BILL ANALYSIS Ó
SB 251
Page 1
Date of Hearing: August 13, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
SB 251 (Calderon) - As Amended: June 17, 2013
SENATE VOTE : 35-0
SUBJECT : INSURANCE: ELECTRONIC TRANSMISSION
KEY ISSUES :
1)SHOULD INSURANCE COMPANIES BE AUTHORIZED TO TRANSMIT INSURANCE
RENEWALS AND RELATED DOCUMENTS ELECTRONICALLY TO AUTOMOBILE
AND PROPERTY-CASUALTY, EARTHQUAKE AND WORKERS' COMPENSATION
POLICYHOLDERS?
2)IF THE LONGSTANDING PROHIBITION AGAINST ELECTRONIC TRANSMITTAL
OF THESE DOCUMENTS IS ABOLISHED, SHOULD THERE NEVERTHELESS BE
ADDITIONAL SAFEGUARDS TO PROTECT CONSUMERS AGAINST THE
SIGNIFICANT HARMS THAT CAN OCCUR IF THESE DOCUMENTS ARE NOT
RECEIVED?
3)IN LIGHT OF THE SUBSTANTIAL UNCERTAINTY PRESENTED BY THE NOVEL
STATUTORY SCHEME OFFERED BY THIS BILL, MIGHT A PILOT PERIOD BE
APPROPRIATE TO EVALUATE ITS PRACTICAL EFFECT?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill is sponsored by the insurance industry to authorize
insurers selling automobile, property-casualty, earthquake and
workers' compensation policies to electronically provide certain
notices, offers of renewal, and other communications to
consumers if the named insured opts-in to electronic
transmission. The general objective of the bill is not
controversial, but the devil is in the details. The Insurance
Commissioner is concerned that, as proposed by the industry, the
bill fails to provide sufficient safeguards that these documents
will come to the attention of the insured when they are sent
electronically. Of course, receiving these documents is
important, the Commissioner notes, because the consequences for
the consumer can be serious, including financial exposure to
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significant uninsured losses for auto accidents and damage to
one's home. Thus, rules that may be acceptable for transmission
of a telephone bill or credit card statement may not be
appropriate for these insurance documents. In an effort to
reach common ground, the Committee hosted a series of meetings.
Despite negotiations that appeared close to resolution, the
sponsor withdrew late last week. As noted in the analysis, the
bill leaves many questions unanswered, suggesting at a minimum
the potential merits of a reasonable sunset period to ensure
that this new authority is working as it should.
SUMMARY : Authorizes insurers to electronically provide offers
of coverage or renewal of certain motor vehicle,
property-casualty, earthquake and workers' compensation policies
by email or other methods, as specified. Specifically, this
bill :
1)Authorizes insurers to electronically provide statutory
notices and offers to renew for certain automobile,
property-casualty, earthquake and workers' compensation
insurance policies if the insurer complies with several
requirements, including that the insured opt in, with
specified disclosures.
2)Allows the Department of Insurance to suspend an insurer from
providing offers, notices, or disclosures by electronic
transmission if there is a pattern or practices that
demonstrate the insurer has failed to comply with the relevant
requirements, and provides an appeal process.
EXISTING LAW :
1)Establishes the Uniform Electronic Transactions Act (UETA)
which generally authorizes the transaction of business,
commerce and contracts by electronic means, except as
prohibited. (Title 2.5 of Part 2 of Division 3 of the Civil
Code, commencing with Section 1633.1.)
2)Specifies certain transactions which are prohibited from being
conducted by electronic means (Civil Code Section 1633.3),
such as:
a) An offer to renew private passenger automobile
insurance. (Insurance Code Section 663.)
b) An offer to renew a policy of property, liability, or
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other casualty insurance on risks located in California.
(Insurance Code Section 678.)
c) An offer to renew a commercial policy of property,
liability, or other casualty insurance on risks located in
California. (Insurance Code Section 678.1.)
d) A notice of reduced earthquake insurance coverage at the
time of renewal of a residential property insurance policy.
(Insurance Code Section 10086.)
3)Requires insurers, prior to expiration of a policy, to deliver
or mail to the named insured either an offer of renewal, or a
written notice of nonrenewal. (Insurance Code Section 663,
678.)
4)Provides that if an insurer, at renewal, exercises its
authority to modify the terms and conditions of an existing
earthquake insurance policy, then the insurer must provide the
named insured with the renewal notice in a stand-alone
disclosure document at the mailing address shown on the policy
or application. (Insurance Code Section 10086.)
