Websites, Electronic Commerce, Excess Line Brokers and The Law
WEBSITES, ELECTRONIC COMMERCE, EXCESS LINE BROKERS AND THE LAW
How can an excess line broker put up and maintain an "effective" Website, and engage in electronic commerce without exposure to inadvertent regulatory violations?
It may be more difficult than you realize. There is no simple answer to the question first because the internet as a medium and distribution channel turns traditional "border based" notions of jurisdiction on its head. Moreover, regulators, legislators and the courts are only beginning to address the many new issues raised by internet marketing and electronic commerce. A clear picture has not yet emerged, nevertheless some guidelines can be offered for your consideration.
For starters, consider these four big picture questions.
1.) Will my Websites ability to reach people in states where I am not licensed allow these states to exercise jurisdiction over me?
2.) Closely related to the first question is, will my website expose me to allegations of soliciting insurance sales in states where I am not licensed?
3.) Will my website be viewed as advertising and subject it to advertising content regulations under the insurance law of various states? If so what state or state laws apply?
4.) In what manner, if any, may I use e-mail, web based insurance applications or electronic insurance document transmission without violating the law?
On the issue of jurisdiction, which essentially defines when a court or regulator can enforce a given states laws or regulations upon you, the interpretations of jurisdictional law that have emerged thus far have not been unfavorable.
New York courts and federal district courts in New York which have addressed the issue have said mere access to a passive website from New York, without more (such as one or more sales in New York via use of the website) is insufficient contact to create jurisdiction over the websites out of state owner. When a website is active or transactional where sales, quotes, applications and other processes occur, the result may well be different. Also, when activities have occurred over the internet, state courts in some instances have determined a need to protect local citizens. In those cases, the courts have exercised jurisdiction. This has been true in the non-insurance areas involving cyber squatting where a party registered another companys trade name as a domain name and then attempted to sell the domain name to its rightful owner or where the internet transactions involved U.S. citizens gambling on sites based in the Caribbean. Similarly, insurance regulators in California and Connecticut have recently obtained a cease and desist order against Pugets Sound Agricultural Society, Ltd., an unlicensed entity offering proof of automobile financial responsibility over the internet. (While this analysis is primarily for the benefit of excess line brokers, eligible non-admitted insurers should be aware that interactive websites could subject such insurers to "doing business" charges with serious tax and other ramifications.)
The National Association of Insurance Commissioners (NAIC) is poised to concur with the foregoing analysis. A subgroup of the NAICs Electronic Commerce and Regulation Working Group has circulated a draft bulletin which one or more states may adopt. It states, "This State does not consider mere maintenance or availability of a website, where the website owner has done nothing to purposely avail itself of the benefits of doing business in this State to alone constitute "doing business." This state will not assert jurisdiction over a website in cases where consumers who visit the site are informed that the advertised products and services are not available in the state."
The New York Insurance Department has interpreted New York Law in a similar fashion. In Circular Letter No. 5 (2001) (attached as Appendix A) the department states:
"The Department does not consider the mere maintenance of a passive web site that is accessible to New York residents containing information about specific insurance products or services to constitute solicitation under New York Insurance Law."
The foregoing interpretations, assuming over time they become broadly adopted standards, are not onerous. Keep in mind, however website access coupled with a few, perhaps even just one sale in a state outside of New York, could create jurisdiction in that state even though you are not licensed there.
You should be aware that several states, notably Virginia, Iowa, New Hampshire and South Dakota have issued interpretations such that use of the internet or access by residents of the state to a website will be considered advertising or solicitation subject to the states regulation. Those interpretations may not be supported by the courts if the interpretations are challenged, however. The fact that a Virginia resident, for example, can telephone you in New York, in and of itself, does not provide Virginia jurisdiction over you. Similarly, if the Virginia resident was to seek out your website without more, the courts of Virginia may be hard pressed to assert jurisdiction. As a practical matter, if your website is accessible from a state where you are not licensed, even if residents of that state have visited your website, the state should have little interest in exercising jurisdiction over you absent sales to residents of that state.
