BILL ANALYSIS Ó SENATE COMMITTEE ON INSURANCE Senator Richard Roth, Chair 2015 - 2016 Regular Bill No: AB 1131 Hearing Date: July 8, 2015 ----------------------------------------------------------------- |Author: |Dababneh | |-----------+-----------------------------------------------------| |Version: |June 29, 2015 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Hugh Slayden | | | | ----------------------------------------------------------------- Subject: Insurance: electronic transmission. SUMMARY Permits life insurance carriers, agents and brokers to send documents and conduct transactions related to life insurance and annuities electronically. DIGEST Existing law 1) Codifies the Uniform Electronic Transactions Act (UETA) which provides that a record or signature cannot be denied legal effect or enforceability because it is in electronic form provided that the transaction complies with specified standards and principles. 2) Exempts types of transactions or classes of records related to specified Insurance Code sections from being conducted under UETA. This bill 1) Applies UETA to the following: AB 1131 (Dababneh) Page 2 of ? a. Notices included or attached to individual policies or annuities that disclose the period in which the applicant has the right to return the policy without penalty ("free look period") (Ins. Code §§ 786, 10127.7, 10127.9, 10127.10.) b. A notice of premium increase for individual policies. (Ins. Code § 10113.7.) c. Notices and signed statements regarding replacement policies and annuities. (Ins. Code §§ 10509.4 and 10509.7.) 2) Defines "licensee" as an insurer, agent, broker, or any other person who is required to be licensed by California Department of Insurance (CDI). 3) Requires the licensee to document the consumer's consent to engage in electronic transactions, as specified, and retain documentation while the policy is in force and at least five years thereafter. 4) Requires a licensee to disclose to the consumer the following: a) The option to receive records electronically is voluntary. b) The consumer may opt-out at any time and a description of the opt-out process. c) A description of the documents to be received electronically. d) The process to change the consumer's email address. AB 1131 (Dababneh) Page 3 of ? e) The licensee's contact information, including phone number and Internet Web site address. 5) Requires the licensee to provide, upon request of the consumer, a hard copy of any life insurance document free of charge once per year. 6) Requires that the consumer's email address be placed on the consent disclosure and, if provided, an annual statement. 7) Prohibits charging a fee or offering a discount based on a consumer's willingness to accept electronic documents. 8) Requires the licensee to confirm the email address of any consumer who elected to receive life insurance documents electronically if more than 12 months have elapsed since the last electronic communication with the consumer. 9) Requires the insurer to follow-up with the consumer within five business days, as specified, if the licensee receives information that the record was not received. 10) Establishes that the following records, if not excluded from UETA, may be sent electronically if not otherwise prohibited by law: a) Records sent by first class or regular mail. b) Records not subject to a particular delivery method. c) Records sent in compliance with the Insurance Information and Privacy Protection Act (Ins. Code §§ Section 791 et seq.) AB 1131 (Dababneh) Page 4 of ? 11) Establishes that the following records, if not excluded from UETA, may be sent electronically if not otherwise prohibited by other law if the licensee maintains a system or process that can demonstrate actual receipt of a document: a) Records sent by registered or certified mail. b) Records sent by any method requiring return receipt or signed written receipt of delivery, or other method of delivery evidencing actual receipt by the person. c) Notices of termination or nonrenewal. 12) Provides that acceptable proof of actual receipt includes any of the following: a) An electronic receipt returned by the consumer or electronic signature executed by the consumer. b) A confirmation receipt or some other evidence that the person received the email in his or her email account and opened the email. c) Evidence demonstrating that the person logged onto the licensee's secure Internet Web site and downloaded, printed, or otherwise acknowledged receipt of the record. 13) Provides that even if a life insurance transaction is excluded from UETA by Section 1633.3(b)(4) of the Civil Code (documents that must be separately signed), any statutory requirement for a separate acknowledgment, signature, or initial may be transacted using an electronic signature or by electronic transaction, so long as the requirement is not AB 1131 (Dababneh) Page 5 of ? specifically excluded from UETA by Civil Code Section 1633(c) and the licensee complies with all applicable provisions of this bill. 14) Requires the licensee to send a hardcopy of any document for which a written acknowledgment of receipt is required if the licensee cannot demonstrate that the electronic document was actually received. 