COMMENTS : Insurance documents have historically been excluded
from the law allowing electronic transmittals of documents in
specified transactions. As discussed below, this exclusion
reflects the many consumer protection issues that arise when
insurance documents are not properly transmitted or received.
This bill, sponsored by the insurance industry, would lift that
longstanding ban to allow transmittal by email, or other methods
as specified. The bill authorizes insurers selling automobile,
property-casualty, earthquake and workers' compensation policies
to electronically provide certain notices, offers of renewal,
and disclosures to consumers if the named insured has consented.
In support of the bill, the author writes:
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, methods of
transmission, and records legal equality with mailed and
paper and ink documents. California, however, excluded
from UETA's provisions some documents required to be
mailed, including insurance notices for renewal and some
notices related to the California Earthquake Authority.
Despite its position as a leader in the information
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technology industry, California has fallen behind in
accepting electronic commerce and still does not apply UETA
to many of its insurance documents. These exclusions
potentially harm consumers whose circumstances are better
served through electronic access and storage of these
documents, such as those who travel or change addresses
frequently, who live in areas with scarce postal services,
or who just prefer to use their smartphones over their
mailboxes.
Sensitivity of Documents and Risks of Harm. The author asserts
that consumers are harmed by the current rules disallowing
electronic transmittal of these documents. If that is true, it
should also be acknowledged that consumers may be harmed by the
rules proposed by the industry. For example, a renewal that
does not come to the attention of the insured may lead to
cancelation, causing significant losses to the consumer if
coverage unknowingly expires. So too, an insurer may change the
terms or costs of the insurance - reducing policy limits,
eliminating coverages, increasing deductibles or increasing
premium - all unbeknownst to the insured who has not received
the required document, particularly for customers who have
auto-pay arrangements.
In particular, insurers are authorized to unilaterally modify
earthquake policies at the time of renewal if they provide the
insured with a required disclosure. Failure to receive this
document would be critical for the many Californians whose only
protection against the total loss of their most precious asset
is earthquake insurance. All of these risks presumably underlie
the longstanding policy prohibiting electronic transmittal of
these documents, and may have increased rather than diminished
in the years since the insurance prohibition was enacted in
1999.
Among other potential problems, receipt of emailed documents can
be impeded by ever more robust but imprecise spam blockers that
filter out legitimate messages. Whatever the problems of the
Post Office may be, there is at least no force or agency
actively seeking to intercept physical mail. Technological
problems can also interfere, such as when a computer server goes
down. A number of ISPs have experienced widespread service
failures, and of course receipt of email messages also depends
on proper operation of the computer systems on the receiving end
that are subject to technological problems of their own. In
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addition, sophisticated computer hackers have regularly disabled
the Internet computer servers of companies through
denial-of-service attacks and other methods. The targets of
these attacks have frequently been wealthy U.S. companies that
are alleged to be engaged in or supportive of controversial or
unpopular activities.
Far from being resolved in the years since the insurance
prohibition was adopted in UETA in 1999, these problems may well
have gotten worse. A recent report shows that email
deliverability - the term used to designate the rate of email
placed in the inbox - has dropped to 76.5%. According to the
study, the reasons for the decline are threefold: ISPs are
being more rigorous with filtering and blocking, sender
reputations are deteriorating, and consumers are reacting to
email overload, including by using a "junk" button to
automatically filter out emails from senders they specifically
opted-in to receive. (See Return Path, Global Email
Deliverability Benchmark Report, 2H 2011.)
The phenomenon of dealing with email overload by designating a
sender as "junk" when the volume becomes too great - even though
the user initially consented to receiving messages from the
sender - may be particularly relevant here. If an insurance
company obtains consent to send renewals by email and
subsequently sends other types of unwanted messages, or a
greater number of messages than the consumer wishes to receive,
the consumer may react by automatically directing further
messages from the insurer to a junk filter without realizing
that a renewal message six months later will be filtered out as
well.