Use of disclosures, disclaimers, disabling software and other strategies discussed below, can help you avoid potential problems.
THIS ADVISOR IS NOT INTENDED TO BE NOR SHOULD IT BE CONSTRUED AS LEGAL ADVICE. THESE GUIDELINES ARE PROVIDED FOR YOUR CONSIDERATION AND FOR USE IN CONSULTATION WITH YOUR LEGAL COUNSEL.
LICENSING REQUIREMENTS AND WEBSITES
Traditional insurance regulation requires a person to be licensed as an agent or broker before soliciting consumers for the purpose of selling insurance. Licensing laws were enacted to protect consumers from dealing with unknowledgeable or even illegitimate operators. It stands to reason that insurance regulators will continue efforts to protect consumers where insurance solicitation comes over this new medium, the internet. In fact, the facelessness of the internet creates new insurance fraud potentials. As shown above, these potentials are already attracting scrutiny by regulators.
One good rule of thumb to keep in mind is that the internet is just another medium for communications, and therefore, what is legal to do by the mail and phones will generally be legal by internet distribution or by other means of e-commerce. The New York Insurance Department in Circular Letter No. 33 (1999) stated "...The great majority of existing provisions of the Insurance Law do not pose any impediment to electronic commerce...". In a March 6, 2000 New York Insurance Department Office of General Counsel opinion the department stated "...The Departments position is that insurance business conducted on the internet or using any other method of electronic commerce is no different from other insurance transactions. Transactions conducted on the internet are, therefore, subject to the Departments jurisdiction to the same extent as the same insurance business conducted by other means of communications." Assuming most states will interpret use of the internet and e-commerce similarly, you have to answer a black and white threshold question. Am I willing to select specific states where I will solicit and sell and obtain those licenses and offer disclaimers or disclosures on the internet or create disabling software to clearly establish where I will not do business?
Many of you will not want to completely foreclose the possibility of doing business in numerous states even if you are not doing business there now. Under those circumstances, consider the following protective steps which may be taken.
Use of disclosures and disclaimers on your website prominent enough to deflect accusations of improper solicitation but not predominant so as to damage the effectiveness of the website have been recommended by some regulators. In Circular Letter No. 5 (2001), the New York Department states, "insurance products or servicesbeing offered [not] by a New York authorized insurer[in advertisements or websites] must contain a clear and conspicuous disclaimernot available in all states would be sufficient". Disclosures on a side bar or banner at the bottom of a website can set forth appropriate information such as states where you are licensed, license numbers and what type of licenses are held. For a wholesale broker a paragraph asserting that you are dedicated exclusively to providing retail insurance producers access to your exclusive or specialty markets for difficult/complex/unique and/or hard to place risks can also be set forth.
Language, such as, "we are not licensed in the following states" or "we do not do business in the following states" is another approach to avoid stepping out of bounds. No particular language has been required, but the concept has been promoted by a number of regulators. If you have a true, tight business plan, use of such disclaimers/disclosures can help you target the specific markets with which you hope to do business and avoid inadvertent actions which can create regulatory problems. What regulatory problems?
First, subjecting yourself to jurisdiction and discipline for selling insurance in a state where you dont have a license. Also, a website might violate an advertising limitation law. Another potential problem would be posting forms or coverage not available or approved in certain states.
You can walk a thin line between having your website constitute advertising but not rise to soliciting potential insureds. New York Insurance Law does not define solicitation, per se, but case law, an opinion from the Office of General Counsel, and Circular Letter No. 5 discuss what constitutes solicitation for purposes of New York Law. Merely bringing attention to ones profession or products is not solicitation without more. Solicitation requires the asking to buy or importuning the transaction such as a personal petition suggesting that insurance be obtained from a particular person or entity. Does a radio station or publisher with advertisements have to be licensed? In response to this question, the department noted an advertisement is not soliciting in and of itself but it can be considered solicitation "when the writer or spokesperson departs from the relative objective role of information provider and introduces his own reputation or credibility to promote a sale".
