Background and Introduction
Insurance company executives and agents warned in 1996 that despite a growing number of online shoppers, insurance is not a commodity, and the "freewheeling nature of the Internet [renders it] a difficult marketplace to police."1 They cited the regulatory hurdles and potential for fraud that make the online marketing and sale of insurance more difficult than other products.2 The National Association of Insurance Commissioners (NAIC) at that time had charged its Market Conduct and Consumer Affairs (EX3) Subcommittee with reviewing some of the issues raised by the use of the Internet in the marketing and sale of insurance, including issues regarding: electronic signatures, fund transfers and applications; privacy and confidentiality; policy forms; and producer and company licensing.3 Two years later, the NAIC issued a white paper in 1998 on "The Marketing of Insurance Over the Internet," noting that "Internet technology is clearly no longer considered a fad." 4
These discussions seem dated today, where "[b]uying from insurers directly online is increasing globally, and in many countries is the predominant distribution channel."5However, regulatory hurdles and fraud continue to present new and ever-evolving challenges for regulators, the regulated community and consumers. The use of e-commerce has become easier and widely available, and the number of online shoppers for insurance has skyrocketed. Indeed, a significant number of today's consumers prefer to obtain immediate information from the Internet, and online marketing and sales have provided unprecedented opportunities for the insurance industry to expand and grow into previously untapped markets and geographic areas. It is estimated that 2.27 billion people now actively use the Internet. As its use grows, so, too, do consumer confidence and demand, and so, too, do new issues and concerns for regulators, the regulated community and consumers.6
Albeit somewhat reluctantly, the traditionally conservative insurance industry has embraced Internet technology, and the use of social media sites, such as Twitter, Facebook, YouTube and LinkedIn, to market and sell insurance is common. The NAIC Market Regulation and Consumer Affairs (D) Committee established a Social Media Working Group in response to the evolving marketplace and the industry's use of social media, and that group issued a white paper in 2011 addressing "The Use of Social Media in Insurance,"7 based on standards first articulated by the Financial Industry Regulatory Authority (FINRA). The white paper was formally adopted by the NAIC in order to provide some guidance to insurance regulators and the regulated industry, and the NAIC has made numerous revisions to its Market Regulation Handbook to address social media issues. Still, regulatory hurdles and confusion persist, and insurance fraud continues.
The Various Approaches to Internet Marketing and Sales
Broadly speaking, insurance marketing and sales on the Internet are offered in one of two ways: by a "single source site," which is a single insurer or insurance producer seeking to market or sell insurance, or by so- called "insurance malls," such as Insweb or QuickenInsurance, which provide the consumer with access to a number of insurers and/or producers, which, in essence, operate as "super agencies" allowing for comparison shopping. The content offered on these sites may be either "static"---merely providing information to the consumer---or "interactive"---actually engaging in an online exchange of information with the consumer.
The differences in the various approaches to the online marketing and sale of insurance raise a myriad of differences in compliance issues, implicating advertisements, licensing, product approvals, referrals and solicitations, and the payments of commissions and fees, among other matters. The Federal Trade Commission (FTC) has established guidelines that are applicable to Internet advertising, many of which have been adopted by the states. Moreover, as with more traditional insurance transactions, online insurance transactions are regulated on the state level. Compliance with the insurance statutes and regulations of all jurisdictions can be difficult, at best, and the marketing and sale of insurance on the Internet cannot always be handled uniformly, or easily, setting traps for the unwary. Nonetheless, the bottom-line goal is for regulators to be confident that insurance consumers are protected.8
"Who's on First?" and "What's on Second?"
The first issue to be considered by regulators and the regulated industry in addressing compliance is who is actually doing the marketing and selling of the insurance product. As always, the role of the insurance intermediary is key: Who is "soliciting," "negotiating" and "effecting" insurance coverage? As the Social Media Working Group noted in its 2011 white paper, "understanding the insurer-producer relationship is critical when determining the insurer's responsibility for its appointed producers' social media communications."9
Typically, the marketing and sale of insurance on a single source Internet site is offered by an insurer---doing business either directly or through independent or employee agents---or by the agents themselves. Many direct insurers offer product information on their own websites and may maintain social media sites such as Facebook, directing Internet users to a link for an online request for a quote. Agency insurers may ask for information on a website, which may be forwarded to an agent to provide a quote and issue the policy, or to a company representative who will call the consumer to confirm the information before providing a quote. Some states continue to require that insurers use a producer licensed by the state and appointed by the insurer in order to sell insurance. Due, in large part, to the consumer demand for immediate information as well as varying regulatory requirements, many traditional agency companies also are using direct response sales on the Internet, striving to balance the competition for online sales with their agency force.