As troubling as these deliverability statistics may be, they do
not reflect the full scope of the problem. Receipt of emails is
also affected by a wide variety of actions of users. For many
people, email addresses are temporary and disposable. Many
people use multiple addresses, often transitioning over a period
of time, or designating specific addresses for certain uses
which may shift with time and experience - for example, a
frequently used general address may become associated instead
with a more specific purpose, or may be abandoned if it is
overtaken by unwanted SPAM. People change or abandon an email
address or a service provider and do not necessarily recall
whether years ago they might have given a particular address to
their insurance company - or if they do recall doing so, they
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may not know how to notify the insurance company that they no
longer use that new email address. It was not long ago that
AOL, Hotmail, Netzero, Compuserve, Prodigy, and Yahoo were quite
popular, and the current popularity of Gmail was not foreseen -
just as it may be difficult for some Gmail or Blackberry users
now to imagine that they will not be using those email addresses
in the future. This problem is compounded because there is no
system of forwarding or return receipt requests for email as
there is with the Postal Service. Email transmission of
insurance documents may also not be effective because of the
increasing fear of computer viruses or scams that cause
consumers to be reluctant to open emails from senders, even when
they appear to be legitimate because of the increasing
sophistication of such frauds.
For these reasons and others, California law in many instances
still requires written notices and other documents to be mailed
to an individual's home or designated physical mailing address
to better ensure delivery and/or receipt for legal purposes.
While it may not be necessary to require that insurers obtain
receipts documenting that the insured has opened or read the
electronic transmittal, it may be appropriate to ensure basic
standards of trustworthiness that documents of this sensitivity
are properly addressed to an accurate and active email account
consistent with the insured's current wishes, rather than simply
obtaining one-time consent that is effective forever, and
permitting insurers to adopt potentially careless processes
controlled by whatever terms the insurer might dictate in a
dense and lengthy boilerplate adhesion agreement. The bill does
provide that within two business days of receiving information
indicating that the offer, notice, or disclosure sent by
electronic transmission was not received, the insurer must
either contact the insured and resend by electronic transmission
or resend by regular mail. However, this obligation may be
rarely triggered because insurers are not likely to receive a
notice of failure, particularly since they are not required to
set up processes that would inform them of the failure.
This Bill Appears To Allow A Vague But Potentially Significant
Exception To The Standards For Transmission of These Documents.
The bill provides that insurance companies must ensure that the
offer, notice, or disclosure provided by electronic transmission
was both sent and received consistent with Section 1633.15 of
the Civil Code. This cross-reference to a provision of the UETA
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statute creates potential confusion because the cited section
appears to allow an exception to the stated standards if "the
sender and the recipient agree to a different method of sending
that is reasonable under the circumstances." (Section
1633.15(a).) Although this section applies in other types of
transactions, research by the Committee and stakeholders
produced no guidance on how this exception is to be interpreted.
What is required to establish an "agreement" and what is meant
by "reasonable under the circumstances"? If it is an open-ended
exemption by which an insurer may obtain a consumer's agreement
to virtually any rules for transmission of the documents, it may
create great potential for mischief among insurers less
scrupulous than the members of ACIC. For example, an insurer's
electronic opt-in agreement might state on page 13 (with only
the first paragraph of the first page showing in a text box next
to an "Agree" button) that the consumer agrees to release the
insurer from any standards, or that the insurer is free to
decide what is reasonable, or that the insurer is not
responsible for errors in addressing the email or for system
failures of its own computers, or that the insurer is free to
ignore bounce-back messages.
Although it may be suitable in the other contexts to which it
currently applies, the question presented by this bill is
whether such an apparently open-ended exemption is proper in
this particular context.
Moreover, it is not clear why such an exception is necessary or
appropriate. UETA sets forth a general and highly flexible set
of standards: "An electronic record is sent when the
information is addressed properly or otherwise directed properly
to the recipient and either (1) enters an information processing
system outside the control of the sender or of a person that
sent the electronic record on behalf of the sender, or (2)
enters a region of an information processing system that is
under the control of the recipient." (Section 1633.15(a).) If
the ostensible purpose of the bill is to allow electronic
transmission of documents according to the standards set out in
UETA, it may be cavalier to allow departures from these
standards. In discussions with the Committee, the sponsor
disclaimed any need or interest in allowing insurers to write
their way out of the specified UETA standards. Nevertheless,
insistence on retaining an exception appears to be the basis on
which the sponsor withdrew from negotiations. If this broad and
vague exception remains in the bill, the Commissioner will
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evidently need to exercise his rulemaking authority to provide
appropriate guidance and clarity on this point, along with the
issues discussed above and other questions arising from the
legislation.
Should This New Authorization Be Piloted Before It is Finalized?
