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Life Health > Life Insurance

California's attempted e-reconciliation misses the mark

By Elizabeth Tosaris, Pat Hatfield

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As a result of new California state law, AB 1131, many insurance companies will be modifying their electronic contracting process for life insurance and annuities applications and perhaps imposing additional burdens on producers who do business in the state. California producers who took the initiative to develop their own e-contracting processes should re-examine them.

Given also the California Department of Insurance’s view of e-contracting law before AB 1131, uncertainty remains about the life insurance applications completed using electronic signatures in accordance with the prior law. Unless the department changes its position, there is little that life insurers or producers can do, aside from waiting patiently and hope for the best.

Background

Assembly Bill 1131, sponsored by the California Department of Insurance, became operational on January 1, 2016. The bill establishes new standards for life and annuity insurers using electronic processes to transact business.

The department views AB 1131 as a companion piece to an earlier bill concerning the electronic notices and signatures set forth in California Insurance Code s. 38.5. AB 1131 amends California’s existing law and adds a new insurance code statute. The latter details how consumers may conduct business with insurers solely through electronic means.

The new statute requires steps beyond those specified in the federal Electronic Signatures in Global and National Commerce Act (“ESIGN”). Further, AB1131 does not address a conflict between ESIGN and California law as interpreted by the Department. That conflict raises a question: whether ESIGN preempts the new California standards.

In the late 1990s, the National Conference of Commissioners on Uniform Laws (NCCUSL) issued a model law, the Uniform Electronic Transactions Act (UETA), enabling businesses to use electronic records and signatures to conduct business. California enacted its version of UETA (“CA-UETA”) in 1999, one year before Congress enacted the federal ESIGN law.

Intended in part to standardize the different state law versions of UETA, ESIGN addressed many of the same issues as the UETA model law. ESIGN also went beyond UETA by providing detailed rules surrounding consumer disclosures.

ESIGN also specifies when it preempts state law. ESIGN expressly states that it applies to the business of insurance, leaving no doubt that ESIGN will preempt conflicting state laws, even conflicting state laws governing the business of insurance.

The provision preempting conflicting state laws (including laws governing the business of insurance) permits nationwide use of electronic signatures and records and prevents states from enacting laws (including changes to UETA) that conflict with ESIGN. Among them: laws that narrow the scope of transactions for which electronic records and electronic signatures are to be recognized.

However, ESIGN does allow states to “modify, limit or supersede” ESIGN in certain limited circumstances. Examples: where the state has enacted the model UETA without provisions that circumvent ESIGN; or where the state law allows an alternative procedure consistent with ESIGN.

One subsection of CA-UETA excludes specific transactions, including free look and lapse notices for life insurance policies, as well as notices that life insurance and annuity writers must provide to insureds and applicants. Historically, the department has taken the position that the CA-UETA exceptions preclude the specified transaction from being conducted electronically.

However, another subsection of CA-UETA states that where another law permits a transaction excluded by Section 1633.3(c) to be conducted electronically, that transaction may be conducted electronically in accordance with that other law permitting the transactions to be conducted electronically. ESIGN is one such other law permitting electronic transactions, as anticipated by CA-UETA Section 1633.3(f). In other words, CA-UETA has a savings clause for those transactions within the scope of ESIGN or other California statutes, where a law requires a written signature or writing to be provided, an electronic signature or electronic record may be used.

However, the department’s reading results in the exclusions in Subsection (c) acting in direct conflict with the limited permitted exclusions in ESIGN. As such, those exclusions in Subsections (c) that are not also in ESIGN should be preempted by ESIGN and nothing in AB 1131 prevents that preemption.

Those transactions described in the list of exclusions in Subsection 1633.3(c) should be given full legal recognition to the extent permitted by ESIGN. Alternatively, under a more harmonious reading, those transactions excluded by Subsection 1633.3(c) should be given full legal recognition to the extent permitted by ESIGN with a proper reading of Subsection 1633.3(f), which permits transactions otherwise permissible under some other law, such as ESIGN.

The CDI sponsored AB 1131 in order to amend CA-UETA to remove one of the previously excepted transactions. The revised statute states that, “this title does not apply to any specific transaction described in…Section 786 as it applies to individual and group disability policies…of the Insurance Code…”

Insurance Code Section 786 sets forth the free look rules for life and disability income insurance policies. Thus, after AB 1131 takes effect, CA-UETA will continue to exclude the free look rules for disability insurance, but will now apply the free look rules in the context of life insurance policies. 