The second issue to be considered by regulators and the regulated industry in addressing compliance is what type of content is being used on the Internet? Some Internet activity is passive, controlled by the consumer, while other activity is interactive. Is the website content "static" or "interactive?" This, too, raises separate regulatory concerns which can be more difficult to define with precision. As stated, "static" content refers to information that remains posted until it is changed. The NAIC white paper on social media treats the information on static sites similarly to information provided in more traditional communications by insurers or agents. However, the advertising laws and regulations of most states also extend to the Internet. Thus, insurance licensees engaged in social media activity must ensure that their postings comply with all laws in all applicable jurisdictions: This includes both insurance laws as well as advertising laws.
Some of the Compliance Issues Raised by Internet Marketing and Sales
By way of brief illustration of some of the regulatory issues presented by the use of the Internet for marketing and selling insurance, the New York State Insurance Department (NYSID) issued a comprehensive Circular Letter No. 5 in 2001 and numerous interpretative Office of General Counsel (OGC) opinions thereafter providing guidance to the regulated community on what constitutes an "advertisement," "referral" or "solicitation" on the Internet under New York law, implicating numerous commission and licensing issues.
Where static online content is provided, New York deems the website to constitute an advertisement, and compensation to a non-licensee may be paid. Thus, for example, an insurance licensee's hypertext link posted on a non-licensee's website may be considered an advertisement where it does not include recommendations, endorsements or promotions.10 "If the link is an advertisement, compensation to the non-licensee can be based on per lead or per sale of an insurance lead."11 However, the owner of a website recommending or endorsing a licensee may be paid a referral fee by the licensee, so long as the website owner is not compensated based on the online user's purchase of insurance.12 While these issues are specifically addressed by New York, the laws of each applicable jurisdiction must be reviewed, and not all jurisdictions offer as much guidance. Many states permit licensees to share commissions with unlicensed persons so long as they do not solicit, negotiate or effectuate the sale of insurance. Some jurisdictions do not allow commission splitting, although they may allow the payment of referral fees. And there are a handful of jurisdictions which continue to prohibit the payment of any fees.
Additionally, licensing issues frequently arise with respect to Internet marketing and sales as well. New York requires that where the website is actually soliciting insurance, the agent or broker as well as the insurer be licensed.13 Where the website is advertising products or services offered by an unauthorized insurer in New York, the website must contain a "clear and conspicuous disclaimer."14 Again, the statutes and regulations of each applicable jurisdiction must be considered in order to avoid compliance issues with licensing.
Where interactive websites provide instant quotes, make coverage available immediately, and have the capacity to provide an insurance identification card and/or issue a policy electronically, many other regulatory issues may arise. Thus, where the site content is interactive, such as communications on social media sites like Twitter and Facebook, the NAIC has recommended a more case-specific approach to compliance. Many social media issues have been addressed by state regulators through the consumer complaint process, and many state regulators also review insurers' use of social media as part of their market conduct examinations. The NAIC's Social Media Revisions to its Market Regulation Handbook are designed to assist state regulators in this regard.15 With respect to marketing and sales, the Handbook provides that the "regulated entity's and the producer's websites should be reviewed with the following questions in mind":
- Does the website disclose who is selling/advertising/servicing for the website?
- Does the website disclose what is being sold or advertised?
- If required by statutes, rules or regulations, does the website reveal the physical location of the regulated entity/entities?