Given the many outstanding issues and concerns about how the
new statutory scheme created by this bill will work in the novel
context of insurance renewals, the Committee may wish to
consider adopting the legislation as a pilot for some period of
time before determining that it should be authorized
indefinitely. Typically such a period would be three years, at
which point the Legislature would review the success of the
program.
ARGUMENTS IN SUPPORT : Supporters believe that electronic
transmission is reliable enough to justify allowing sending
these important documents electronically. In particular, the
sponsor of the bill, Association of California Insurance
Companies (ACIC), argues:
California is only one of three states in the nation that
continues to have a statute that expressly disallows
insurers from providing notice or documents related to
policy renewal or conditional renewal by electronic
transmission. SB 251, therefore, is a necessary public
policy step as the nation continues to move towards
electronic transactions and as more consumers demand
paperless transactions. To that point, a recent J.D. Power
and Associates study, US Auto Insurance Study (2012),
concluded the Gen Y consumers (born from 1974-1994) have
clearly shown a preference toward interacting online, and
that specifically:
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 contrast, the most
frequent starting point for Boomers (born from 1946-1964),
who have used multiple channels to resolve an issue, is
their agent (40%). (Emphasis Added.)
Current California law is simply outdated to accommodate
the Gen Y customer demand cited in the study above.
Furthermore, SB 251 is "optional" on both consumers and
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insurers. Nothing in SB 251 compel consumers or insurers
to participate in the electronic renewal process set forth
in the bill and it is limited only to renewals and excludes
policy cancellations. The bill is a modest step to provide
Gen Y consumers a way to communicate or conduct their
business online. It also attempts to accommodate "transient
consumers." These are consumers who may be constantly on
the move and may not have permanent home or rental
addresses but rely heavily or solely on electronic mail
address.
One of the initial concerns raised by SB 251 is how to
protect consumers when policy renewals are conducted online
given the technological challenges. ACIC submits that
conducting policy renewals electronically is a better
delivery system than regular mail because it is more
secured and efficient. Each consumer is likely to have his
or her own password protected profile and will receive
renewal offers within minutes rather than days.
Nonetheless, to address consumer protection issues, SB 251
provides the following:
Require insurers to obtain consent from a
consumer prior to providing policy renewals electronically,
notify consumers that they have the right to "opt out," and
retain a record of the consumer's consent for five years;
Require insurers to provide one free printed copy
of the notices or documents provided electronically upon
request;
Require insurers to send the electronic renewal
consistent with "the applicable statutory regular mail
delivery deadline," and maintain a process or system to
demonstrate that the electronic policy renewal was sent and
received (Note: This is a higher standard than regular
mail.); and
Provide a "catchall provision" requiring insurers
to contact or resend the renewal to the consumer within two
business days upon "receiving information indicating that
the renewal was not received."
ARGUMENTS IN OPPOSITION : Insurance Commissioner Dave Jones and
the California Department of Insurance (CDI) oppose the bill and
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express many concerns as set forth in detail below. In
addition, Consumer Attorneys of California and United
Policyholders oppose the bill, mainly on the grounds that
technology is not always reliable and that they believe that
this bill will increase the likelihood that consumers will fail
to receive these notices. CDI states:
Renewal notices for insurance are critically important
documents for consumers. They frequently include changes
in the terms and conditions of policy coverage for a
consumer's most important assets. For this reason, the
Legislature previously excluded them from UETA, along with
a very extensive list of hundreds of other sensitive and
important transactions and documents mentioned throughout
California's codes. Renewal notices are also required to be
issued in a specified timeframe to provide policyholders
the opportunity to make thoughtful and informed decisions
about their insurance products and coverage.
The California Department of Insurance is absolutely not
opposed to the concept of the electronic issuance of
insurance renewal notices in general. We want consumers and
insurers to have this option. ? CDI's objective is to
ensure that if electronic renewals of certain insurance
policies are permitted they exist alongside a framework of
consumer and business protections. These protections guard
against consumers and businesses mistakenly believing they
are insured or filing claims when in fact the insurance
policy has expired due to the electronic renewal notice
never being properly sent by the insurer or properly
received by the consumer or business, thus leading to
cancellation.