AB 1131 also enacted a new Insurance Code provision at section 38.6. Among other things, Section 38.6 allows the electronic transmission of certain written notices when the life insurance consumer has consented to electronic transmission following receipt of a disclosure that meets a number of detailed requirements.

While there is overlap between the ESIGN consumer disclosure and those in Section 38.6, there are also the following differences:

1. California requires the disclosure to be bolded and the placement of the signature immediately below the opt-in. ESIGN has no such requirements.

2. The inclusion of the insurer’s contact information is required under California law, but ESIGN does require the inclusion of any contact information.

3. The inclusion of the email address and the method of changing the email address are unique to the California law.

4. ESIGN does not require either party to take steps if there is an indication an email was not received, while California requires the insurer to take a number of steps.

Reconciling AB 1131 with ESIGN

The discrepancy between the California and federal laws raises the issue whether the preemption provisions of ESIGN apply. ESIGN’s preemption provisions address versions of UETA enacted before and after the federal law.

In general, a state law “may modify, limit or supersede” ESIGN if the state law constitutes an enactment or adoption of UETA as approved and recommended by NCCUSL. In addition, ESIGN’s preemption provisions allow a state law to “modify, limit or supersede” ESIGN if the state law:

(A) specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, if–

(i) such alternative procedures or requirements are consistent with this title and title II; and

(ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; and

(B) if enacted or adopted after the date of the enactment of this Act, makes specific reference to this Act.

While AB 1131 does modify the CA-UETA, none of the new laws make specific reference to ESIGN, and the condition specified in subsection (B) is therefore unmet. This failure alone could preempt.

Moreover, while Section 38.6 does not require or give greater legal status to a particular technology (i.e., it is technology neutral), the statute does require procedures beyond those required by ESIGN. This raises the issue of whether the alternative procedures or requirements are consistent with ESIGN.

Although ESIGN has been in effect for more than fifteen years, a court has yet to rule on whether a state law is preempted under ESIGN’s preemption provision.  The closest a court came was the 2002 case of People v. McFarlan, 744 NYS 2d 287. The McFarlan court noted an issue as to whether ESIGN preempted a pre-existing state law.

However, the court ultimately held that the federal and state laws treated the type of electronic record in issue identically, and that the court therefore did not need to rule on whether ESIGN preempted the New York law. Thus, there is no case law interpreting the provision of ESIGN that allows states to provide “alternative procedures or requirements” only if they “are consistent” with ESIGN.

We assume that a court would only focus its analysis of whether ESIGN preempted California law on the portions of the California law that provide additional requirements beyond those required by ESIGN. As noted above, there are also ways in which the state and federal laws track one another; for instance both laws require a notice that any consent to an electronic transaction is voluntary.  Because there are areas of consistency, we do not think any preemption analysis would encompass the entirety of the new legislation passed under AB 1131, just the portion of the statutes that provide the alternative or additional requirements.

But to the extent that there are differences in the laws, a court would have to consider whether those differences are consistent with ESIGN.  We believe that the differences noted above are inconsistent with ESIGN. 

Not only do the new California requirements go well beyond what is required under ESIGN, imposing additional burdens upon the insurer, but they also go beyond the concerns that were factors in ESIGN, such as having technology neutral processes, and, more importantly creating “a uniform system where contracts have the same validity across all 50 states.”

In other words, Congress did not intend ESIGN to create a minimum standard but to standardize the completion of electronic transactions across the country. Moreover, the new California legislation fails to reference ESIGN, which is also a requirement to avoid preemption.  While a court might reference the long-standing savings clause in CA-UETA as a means of satisfying this requirement, we think the department’s long-standing interpretation of the meaning of CA-UETA would make this a difficult position.

Summing up

Bottom line for California producers:  Until the issue is resolved in either the California courts or a clearly-stated change in position within the department, the safest approach for California producers may be to revise their e-contracting process to comply with AB 1131 and hope for the best on previously-completed applications for insurance. 

See also:

Insurance & tech: Use of e-signatures expected to increase

How tablets are revolutionizing the insurance industry

Most insurers eyeing adoption of e-apps

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