California may adopt an extremely broad definition of solicitation. In a document entitled "California Insurance Department Draft Statement On Internet Transactions Requiring a Producer License" the department opines that solicitation is any statement or act designed to provoke or heighten a persons interest in buying insurance. Negotiating means communicating with another person with the goal of arranging the terms of a contract. The draft also says advertisements generally constitute solicitation except where the advertiser does not intend to do business (with Californians). By implication, a disclaimer to Californians that you do not do business there combined with a mere informational website, appears to leave you outside the requirement to obtain a California producers license. Conversely, providing Californians quotes, applications or policies through the internet will probably require a license whether or not this draft statement is adopted as policy.
California has recently raised this bar a notch by enacting a new law (Section 1726 of the California Insurance Code) signed on August 9, 2000 which requires California licensed brokers and agents who advertise on the internet to set forth on there websites:
(a) his or her name "as it appears on his or her insurance license",
(b) his or her state of domicile and principal place of business and
(c) his or her license number.
Be aware that many states, California included, have advertising content limitations, which obviously apply if you transact a website business there. When it comes to jurisdiction and solicitation, it makes sense to first make clear determinations as to where you will and where you will not be doing business and license yourself accordingly. If you are going to conduct a regular business with Californians, for example, and this is made obvious on your website, compliance with the laws of California is necessary.
No doubt some readers are saying to themselves I already have California producers bringing me business, I have no license there and never had a problem. Whats changed?
The answer is a few things. If a properly licensed California producer (probably a surplus line broker) historically brought you California accounts to access a unique facility, on the face of the transaction, the consumer was protected by a licensee, who met the requirements of California law. In all likelihood, the insurance department was either unaware of you as an additional intermediary, looked at you as an arm of the insurer, noted you were licensed in your home state or simply looked the other way regarding your licensing status in California since the transaction was compliant in all other respects. If that same transaction was conducted over the Web today, there is at least some argument that the New York producer or intermediary involved would have a much higher level of visibility to the regulator. In the past, a number of brokers were convinced that in circumstances such as the California example used above, the California department could not touch them. In other words, if I dont have a license, the department cannot take it away and cannot fine me so Im right where I want to be. If that is how you felt historically, you probably took to much comfort in such an analysis. If you are dealing with a California licensed surplus line broker who is reaching the non-admitted market through you as an additional intermediary, historically you have probably had no problems with the California Insurance Department. The question is will your promotional website attract a regulators attention and be viewed as actively soliciting in that state. If you are in fact binding or broking accounts for a California surplus lines broker the California Insurance Department could make a regulatory issue out of your unlicensed status.
Most states consider use of the mail system and phones to reach consumers in their states from an out of state office as solicitation and doing business just as if you physically crossed the state line and started knocking on doors. Use of e-mail or websites can be viewed in the same manner, as a different medium by which solicitations are occurring.
Since most producers will want to be expansive in communicating on their websites, obtaining nonresident broker licenses in states where you intend to solicit is certainly one way to go. Also, many states now intend to offer nonresident E&S licenses. (29 states must offer uniform or reciprocal nonresident licenses to E&S brokers by November 2002 to avoid federal preemption of the state licensing laws. See Appendix B for a list of states which authorize unlimited or reciprocal nonresident E&S broker licenses).
Here are a few simple thoughts on the issue of website solicitation. Use a disclaimer for states where you have no interest in doing business. In states where you are not doing business, know the states interpretation of passive website purveying. If the department accepts the NAIC draft bulletin your website should not cause you trouble. If you are doing business in a state over your website, obtain a license from that state.
Its a pretty certain bet that all websites, even limited informational websites, will be viewed as advertising. The California Insurance Departments draft statement mentioned above states, "An insurance producers internet website virtually always advertises that producers products and services." A website meets almost every definition of the word "advertise" in Websters dictionary. Therefore, compliance with the advertising laws of the state or states where you are licensed should be your first concern. (Hopefully, the states where you are licensed are the same states where you are doing business.) Practically speaking, it is unlikely that a state insurance regulator will bother you about your website, even if your website is not compliant with that states law, if you are not licensed in that regulators state and not doing any business there.