15) Requires the Insurance Commissioner (IC) to report to the Governor and the Legislature regarding the impact and implementation of the bill on or before January 1, 2020. 16) Permits CDI to suspend the authority of a licensee to transmit life insurance records electronically if CDI can establish a pattern or practice that demonstrates a lack of compliance with the provisions of this bill. 17) Sunsets the bill effective January 1, 2021. COMMENTS 1. Purpose of the bill According to the author, AB 1131 will further modernize California's electronic commerce ("e-commerce") law for life insurance and annuities which are otherwise authorized pursuant to California's version of the UETA, the California Insurance Code, and the federal ESIGN framework. Specifically, this bill will allow certain insurers to transact specified insurance related business electronically in lieu of mailing them with the prior opt-in consent of the consumer so long as the insurer complies with the specified provisions of state and federal law and additional procedures and standards. 2. Background Every day, countless electronic transaction occur via email, facsimile, smart phone applications, web pages, and other digital forums. The technology works behind the scenes to facilitate contracts, sales, and other commercial activity, but it is the law that makes agreements AB 1131 (Dababneh) Page 6 of ? "real" and enforceable. Some types of agreements are only enforceable if they are in writing. Not too long ago, "writing" meant ink and paper and it was not clear whether the law recognized agreements formed and memorialized electronically. In 1999, the National Conference of Commissioners on Uniform State Laws (NCCUSL) adopted the model UETA to establish consistent interstate rules for electronic transactions. SB 820 (Sher), Chapter 428, Statutes of 1999, enacted California's version of UETA almost immediately afterward. The following year, Congress enacted the Electronic Records and Signatures in Global and National Commerce Act (ESIGN), in part, to encourage the states to adopt UETA in its broadest form and facilitate e-commerce among the states. ESIGN's preemption provisions bind states that fail to adopt UETA or laws similar to it; ESIGN's practical effect is to establish UETA as the universal standard. Back in 1999, many consumers lacked access to, and understanding of e-commerce, and electronic delivery was seen as unreliable. This led to California adopt numerous exceptions to UETA, including many insurance-related documents. Since then, the growing use of electronic devices has made e-commerce inevitable. Many consumers have grown to depend on its flexibility and portability. In fact, postal mail might serve some consumers poorly, including students, frequent travelers, and others who "live away from home." Both UETA and ESIGN establish the fundamental principle that a record or signature cannot be denied legal effect or enforceability because it is in electronic form if both parties agree. This means that, with some exceptions, if the parties agree to use an electronic format involving a transaction that requires something "in writing," the law will treat the electronic format as if it occurred using hardcopy (provided UETA standards are met). This bill addresses some of the exceptions specific to life insurance. Uniform Electronic Transactions Act. UETA establishes ground rules for parties engaging in e-commerce. The most important rule is that engaging in electronic forms is voluntary. This rule allows the consumer to weigh the AB 1131 (Dababneh) Page 7 of ? benefits and risks of engaging in e-commerce and choose what is best for them based on their lifestyle and experience. UETA also recognizes that the underlying law might treat certain transactions with special consideration. For instance, UETA leaves undisturbed provisions that call for a document to be sent within 30 days or specified formatting rules (such as a 12-point font). But UETA does not impose obligations on either party greater than that imposed by the underlying law and specifically provides that a record may be received even if no individual is aware of its receipt. The NCCUSL drafting committee of UETA explains: "As in the paper world, obligations to send do not impose any duties on the sender to assure receipt, other than reasonable methods of dispatch." (Uniform Electronic Transactions Act (1999) with Prefatory Note and Comments, Comments to Section 3, p. 19.) Still, some concepts from the paper world do not translate easily into the digital. For instance, UETA must provide default definitions of "send" and "receive." The UETA drafting committee explains that to be "sent" under UETA, the electronic information must be properly addressed or otherwise directed to the recipient (a general broadcast message would not suffice). 