (frequently at the end of a year). Unless the insurer notifies the consumer that it does not intend to renew coverage, an insurer must mail the policyholder an offer of renewal that may or may not contain changes to the terms or coverage. i. Private Passenger Automobile Insurance. Existing law requires a motor vehicle insurer to provide a notice of renewal of a private passenger automobile insurance policy at least 20 days prior to the expiration of the policy. (Ins. Code § 663.). ii. Property, Liability, and Other Casualty Insurance. Requires an insurer that is renewing a policy of property or other casualty insurance on risks located in California to deliver a notice of renewal, which must include notice of any changes in coverage or premium, at least 45 days prior to the termination of the policy. This requirement applies to an offer to renew a policy of personal lines of property, liability, or other casualty insurance (Ins. Code § 678) and the notice of conditional renewal for policies of commercial lines that provide coverage for property, liability, or other casualty types insurance. (Ins. Code § 678.1.) Notices of cancelation, termination, and nonrenewal are not impacted by this bill and must be mailed. Failure of the insurer to properly deliver a notice of renewal with modified terms, cancelation or nonrenewal could leave coverage remains in place under the existing terms until a specified time after the document is properly sent or delivered. (Ins. Code §§ 663(c), 678(b), 678.1(d).) SB 251 (Calderon), Page 7 A. Electronic Transactions Law. The National Conference of Commissioners on Uniform State Laws adopted the UETA Model Act in 1999 establishing a consistent interstate policy for electronic transactions. (On a historical note, former California Legislative Counsel Bion M. Gregory sat on the drafting committee.) California enacted UETA that same year. In 2000, President Bill Clinton signed the Electronic Signatures in Global and National Commerce Act (ESIGN) (15 U.S.C. 7001 et seq.). Congress drafted ESIGN to apply to insurance and preempts any state law not substantially similar to the UETA Model Act. Forty-seven states have adopted some version of UETA. Generally speaking, UETA provides that any transaction not otherwise exempted from UETA may be conducted electronically subject to specific rules and standard. Major principles governing UETA include: i. Preservation of Choice & Requirement for Agreement (Civil Code § 1633.5.) All parties must agree to conduct the transactions electronically. All parties must "opt-in" and any may "opt-out" from conducting further transactions electronically. This rule may not be varied by agreement. ii. Governs Procedure, Substantive Law Continues to Apply (Civil Code § 1633.3). Transactions subject to UETA remain subject to any other applicable substantive law. For instance, if a document is required to be mailed within 30 days, that deadline remains in force. iii. Construed to Facilitate E-Commerce (Civil Code § 1633.6). UETA should be construed and applied to facilitate electronic transactions consistent with other applicable law and with reasonable practices concerning electronic transactions. SB 251 (Calderon), Page 8 iv. Electronic Writings and Signatures Validated (Civil Code § 1633.7). A record or signature cannot be denied legal effect or enforceability because it is in electronic form. v. Send/Receipt Rules Appropriate for E-Commerce (Civil Code § 1633.15). Specifies the electronic conditions by which an electronic record is considered to have been "sent" and "received." The UETA drafting committee explains that to be "sent" under UETA, the electronic information be properly addressed or otherwise directed to the recipient - there must be specific information which will direct the record to the intended recipient (a mass email does not satisfy this definition). The record will be considered sent once it leaves the control of the sender, or comes under the control of the recipient. Records sent through e-mail or the internet will pass through many different server systems; when more than one system is involved the sender must lose control of the document. A record is "received" when it enters the system which the recipient has designated or uses and to which it has access, in a form capable of being processed by that system. vi. Substantive Laws Requiring a Writing (Civil Code § 1633.8). If a law requires a person to provide information in writing to another, that requirement is satisfied if the information is provided in an electronic record capable of retention by the recipient at the time of receipt. If a sender inhibits the ability of a recipient to store or print an electronic record, the electronic record is not enforceable against the recipient. vii. Other Substantive Law Applies if Sender Knows Record not Sent/Received (Civil Code § 1633.15). If a person is aware that an electronic record purportedly sent or received as provided by UETA was not actually sent or received, the legal effect of the sending or receipt is determined by other applicable law. SB 251 (Calderon), Page 9 viii. Special Record Handling Rules (Civil Code § 1633.11). If a law other than UETA requires special mailing or special formatting rules, then the record shall be transmitted by the method specified