Insurance Transactions on the Web


by Douglas A. Greer, Summer 1998 

There's no longer any question that the explosion in communications is dramatically impacting our lives. Use of the Internet has been expanding at an astounding rate. As more businesses go on-line, the "Net" has become a marketplace for advertising and transactions as well as the exchange of information. This has resulted in significant changes in marketing practices as well as consumer and business relationships. As these changes occur, issues will continue to arise that challenge the application of our existing laws and call for new legislative and regulatory responses. Until these issues have been resolved, it is essential that those in the insurance business be aware of the legal potholes they may encounter in the information super-highway.

Soliciting in Cyberspace

Watch out for potential liability for defamation, copyright and trademark infringement.

The content of advertising on the Internet is no different from advertising in the traditional media. There is no apparent reason, therefore, why the laws and regulations governing advertising in general would not apply to the Net. This includes consumer protection laws, securities regulations, false advertising restrictions, and various other levels of regulation that are applied to commercial speech.

Insurance advertising laws and regulations are typically based on the prohibition against false or misleading statements about an insurer's own product or a competitor's product. Some changes or modifications in these laws may be required, however, to address new situations encountered on the Net. For instance, it is often difficult to know precisely who makes statements on the Internet concerning an insurer's products and service, and whether the insurer has sustained any damage. Examples of such statements are e-mail or comments made in chat groups.

Modifications in defamation laws are also likely as the Internet evolves, and those changes will apply to statements made about insurance products on the Internet. Obviously, brokers and agents disseminating comparative information regarding competing plans are subject to those laws. It is also possible that the on-line service provider may share in potential liability. However, two states which have brought actions against advertisers on the Internet, Minnesota and Pennsylvania, have focused on the individuals or businesses placing the advertisements and not the Internet on-line service provider.

Additionally, it is extremely important to recognize that an Internet advertiser is subject to all of the laws regarding copyright and trademark infringement, misappropriation of ideas and patent infringement. Copying, or even imitating, another company's website or interactive program can result in liability for infringement. The choice of a "domain name," or Internet address, must be made carefully or it could violate trademark and copyright laws, or "trade dress" restrictions. A website or on-line ad must be designed with these, and similar, issues of potential liability in mind.

Regulating the Net

Look for increased regulation of advertising on the Net in the future.

Up to this point, state insurance commissioners have tended to assume that current insurance laws are adequate to regulate Internet transactions. This will undoubtedly change as legislators and regulators continue to become more aggressive in regulating commerce on the Net. For example, a new Article 2-B, which will regulate the sale of goods on the Internet, has been proposed as an amendment to the UCC. Additionally, the Federal Telecommunications Act of 1996, 47 U.S.C. § 223(a)-(h), applies to Internet transactions. The FTC regulates unfair competition in the marketplace, including unfair or deceptive acts or practices that injure customers. The Federal Trade Commission Act, 15 U.S.C. § 45, grants the FTC the power to pursue a variety of civil and criminal acts with respect to proscribed advertising practices.

Some of the most important issues regarding the Internet are jurisdictional. One issue that must be confronted is whether the Internet is subject to regulation at the state or federal level, or both. It is presently unclear, for instance, whether an insurance transaction on the Internet is an electronic transmission in commerce, to be regulated under the commerce clause by the federal government, or whether it is an insurance transaction, to be regulated under the McCarran-Ferguson Act (15 U.S.C. § 1012) by state regulators.

Whose Laws Apply to Internet Transactions?

Be aware of the laws in each state where you solicit or transact business.

It is surprisingly difficult to determine when and where an insurance solicitation takes place on the Internet. Obviously, this must be known in the event it is necessary to determine which state's laws will apply. Is the solicitation made when the broker or insurer displays a rate page or rate comparison chart, or is it made when the information is viewed or downloaded? Is there a solicitation made by simply registering a website? Putting a web page on a server is, of course, an invitation for everyone to visit, read and react to the content of the site. Some insurers and brokers even include interactive forms for browsers to submit underwriting information from the web pages.

Additionally, it must be considered whether the solicitation takes place in the broker's, or insurer's, home office, the applicant's home, or somewhere in "cyberspace" where no laws yet apply. This could be extremely significant because of varying state laws on such issues as binding authority, sharing commissions, rebates, and countersignature.

Once a transaction becomes interactive, and insurance can be bound over the Net, then the issue of the location of the transaction takes on increasing importance. For instance, when the insurance transaction takes place on the Net, where is the policy issued and delivered? Location, or "situs" of the transaction also plays an important role in the application of state laws on premium taxes, participation and residual market mechanisms, and guarantee funds, as well as policy cancellation and/or nonrenewal laws. Since there is no regulation of "cyberspace," insurance regulators will have to decide the location of an Internet transaction, and the decision would have to be consistent among regulators.

Increased Vulnerability to Lawsuits?

You may be subject to lawsuits in each jurisdiction where you solicit or transact business.

Another question is one that presently confronts all individuals and businesses using the Internet. Does a business, by soliciting or transacting business on the Net, establish sufficient contacts with each state or country foreseeably reached by its advertising or solicitations to afford the courts of those states personal jurisdiction over the business, thereby forcing it to litigate there? Commentators presently appear to be arguing for relaxed rules of jurisdiction for the Net which may lead to increased vulnerability to suit. One recent California case has found that use of e-mail and the telephone may be sufficient to support personal jurisdiction over an out of state defendant.

These are all issues that are currently being addressed by legislators and regulators as the Internet becomes more and more of a commercial marketplace. Answers are needed, and must be determined quickly. Until they are, however, it will continue to be difficult to determine what laws apply to business conducted over the Net. Clearly, advertising or interactive solicitations on the Net must be carefully planned to minimize potential liability. It is very important that brokers or agents engaging in solicitations or transactions on the Net constantly reevaluate their practices in light of new developments in the regulation of Internet commerce. Due to our broad insurance and commercial practice, we at Cotkin & Collins are uniquely able to assist clients to stay abreast of changes in the laws and avoid unforeseen problems.