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. In other words, the system designated by the recipient receives that document, but, just like standard mail, recipients may not know it until they check their mailbox. Insurance E-commerce. Since so many insurers cross state lines, consistent e-commerce rules play an important role in the industry. Although federal law usually respects state-based insurance regulation, Congress specifically intended ESIGN to apply to insurance. There is evidence to suggest that the insurance industry as a whole tends to use good practices that increase the reliability of e-delivery, AB 1131 (Dababneh) Page 8 of ? especially email, such as monitoring "undeliverable" emails, coordinating with email providers to avoid spam filtering, and taking active measures to ensure that contact information is accurate. Return Path studies inbox placement rates and measures how frequently commercial email reaches the inbox rather than spam folder or just disappears. In its Inbox Placement Benchmark Report 2014, Return Path estimates general inbox placement rates for the U.S.A. at 87%, but a placement rate of 92% for the insurance industry as a whole (the rate is higher when counting actual junk mail properly delivered to a spam folder). Nonetheless, insurers cannot control many of the factors that might make e-delivery problematic, such as whether the recipient's information system provides accurate delivery feedback. For this reason, insurance legislation applying UETA to insurance transactions tends to focus on reinforcing consumer consent requirements, providing detailed disclosures, and encouraging best practices. While UETA establishes the legal effect of an electronic document, two bills, Chapter 433, Statutes 2009 (AB 328, C. Calderon) and Chapter 369, Statutes of 2013 (SB 251, R. Calderon) established specific procedural and substantive guidelines. These bills set up differing sets of obligations based on whether a document merely provides information for future reference or whether the information may prompt the insured to act. AB 328 authorized electronic transmission of informational-only type documents such as the notice of reasons for refusal to issue a good driver policy, notice of the reasons for cancelling an automobile insurance policy, and others. Pursuant to AB 328, an affidavit of the person who sent the record stating the relevant facts provides satisfactory evidence that the record was mailed, for the purposes of the Insurance Code, absent evidence to the contrary. The affidavit establishes an evidentiary presumption similar to the evidentiary "mailbox rule" (if mail is given to the U.S. Postal service, it is presumed to be delivered). But AB 328 also prohibits insurers from engaging in willful ignorance by imposing an obligation on the insurer to monitor whether the record was sent as defined by UETA. The additional obligation only impacts the AB 1131 (Dababneh) Page 9 of ? legal effect of the record if the insurer receives information that the record was not, in fact, sent. SB 251 authorized insurers to transmit electronically more sensitive documents that could impact a consumer's legal rights, including offers of renewal for property and casualty lines that may involve changes to the policy. Along with heightened requirements to document and obtain consent, SB 251 requires an insurer to maintain a process or system that can demonstrate that the document was both sent and received, as defined under UETA, by the information system designated by the consumer. The insurer must follow-up within two business days if it has a reason to believe that the message was not received. Again, an affidavit that the document was sent creates a presumption that the document was properly mailed. But here the affidavit may be even more important because many information systems, such as email services, used by consumers do not provide feedback on receipt. Without the affidavit, the insurer might have to prove receipt using information it might not be able to obtain; such a burden exceeds the requirements of underlying law, is inconsistent with UETA, and may be preempted under ESIGN (which only requires acknowledgment or verification if the substantive law does as well). In the absence of feedback, SB 251 establishes a presumption that the record was properly sent using the affidavit, unless the insurer receives information to the contrary. But it also requires the insurer to actively monitor the status of delivery and follow-up if necessary. Consistent with UETA, SB 251 does not require insurers to assure delivery, but it does not permit an insurer to send a record and avoid or ignore potential warning signs that the record was not delivered. SB 251 also added new consumer protections that have been mirrored in AB 1131. The insurer must: Include the insured's email address on the policy declaration page. Provide one printed copy of any of the documents free of charge every year upon request. AB 1131 (Dababneh) Page 10 of ? Retain documentation related to the transaction while the policy is in force and for five years thereafter. SB 251 also authorizes