In New York, Circular Letter No. 5 (2001) offers an analysis regarding advertising and the insurance law.
The insurance department notes internet advertising for insurance products and services can appear in many forms including banner ads, tiles, hypertext links, frames and embedded links. The department states that such ads can appear even on the website of a non-licensee where solicitation takes place as long as the advertisement is clearly delineated as such and the advertisement is not framed by recommendations, endorsements or promotion by the non-licensee. Conceptually the insurance department is distinguishing advertising from solicitation. It unfortunately becomes more complex when you act as an excess line licensee.
As an excess line broker, your first concern should be New York law. New York Insurance Law 2122 states:
" 2122. Advertising by insurance agents and brokers
(a)(1) No insurance agent or insurance broker shall make or issue in this state any advertisement, sign, pamphlet, circular, card or other public announcement purporting to make known the financial condition of any insurer, unless the same shall conform to the requirements of section one thousand three hundred thirteen of this chapter.
(2) No insurance agent, insurance broker or other person, shall, by any advertisement or public announcement in this state, call attention to any unauthorized insurer or insurers.
(b) Every agent of any insurer and every insurance broker shall, in all advertisements, public announcements, signs, pamphlets, circulars and cards, which refer to an insurer, set forth therein the name in full of the insurer referred to and the name of the city, town or village in which it has its principal office in the United States."
Subsection (a)(1) prohibits advertising the financial condition of any insurer except where such advertisement conforms to the proscriptions of 1313 of the insurance law. Without a 1313 microanalysis, in effect such an advertisement must show certain specific information set forth in the insurers last verified financial statement filed with the superintendent.
It is probably a bad idea to advertise on your home page names and financial specifics or products of a particular insurer. Many insurers prohibit your use of their names in any advertisement without express permission. Moreover, financial information becomes outdated quickly and insurers will advise you of this fact occasionally by service of a summons and complaint if the carrier believes you disparaged them.
Instead, an effective website can refer to the classes of business in which you specialize, the volume of business you place, professional designations, and perhaps the number of insurers with whom you place business. Also, the ratings by the various rating agencies are often mentioned in print ads without insurance department objection. For example, "We have relationships with over twenty insurers rated A or better by A.M. Best."
The second paragraph of subsection (a) prohibits "calling attention to" unauthorized insurers. Whats an aggressive excess line broker to do? The answer is tout your own skills and specialties and note you act as a licensed excess line broker. Again, the law is not concrete on this, but the insurance department generally has not objected to print ads stating you place business on both an admitted and an excess line basis with over 20 insurers rated A or better by A. M. Best Co.
Subsection (b) of 2122 imposes certain duties on you namely when you refer to an insurer in an ad, you must identify the insurer by full name and principal U.S. address. This appears to be directed towards ads which state such specifics as a price quote for insurance based on a set of rating criteria. If the ad, or in this case the website, offered such specifics, the law requires you to identify the carrier whose rates were used to calculate the quote or indication. In any event, you would never do this in New York with respect to a specific nonadmitted carrier because of 2122(a)(2). You should also keep in mind that comparative quotes, general comments about an insurers financial condition, a competitors financial condition, even touting "we can obtain the lowest premium..." can be interpreted to be unfair methods of competition or unfair and deceptive acts and practices under 2402 and 2405 of the insurance law. This does not prevent you from stating you shop the markets for the most competitive quotes to serve your customers (assuming the statement is true!). In addition to the comments above, here is your best practical rule for advertising content across state borders. Offer nothing which can be deemed false and misleading. Specifics as to insurers, pricing, benefits and the like are a minefield to navigate so avoid this advertising approach.