There are many reasons why a person may not be aware of an
e-mail or electronic transmission. These include spam
blockers, junk mail filters, server problems, one's
electronic mailbox being full, the use of an outdated
e-mail address and many others. Given that insurance
renewal offers generally happen annually or semi-annually
and a consumer is not necessarily on alert for the
information, there is a greater chance of them being
overlooked. The failure rate for e-mail is higher than
that of traditional U.S. mail. Numerous industry white
papers constantly lament the fact that so many e-mails,
even from companies with a business relationship to a
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consumer, never properly land in that consumer's e-mail
inbox.
This information is directly relevant to the construct of
SB 251 because many e-mail messages from insurers may not
ever arrive in the inbox of their customers, and neither
the insurer nor the consumer may have any idea that this
was in fact the case. This can lead to bad outcomes for
the consumer, as well as potentially lost business for the
insurer. So it is important that the consumer protection
regime connected to any e-renewal program ensure that
consumers get properly notified of their upcoming insurance
policy renewal information.
Common sense safeguards can be easily employed to help
ensure consumers receive their important insurance renewal
notices. Those common sense safeguards, along with
utilizing accepted industry best practices, have been the
focus of CDI's participation in the negotiation process up
to this point on SB 251.
To that end, CDI's position has consistently been that in
return for removing UETA's current prohibition on the
electronic transmission of some insurance policy renewal
documents, some guidance and clarity, done in a
technologically neutral way, is appropriate. Such guidance
and clarity would NOT pick one technology over another, but
instead provide helpful markers and clarity to insurers,
regulators, and consumers that would ensure that an
e-renewal regime works in the best interests of all.
However, in the current version of SB 251, the specific
tie-back language to Section 1633.15 of the Civil Code
would allow for the following negative consequences:
Language in 1633.15 of CA UETA states UETA's
general definition of sent and received. However, at the
beginning of each relevant definition an exemption from
that definition is outlined, stating that "Unless the
sender and the recipient agree to a different method of
sending that is reasonable under the circumstances?." This
opens up a potentially large loophole and could essentially
render moot the definition of sent and received in both
UETA, and as supplemented in SB 251 on page 6, lines 15-27
of the bill. What does "reasonable under the
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circumstances" mean? How would this be interpreted by
insurers? An insurer could therefore potentially create
their own opt-in notice for e-renewal that creates
completely different standards for sent and received, then
argue that this opt-in was "reasonable under the
circumstances." This language in UETA, when specifically
applied to insurance policy renewals subject to SB 251's
scope, seems unclear and the ensuing lack of clarity may
well lead to uncertainty on the part of consumers, insurers
and regulatory entities such as CDI. This uncertainty
would not be beneficial to any of the stakeholders.
Subdivision (e) of 1633.15 of the Civil Code
states that an electronic record is received "even if no
individual is aware of its receipt." How would this be
interpreted, especially in light of the "reasonable under
the circumstances" language mentioned in the previous
bullet? This would allow insurers to assert that it
doesn't matter if the consumer was even aware of the e-mail
notification sent prior to the renewal of their insurance
policy, never mind the possibility that the e-mail never
made it to the consumer because of the tidal wave of spam
that the consumer's ISP is attempting to combat.
If the e-renewal process goes wrong for any reason, the
consequences can be dire for consumers, as they may think
they have coverage when they in fact do not. By the time
they try to make a claim with their insurer, it is often
too late to rectify the situation. Some of these claims
can devastate a consumer's financial situation and
eliminate their most important assets, the very assets they
wanted to make sure they had properly insured. That kind
of outcome would not be beneficial to consumers, insurers,
or regulators and should be avoided by including clearer
consumer protections in SB 251.
CDI urges that SB 251 include clarifying broad standards
that are technology neutral but specific to the ways in
which electronic renewals of some insurance policies exist
and interact. Those standards would clarify UETA as it
pertains to the scope of SB 251. CDI stands committed to
continuing to work in good faith with the author and
sponsor to resolve these issues still on the negotiating
table regarding SB 251. The bill as currently in print,
however, has not resolved those consumer protection issues.
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Prior Related Legislation : SB 1212 (Calderon, 2012) was a very
similar bill. It was referred to this Committee but the author
elected not to present it.
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California Insurance Companies (sponsor)
American Insurance Association
Californians Against Waste
Independent Insurance Agents and Brokers of California
National Association of Mutual Insurance Companies
Pacific Association of Domestic Insurance Companies
Personal Insurance Federation of California
State Farm Insurance Company
Opposition
California Department of Insurance
Consumer Attorneys of California
United Policyholders
Analysis Prepared by : Kevin G. Baker and Tom Watts / JUD. /
(916) 319-2334