CDI to suspend the insurer from sending certain documents electronically if there is a pattern or practice that demonstrates the insurer has failed to comply with applicable requirements. E-delivery of Life Insurance. Unlike prior insurance-related e-commerce bills, this bill addresses life insurance only and establishes standards for most, if not all, life insurance transactions. Life insurance is a long-time commitment that may involve significantly more premium over the life of the policy when compared to other types of coverage. Also, unlike, auto or homeowner's insurance, consumers do not switch carriers as frequently. This bill applies UETA to the following documents: A notice of premium increase for individual policies that must be delivered or mailed. Notices and statements requiring the signature of either the applicant or agent related to replacement policies or annuities. Life insurance policies and notices related to the "free look period" that must be mailed or delivered with proof of delivery (such as certified or registered mail). Notices and transactions pursuant to the Insurance Information and Privacy Protection Act Consistent with UETA and ESIGN, this bill imposes duties for electronic delivery based on the delivery method assigned by substantive law. If a transaction or record, not excluded from UETA, is required to be sent by first class mail, AB 1131 (Dababneh) Page 11 of ? regular mail, or if substantive law does not provide for a particular delivery method, the record may be sent electronically so long as it complies with UETAs standards. No additional procedures apply, including those provided in AB 328 and SB 251. Under this bill, if a record must be sent by certified or registered mail, the insurer must obtain proof of "actual receipt" to verify that the document was delivered and specifies the type of evidence necessary to show compliance: The person acknowledges receipt by returning an electronic receipt or by executing an electronic signature. The record is made part of, or attached to, an email sent to the email address and there is a confirmation receipt or some other evidence that the person received and opened the email. The record is posted on the Internet Web site, and there is evidence demonstrating that the person logged onto the site and downloaded, printed, or otherwise acknowledged receipt. These standards deviate from UETA and ESIGN to the extent an insurer must monitor responses by the consumer beyond acknowledging receipt. However, the heightened standards reflect the challenges of finding electronic delivery equivalents to certified and registered mail. This raises the issue of whether automatically generated delivery receipts equivalent to paper delivery receipts signed by a human being. Only one transaction has been identified that requires acknowledgment and would be subject to this provision. Most Insurance Code provisions involving registered or certified mail apply to the IC or a consumer, but current law requires an insurer to deliver life policies to the owner in order to start the "free look" period using a method providing proof of delivery. However, this bill also treats notices of AB 1131 (Dababneh) Page 12 of ? termination or nonrenewal with the same care as documents sent by certified or registered mail. While inconsistent with the underlying mailing requirement, even ESIGN does not apply to notices of termination. Given the importance of the documents, these enhanced standards could be viewed as consistent with national standards. 1. Support The Association of California Life and Health Insurance Companies explains that this bill will help modernize California law to more clearly allow consumers to receive and sign life insurance documents electronically. 2. Opposition None received 3. Questions This bill is double-referred to the Committee on Judiciary. Adoption of committee amendments may unintentionally prejudice the bill given the upcoming legislative deadlines. However, while this bill moves forward, the author may wish to consider the following. This bill characterizes the effects of Civil Code Sections 1633.3 and 1633.8 as "prohibiting" electronic transactions. Should these references be revised to read that the effect of these sections is to "exclude application of UETA" since UETA does not prohibit any type of electronic transaction, but might leave the underlying delivery method place based on those Civil Code sections? (See proposed Ins. Code § Section 38.6(b)(6) and (7) and (d).) This bill addresses several contemporary forums of e-commerce, but not all. Should relevant language be revised to allow for more flexibility related to evolving technologies? For example, should language that refers to a website be modified to include a cell phone or tablet application? (See proposed Ins. Code § Section 38.6(b)(7)(C).) AB 1131 (Dababneh) Page 13 of ? POSITIONS Support Association of California Life and Health Insurance Companies (sponsor) Department of Insurance (sponsor) American Council of Life Insurers Oppose None received -- END -