LEGISLATION CATCHES UP TO TECHNOLOGY

Over the past several years the use of electronic commerce as a distribution channel for the sale of insurance has evolved rapidly. A large number of insurance companies now have websites that provide information to their customers. The Internet strategies of most insurance companies have been limited to building websites that describe their companies and products. On some websites it is possible to obtain quotes for personal lines of insurance.

However, technology now exists to enable all aspects of the purchase of insurance to occur electronically. Despite this advancement, only a small number of transactions currently appear to be done in this manner. Part of the reason for the relatively low utilization of the new technology available is the uncertainty regarding certain legal aspects of an electronic transaction. That will soon change with the passing of Bill-88 in Ontario.

Legislative catch-up

It is expected that Bill-88, the Electronic Commerce Act in Ontario, will be passed by the end of this year. This act follows the principles in federal Bill C-54, The Uniform Electronic Commerce Act, and is similar to electronic commerce legislation that is in process of being passed in other provinces.

Similar legislation is also being passed in a number of other countries. Bill-88 will have significant implications for the Internet strategies of insurance companies when it is enacted. The basic purpose of Bill-88 is to ensure that a transaction that is done electronically is legally enforceable. The intent is to make an electronic transaction an alternative to a paper based transaction, but not to change the basic rules as to what a legally enforceable transaction requires. Bill-88 does not require any types of transactions to be done electronically. The parties involved will always have the right to decide whether to use an electronic transaction or a paper based system.

Bill-88 will, however, apply to all transactions and legal documentation in Ontario subject to certain exceptions. One of the most important of these exceptions is that it will still be necessary for wills, powers of attorney, and negotiable instruments to be made in a written form.

Privacy intact?

Bill-88 does not deal with privacy and data collection. As a result, data that is transmitted or stored electronically will still be subject to the normal rules regarding the privacy of information. Bill C-6, the Federal Privacy Law, is also expected to be passed by the end of the year and will have significant implications for the insurance industry. It is likely that similar privacy legislation in Ontario will follow. One of the challenges of electronic commerce is that data becomes much more difficult to maintain securely.

Concerns over privacy will likely continue to be a major impediment to greater use of the Internet for many different types of consumer transactions. The Ontario legislation also provides that, where there is a legal or contractual requirement to retain data, then it may be done electronically. If information is provided or stored in electronic form, it will be considered to be as valid as if it was stored in a paper based format. As a result, electronic information will be able to be introduced in court as evidence as though it was an original paper based document, provided that it can be demonstrated that there was integrity as to how it was stored and has not been altered.

Electronic signatures

In order to meet the legal requirement of a signed document, it will be possible for an electronic signature to be used. An electronic signature can be used in a number of ways, including as a copy of a signature or using security code numbers. “Formation of Contracts” basic contract law of offer and acceptance will still be applicable for electronic transactions. Bill-88 confirms that a valid transaction is created by the party agreeing to it by clicking on an icon to show acceptance. Insurance companies will no longer be able to rationalize maintaining huge amounts of paper records based on the requirement that they may one day be needed in court. Bill-88 provides that electronic information is deemed to be sent once it enters a computer outside the sender’s control. One of the problems with Bill-88, however, is the presumption that a document is received once it reaches the computer of the recipient. As a result, if the recipient has not checked for e-mail, there may be significant consequences as a result of the deemed receipt, regardless of the lack of actual knowledge that it was sent.

Jurisdiction issues

The issue of jurisdiction of contracts is dealt with by providing that electronic information is deemed to be sent from the sender’s business office and received at the recipient’s business office. As a result, the actual location of the parties at the time e-mails are sent is irrelevant. This is particularly important when people are travelling away from their offices and doing business.

Furthermore, Bill-88 does not provide answers to many jurisdictional issues that will occur with e-commerce transactions. The normal rules regarding licensing of insurance companies as well as brokers will be applicable for Internet insurance transactions. If a customer in a foreign jurisdiction applies online for a policy to an insurance company with its head office in Ontario, a number of questions will have to be answered before a policy can be issued. It will be necessary to determine whether the insurance company is licensed in the jurisdiction of the customer. It will also be necessary to determine whether the insurance company was involved in solicitation activities in the foreign jurisdiction. This may be difficult to determine, particularly if the website of the insurance company is interactive rather than passive. If the insurance company is not licensed in the foreign jurisdiction, then the application will likely have to be rejected. As such, it is probable that the internet will make it much more difficult for insurance companies and regulators to prevent the unlicensed sale of insurance to persons in other jurisdictions.

Harmonization in Ontario

Bill-88 provides a basic framework that will ensure that electronic transactions are legally enforceable. One of its basic intents is that it is harmonized with other legislation, both provincially and federally. As one of the basic principles of the Internet is universality, it is critical that e-commerce legislation developed around the world is as consistent as possible. For instance, the e-commerce legislation proposed in Quebec has been criticized for varying in a number of respects from the uniform act legislation that is being adopted in other provinces.

Looking ahead

Bill-88 will enable complete online insurance purchases to be done with confidence that they are legally enforceable. Many websites provide information on products, but do not easily allow the binding of coverage.

It will be necessary for insurance companies to decide whether they are prepared to use electronic forms for all aspects of their operations including areas such as applications, underwriting information and proofs of loss. Utilization of electronic signatures will help to reduce one of the great uncertainties about using online applications. The decision to bind coverage electronically will be an important one for all insurance companies to consider.

In addition to concerns regarding privacy or customer information and security of electronic transactions, insurance companies must also look at the implications on their distribution systems. It is necessary to determine whether an insurance company’s e-commerce strategy is intended to assist and complement the traditional role of its brokers or to put them in direct competition.

Bill-88 is an important piece of legislation for the insurance industry and it will be necessary for all companies to be aware of its implications. The transformation from paper-based to electronic storage systems for all data stored by insurance companies as well as the use of electronic transactions will result in significant increases in effi ciency and cost savings. It is likely that at least some insurance companies will take advantage of the legal certainty provided by Bill-88 and significantly evolve their e-commerce strategies. The efficiencies of these new strategies will make it impossible for insurance companies to ignore the Internet.

Evolving field

As the Internet evolves, it is likely that frequent changes and updates to Bill-88 and other legislation will be required. New types of problems will emerge as e-commerce transactions get more sophisticated and varied. However, the legislation currently appears to be catching up to the technology – whether it remains up-to-date will be the future challenge.