in the other law. The record shall contain the information formatted in the manner specified in the other law. (ESIGN requires that if a state law enacted prior to ESIGN requires a record to be provided by a method that requires verification or acknowledgment of receipt, the record may be provided electronically if the method also provides verification or acknowledgment of receipt.) ix. Satisfaction of Record Retention Rules and Evidentiary/Audit Requirements (Civil Code § 1633.12). Requires that electronic records that must be retained must accurately reflect the information set forth in the record at the time it was first generated in its final form as an electronic record or otherwise, and the electronic record be accessible for later reference. x. Exclusions (Civil Code § 1633.3). The Model Act excludes numerous classes of transactions, including, but not limited to: wills, codicils or testamentary trusts and specified transactions in the Uniform Commercial Code. California added its own exclusions, including those specific to property and casualty insurance. Currently, exclusions include documents relating to the renewal and termination of policies. (Ins. Code §§ 662, 663, 664, 667.5, 673, 677, 678, and 678.1.) A. Reliability of Transmission. Concerns have been raised related to the reliability of electronic mail. The issue has persisted since the drafting of UETA. The drafters of the Model Act provide some guidance as to how UETA is designed to handle this concern. The preservation of existing safeguards [in UETA], together with the ability to opt out of the electronic medium entirely, demonstrate the SB 251 (Calderon), Page 10 lack of any need generally to exclude consumer protection laws from the operation of this Act. Legislatures may wish to focus any review on those statutes which provide for post-contract formation and post-breach notices to be in paper. However, any such consideration must also balance the needed protections against the potential burdens which may be imposed. Consumers and others will not be well served by restrictions which preclude the employment of electronic technologies sought and desired by consumers. (Comments to Section 3.) Many of these concerns relate to consumer behavior and email services outside of the control of the insurer. Insurers, however, can engage in various practices to increase the reliability of electronic transmission including monitoring "undeliverable" emails, coordinating with email providers to avoid Spam filtering, and taking active measures to ensure that contact information is accurate. Additional Consumer Protections Added by Recent Amendments. Recent amendments added additional procedures and requirements in addition to those provided under UETA including: i. Record of Consent. The insured must follow specific procedures to document and retain evidence of the consent of the insured. ii. Additional Disclosures. The insurer must disclose, describe, or provide: that the "opt in" to receive the document by electronic transmission is voluntary; that the insured may opt out at any time and the process to do so; the document to be sent electronically; the process or system to report a change or correction in the insured's email address; and the insurer's contact information. iii. Record of Electronic Address. The insurer must SB 251 (Calderon), Page 11 include the insured's email address on the policy declaration page. iv. Free Hardcopy on Request. The insured may request one printed copy of any of the documents free of charge. v. Heightened Standard for Transmission. Generally, under UETA, a document must only be sent unless otherwise specified. (Civil Code § 1633.8(a).) This bill requires the insurer to maintain a process or system that can demonstrate that the document provided electronically was both "sent" and "received" as defined by UETA. (See Civil Code § 1633.15.) The insurer must retain this information while the policy is in force and for five years thereafter to show that the document was sent by the applicable statutory regular mail delivery deadlines and ultimately received electronically. vi. Follow-up for Delivery Failure. If the insurer receives information indicating that the document was not received by the insured (such as failure of delivery notice provided by many email services), the insurer shall, within two business days, either contact the insured to confirm contact information and successfully resend the document electronically or send the document by regular mail. (See also Civil Code § 1633.15(g).) vii. Administrative Remedy. Allows the Department of Insurance to suspend the insurer from providing documents by electronic transmission if there is a pattern or practices that demonstrate the insurer has failed to comply with these requirements. A. Types of Electronic Transactions. The drafters of UETA and ESIGN designed the language to accommodate different types of existing and potential technology. ESIGN specifically preempts state laws that specifies alternative procedures or requirements of electronic SB 251 (Calderon), Page 12 records that accord "greater legal effect to, the implementation or application of specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures[.]" (15 U.S.C. 7002(a)(1)(2)(A)(ii).) Insurers may use any number of currently