Effectively Using E-Sign to Underwrite UM/UIM Coverage

In most states, insurance companies are required to offer uninsured motorist (UM) and underinsured motorist (UIM) coverage as part of an automobile liability policy. Typically, underwriting must offer UM/UIM coverage in writing. Failure to provide a written offer of UM/UIM coverage often results in the UM/UIM coverage being imputed into the policy by operation of law at the limits of the policy’s liability coverage. However, where the insurance company is a direct writer, federal law may eliminate the need for a state required written offer of UM/UIM coverage depending upon the underlying underwriting transaction.

When a consumer buys an insurance product over the phone “a licensed agent will probably be involved, but a recorded acceptance will be utilized instead of a written application.” Michael A. Eubanks and Melissa M. Schwartz, Practical Tips, Accidental Death Claims: In-House Counsel’s Perspective, 30-FALL Brief 62, 62 (Fall 2000). The American Law Institute has noted that “written applications or consent requirements could be problematic under many states insurance laws in light of the new industry practices of selling insurance products over the telephone or the internet. Cynthia J. Borrelli and Douglas C. Furlong, Regulation of and Litigation Involving Insurance Agents and Brokers and their Activities in the Year 2001, SF 81 ALI-ABA 359, 361 (May 10, 2001). State statutes are silent as to how the UM/UIM “written notice” requirement should be interpreted in light of the new modes of doing insurance business. The answer may lay in Congress’ enactment of E-Sign.

In 2000, Congress passed the Electronic Signatures in Global and National Commerce Act (E-Sign). PUB. L. 106-229 (June 30, 2000), 114 STAT. 469, 15 USCA prec. § 7001. Under E-Sign a “record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form.” 15 USC § 7001(a)(1) and (2). Electronic form relates to technology having electrical or digital capability. A qualifying “electrical record” is a record sent, communicated, received or stored by electronic means. 15 USC § 7006(4).

Typically, the phone call made to a direct writer is electronically or digitally recorded. Pursuant to E-Sign, the electronically recorded telephone call where UM/UIM coverage was offered and either accepted or rejected can qualify for state statutory written notice requirements. To be safe, the insurance company should still send a written offer of the coverage to the consumer.

The underwriting representative of the insurance company should get the consumer’s consent that the transaction will be recorded as confirmation of what the consumer wanted to purchase. However, failure to get such consent is not fatal. See, 15 USC § 7001(c)(3) which provides that the legal effectiveness of the transaction shall not be denied because of the failure to obtain electronic consent or confirmation of consent by the consumer. The agreement to do business electronically may be implicit and “need not be in any particular form” but can be inferred from the parties’ conduct. Robert A. Wittie and Jane K. Winn, Electronic Records and Signatures Under the Federal E-Sign Legislation and the UETA, 56 BUS. LAW 293 n.181 (2000). Additionally, oral communications including recorded phone conversations are exempt from the consent requirement. 15 USC § 7001(c)(1)(C)(ii) and 15 USC § 7001(c)(6).

Under the supremacy clause of the United States Constitution, E-Sign controls over state laws. The McCarran-Ferguson Act, 15 USC §§ 1011-1015, which established generally a form of “inverse preemption” allowing state laws to prevail over federal rules that do not specifically relate to the business of insurance, is not applicable to E-Sign situations. Under 15 USC § 7001(i), Congress expressed specific intent that E-Sign applies to the business of insurance. This statement of Congress overcomes the implied “inverse preemption” under McCarran-Ferguson Act.

The purpose of state statutory UM/UIM written offer requirements is to insure that the offer is made. A contemporaneous recording demonstrating that the offer was made can be more significant than the evidence of a signed written offer. Where insurance agents are involved in the transaction, the paper containing the written offer may be lost in the shuffle of papers in the overall transaction and may never have been read by the consumer. With E-Sign, the actual contemporaneous record can be searched to determine if the consumer was actually aware of the offer and what the consumer’s choice was in light of that awareness.

To best utilize E-Sign in conjunction with the underwriting of UM/UIM coverage as a direct writer, the insurance company should: (1) notify the consumer that the transaction is being tape recorded; (2) secure the general consent of the consumer that the phone call will memorialize the transaction if the consumer chooses to purchase coverage; (3) that the consumer is advised clearly of the right to purchase UM/UIM coverage up to the selected liability limits of the policy and that the consumer also has the right to reject such coverage; (4) the consumer should be advised that the consumer will not receive in writing a specific offer of UM/UIM coverage but that the issuance of the policy declarations page will reflect the consumer’s ultimate decision, i.e., the declarations page will either show the presence of UM/UIM coverage if purchased and, if not, it will not be indicated on the declarations page. The consumer should be advised that if the declarations page does not accurately reflect the coverages purchased that the insurance company should be notified immediately so that it can be corrected with any applicable premium change; and (5) the consumer should be alerted to how cheap UM/UIM coverage is compared to the purchase of liability coverage. Regarding this last suggestion, not only does it help underwriting in selling the UM/UIM coverage, but it also demonstrates that where the insured rejected the coverage the insured was made aware of how inexpensive it was. After a UM/UIM claim incident occurs and the insured realizes that the coverage was not purchased, one of the typical arguments that lawyers raise is that the insurance company failed to tell its insured how inexpensive the coverage was and if the insured had been so advised the insured would have purchased the coverage.

Steven Plitt is a national legal expert on insurance law and insurance agent issues. He is the author of the current national treatise, Couch on Insurance 3D.