Analyzing the advertising laws in every jurisdiction in which you are licensed can be a daunting task and is beyond the scope of this brief analysis. Yet, you can take some comfort that many states have laws which are similar in approach as to what is acceptable advertising. Ultimately, it would be a good idea to survey the laws where you are licensed, and to the extent one state mandates or prohibits something, apply that requirement across all states in designing your website. For example, put your name, license number(s), and business location for each state where applicable because California requires it.
OTHER ADVERTISING SCENARIOS
No doubt you have a myriad of other approaches in mind that have not been addressed. Some of the scenarios are as follows:
1) You want to contract with someone like Price line.com for a banner ad and will pay them a fee for each account bound. Can I do this? Will price line need a license or is it commission splitting with an unlicensed entity? New York has opined that you can make such an arrangement with a hyperlink from the "advertiser" to your site and pay a percentage of revenues for the advertising fee as long as the banner ad does not cross the line from advertising to a recommendation or endorsement or solicitation by the website provider (in this case, Price line.com).
2) Even as a wholesaler I want to directly target certain businesses, banks for instance, with a specialized line of insurance products at my website and then refer them to a retailer or work with their retailer. Is this permissible? In all probability, most states will consider referrals or recommendations to be a form of solicitation. New York Law has a specific narrow exception to the general concept that referral equals solicitation. That exception is discussed in Circular Letter No. 5. For the excess line broker who is interested in developing business out of state your concern is how do other states view referrals. Historically, many wholesale brokers believed they did not need a license in that foreign state if a resident E&S broker in that state was making the placement. In effect, the local E&S broker complied with the law so my licensing status was not relevant.
Today, it would be better to have a nonresident brokers or E&S license where available in such states so you clearly have the right to solicit there. Any inquiry by such a states insurance department would recognize that licensing status. Now that nonresident E&S licenses are becoming more prevalent, consideration should be given to obtaining such licenses. The license offers you the benefit of openly soliciting and making your website interactive.
3) If I put insurance applications and other tools of the trade on my website will that make it appear that I am soliciting in all states even with disclaimers displayed? The answer depends on your approach. Applications available to anyone would arguably be soliciting under most state laws. However, the New York Department has embraced having such forms and transactional documents available in a password protected area. In this manner, your site would be more of an advertisement on your home page and only interactive with those to whom you have provided a password. Keep in mind when your are putting up forms, be they applications, policies, certificates or others, you have to be mindful of regulations regarding type size, disclosures, etc. The states, at a minimum, are looking for electronic equivalents of all approved paper forms.
AND WEB BASED INSURANCE APPLICATIONS
AND DOCUMENTS IN THE E&S MARKET
New York Circular Letter No. 5 (2001) (Appendix A hereto), demonstrates the New York insurance departments positive embrace of electronic commerce in the admitted market. It was not directed primarily to the E&S market, however, one comment quoted below caused ELANY to seek clarification from the department.
The Circular Letter stated in part "if the insurance products or services are not being offered by a New York authorized insurer, thewebsitesmust contain a clear and conspicuous disclaimerand such products or services cannot, in fact, be made available in New York." While the circular referenced the "mail order" exception for excess line brokers later in the text, ELANY sought and obtained an Office of General Counsels Opinion which is attached hereto as Appendix C.
The opinion, in short summary, provides that once the risk has been qualified for placement under the excess line law, many steps in the application and documentation process can legally occur electronically provided the excess line broker is the conduit for transmitting the electronic files and documents between the insured (and retail producer where applicable) on one hand, and, the insurer on the other. The Opinion of Counsel consistently reinforces the legal principal that an unauthorized insurer, a New York insured even with a New York broker involved, cannot complete a New York excess line transaction except through a licensed excess line broker.
An excess line broker can transmit an electronic version of the unauthorized insurers application to a retail broker or prospective insured but the unauthorized carrier cannot. A retail broker or prospect insured or the excess line broker can complete the application housed on the excess line brokers website but not housed on the unauthorized insurers site.
Whether the documents in question are applications or insurance policies, certificates, endorsements or the like, the unauthorized insurer must deliver the documents to the excess line broker and the excess line broker is the only party which should be delivering applications and other documents to the unauthorized insurer.