existing technologies, including email, facsimile, text messaging, or smartphone or tablet application. Smartphone or tablet applications are a potentially powerful and growing means that an insurer could communicate with consumers. Last year, AB 1708 (Gatto) provided that a motorist may present proof of insurance to police during a traffic stop. In order to provide this service, a growing number of insurers have developed mobile applications that provide access to the digital proof of insurance, send the consumer notifications, offer access to coverage terms, assists in filing claims, etc. Although it is not clear if insurers have used mobile applications to provide mandatory notices pursuant to UETA yet, mobile apps function as a powerful tool for effective and confirmed delivery of these notices. 1. Arguments in Support The bill's sponsor, the Association of California Insurance Companies, explains that SB 251 is a necessary public policy step as California and the rest of the nation continue to move towards electronic or paperless transactions. ACIC cites the 2012 US Auto Insurance Study (June 2012) by J.D. Powers and Associates that states: Among customers who utilize multiple contact channels to resolve an issue, 40% of Gen Y customers begin online, further underscoring their preference to seek answers to their questions via this channel. In contracts, the most frequent starting point for Boomers (born from 1946-1964), who have used multiple channels to resolve an issue, is their agent (40%). ACIC argues that California's current law is outdated to accommodate the Gen Y customer demand cited in that study. SB 251 (Calderon), Page 13 SB 251 gives Gen Y consumers the choice to "opt-in." ACIC also points out that California is only one of three states in the nation that continues to have a statute that expressly disallows insurers form providing notice or documents related to policy renewal or conditional renewal by electronic transmission. 2. Opposition A. United Policyholders states that nearly 90% of homes in California are uninsured for earthquake losses and believes that SB 251 will decrease the likelihood that homeowners will receive and accept the offer to buy earthquake insurance if the notice is only made electronically. B. Consumer Attorneys of California (CAOC) and United Policyholders oppose the bill expressing concerns that actual receipt of emailed documents can be compromised by: (1) SPAM blockers that filter out legitimate business messages; (2) the actions of people who change their email addresses or service providers but do not know who to notify the insurance company of their new email address; (3) technological problems, such as when a computer server is down when an important email message is sent; and (4) the real threat of computer viruses or scams that makes consumers reluctant to open emails from senders not immediately recognizable. C. In addition CAOC argues that the bill could lead to confusion between insurers, agents and insureds over whether the renewal was received. Agents, brokers and insurers could be faced with a tremendous amount of paperwork, administrative procedures and customer service issues as a result of questions surrounding whether or not a renewal was received. 1. Prior and Related Legislation SB 1212 (R. Calderon), 2011-12 Legislative Session. Would have authorized an insurer to transmit electronically specified offers of renewal for automobile, property, or commercial insurance, as well as certain liability insurance, and notices related to earthquake coverage. SB 251 (Calderon), Page 14 AB 328 (C. Calderon), Chapter 433, Statutes 2009, authorized electronic transmission of certain notices that otherwise would require a mailing, upon agreement by the policyholder to receive the electronic communication, including notice of reasons for refusal to issue a good driver policy pursuant to Proposition 103, notice of the reasons for cancelling an automobile insurance policy, notice of the right of a homeowner to purchase earthquake coverage from or as arranged by the homeowner's insurer, or the proof of mailing this notice, and the standard residential property insurance disclosure that sets forth the various types of homeowners' insurance policies. SB 820 (Sher), Chapter 428, Statutes of 1999, enacted California's Uniform Electronic Transactions Act. SB 1124 (Vasconcellos), Chapter 213, Statutes of 1999, validates brokerage agreements between a customer and a broker dealer, if it is electronically sent back by an applicant and it is accompanied by a digital signature, as defined. SB 367 (Dunn), Chapter 514, Statutes of 1999, establishes the manner in which documents electronically filed with the court would be given legal effect, allow parties and the court in specified types of cases to agree to file and serve documents electronically, and direct the Judicial Council to develop rules regarding electronic filing and service of documents for use by all courts by January 2001. POSITIONS Support Association of California Insurance Companies (Sponsor) Pacific Association of Domestic Insurance Companies Personal Insurance Federation of California State Farm Insurance Company Oppose Consumer Attorneys of California United Policyholders SB 251 (Calderon), Page 15 Consultant: Hugh Slayden, (916) 651-4110