While to some this approach may seem cumbersome, it is consistent with the law and provides a method for the E&S market to utilize the significant benefits of electronic commerce.
RECOMMENDATIONS AND GUIDELINES
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(1) If you are a multistate brokerage operation (50 state licensed) you have no worries with jurisdiction and licensing, as you have consented to jurisdiction in all of those states. You will, however, have to comply with the advertising laws of all fifty states.
(2) If you are a small one state operator, you can make that absolutely clear in your website and dont deviate lest you inadvertently subject yourself to jurisdiction and sanctions for selling without a license. Comply with the advertising laws of the one state. Also, do not forget that if you are a wholesaler you can specify that you accept business from those licensed as New York brokers, resident or nonresident.
(3) The vast majority of you fall between categories one and two above. Comply with the laws of the states where licensed. Disclose your licenses and your addresses. If you are clear that you will not do business in certain states, you should say that. Also, if you are a wholesaler, note you do business with residents of those states where you hold nonresident licenses through local brokers.
(4) Use disclosures, disclaimers or disabling software to ward off any regulator who might otherwise accuse you of soliciting in a state where you are not licensed.
(5) Design your website with the thought in mind to stay away from naming specific insurers, their financial condition or comparative quoting. Your products, special skills, professional designations, years in business and other attributes can be emphasized.
(6) A smart website can be designed with a homepage for general access with a "behind closed door approach" for existing producers and insureds. Those producers and insureds can be offered a password to access policy applications, policies, certificates, loss runs or other documents. However, since the general public cannot gain access, it is not likely to be considered advertising or solicitation which a regulator is likely to analyze.
(7) For the aggressive, you can consider a referral service for insureds who contact you. If so, licensing on a multistate basis must be considered to avoid regulatory exposures. If you had a special product for banks, for example, and a California bank visited your website and you referred them to a California retailer, this probably constitutes transacting business in California. It would certainly seem so if you received a referral fee or ultimately acted as the wholesale broker on the account. This prospect should be weighed very carefully.
OTHER WEBSITE ISSUES
As the internet continues to grow as the new, fast distribution medium of choice, one issue which chronically rears its head is the security/privacy rights of the information transmitted.
Do you provide credit card, social security numbers or other personal identification information over the internet? Some people will not for fear of identity theft and liability for fraud by others.
SELECTING AN ISP
As an internet player, you will want to provide the greatest safeguards and security possible. This means when selecting an internet service provider (ISP), you want your information technology staff or consultants to determine what security structures the provider, (Prodigy, America Online and the like) have deployed.
Does the site have or employ:
1) Password protection
2) encryption technology
3) Firewall protection (separate web server for data storage)
4) Off-line Data Storage
5) Network website and server monitoring (to detect hacker or other disruptive activity quickly)
6) A disaster prevention/recovery plan
7) Insurance coverage to protect you from its negligence.
WHAT OTHER EXPOSURES AND ISSUES SHOULD CONCERN ME?
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1) Make sure you, not your consultants, own all rights to your website design.
2) Most site designs begin from some basic design program. Verify your designer/consultant has authority or a license to use the program and modify it for your design.
3) The content on your website should also belong to you. Use of material owned by others, even under license to you, must be looked at closely to avoid liability exposures.
4) The traffic or information which comes to your website should be owned by you not the ISP.
5) Hyperlinking raises potential vicarious liability for copyright or trademark infringement or other misconduct on the linked sites. Consider linking agreements with indemnity provisions. Lets be careful out there!
6) Consider the matter which will be collected on your site. You can own content or license the right to put information on the site by a point and click feature asking the communicator to agree to certain terms--i.e., communicator is responsible should he/she publish defamatory comments, etc.
7) Maintain a record of your websites content and all changes to it. Some day it may be necessary to prove your disclaimers and disclosures were made.
8) Consider obtaining insurance coverage for the new exposures created in e-commerce.
"This is not intended to be nor should it be construed as legal advice. Consult with your own legal counsel."