- Does the website reveal the jurisdictions where the advertised product is (or is not) approved, or use some other mechanism (including, but not limited to, identifying persons by geographic location) to accomplish an appropriate result?16
With respect to Internet advertisements, the Handbook directs the examiner to:
- Run an inquiry with the regulated entity's name;
- Review the regulated entity's home page;
- Identify all lines of business referenced on the regulated entity's home page;
- Research the ability to request more information about a particular product and verify the information provided is accurate; and
- Review the regulated entity's procedures related to producers advertising on the Internet and ensure the regulated entity requires prior approval of the producer pages, if the regulated entity name is used.17
Finally, with respect to the review of social media, the Handbook revisions provide, in relevant part, that where "a regulated entity is using social media, the examiner should review the regulated entity's policies and procedures with regard to regulated entity handling of complaints received via social media." The Handbook directs the examiner to:
- Perform a search of social media sites with the regulated entity's name;
- Identify social media sites in which the regulated entity is active;
- Review identified social media sites and verify any product information provided by the regulated entity is accurate;
- Review the regulated entity's policies and procedures to identify the personnel involved in monitoring the regulated entity's marketing and sales-related social media activity;
- Review the regulated entity's policies and procedures for tracking marketing and sales-related social media requiring regulated entity review; and
- If the regulated entity requires preapproval of producer advertising on the Internet, review the regulated entity's preapproval procedures to determine whether the regulated entity identifies marketing and sales-related social media as also requiring regulated entity preapproval.18
A Case Study In Regulatory Traps for the Unwary
The Order issued by the Superintendent of the Maine Bureau of Insurance in the matter of In Re FCHCN Insurance Agency, Inc., is a good example of the regulatory hurdles which arise in marketing and selling insurance online where a licensee is not aware of the requirements of all jurisdictions.19 In that matter, First Choice Health Care Network, Inc. (FCHCN), a Florida corporation, marketed coverage in or about 2007 and 2008 under a group accident and sickness health insurance policy issued by Guarantee Trust Life Insurance (GTLI) through an Internet website, where Internet consumers were directed to call a toll-free number for more information. FCHCN was not licensed as a producer by the State of Florida until 2010. FCHCN's representatives solicited insurance coverage to callers to that number and sold coverage to 17 Maine residents. FCHCN was not licensed by Maine as an insurance producer.
As a result, the Superintendent charged FCHCN with several violations of the law, including: the failure to become licensed in Maine prior to selling, soliciting or negotiating insurance; the failure to obtain an insurer appointment from GTLI; paying a commission or fee to an unlicensed individual for soliciting insurance; and deceptively using and assuming a name without revealing the name of an actual insurer. Ultimately, FCHCN entered into a consent agreement with the Superintendent and the Attorney General, admitting the violations and paid a civil penalty of $15,000.
Insurance Fraud Creates Traps for the Unwary as Well
Finally, regulators, the regulated industry and consumers must continue to be vigilant in using the Internet, which continues to provide ever-increasing opportunities for fraud, including insurance fraud. Some of the more common cyber fraud insurance schemes mentioned by NAIC and state regulators include:
- Fake websites, which promise insurance coverage from what appears to be a reputable insurance company.
- Copycat websites with company logos, where the consumer later learns that the real insurer never received the application or the payment.
- Websites offering insurance at low rates, and the consumer later finds out that the policy offers inadequate coverage and limited benefits, or that the policy is worthless.
- Websites facilitating identity theft, where the consumer provides personal details online in order to obtain insurance.
- Websites facilitating premium theft, where an agent advertises online, provides a fake policy to the consumer upon payment of the premium, and keeps the premium payment for themselves. 20
The latest emerging fraud trend spawned from the increase in online insurance sales has been dubbed "ghost brokering:" The "ghost broker" will alter key underwriting details provided by the consumer online in order to obtain a lower premium for the insured and then charge a fee for their services.21
The NAIC and virtually all state regulators have been proactive in attempting to provide consumers with information to assist in making educated decisions on purchasing insurance online. 22 Insurance consumers should take precautions to make sure they are dealing with a legitimate company, compare all coverages quote-for-quote, read all materials carefully, use caution in providing personal information, and be especially wary of insurance offers obtained by e-mail.
Conclusion
The Internet is borderless, and while state regulation is becoming more consistent in many respects, regulatory hurdles and fraud continue, and traps for the unwary remain. Familiarity with the advertising and insurance laws of all applicable jurisdictions is necessary when using the Internet for the marketing and sale of insurance. While both regulators and the regulated industry continue to address these issues, consumers, too, need to review and understand their insurance requirements and needs as well as their coverage options before purchasing insurance online.
1. Joseph B. Treaster, Internet Sales Offer an Insurance Alternative,N.Y. Times, Sept. 6, 1996.
2. Id.
3. National Association of Insurance Commissioners, The Marketing of Insurance Over the Internet (1998).
4. Id.
5. Stuart Rose, Who You Gonna Call? Insurers Aim to Bust Ghost-Brokering Practice, Property Casualty 360° (Aug. 14, 2013), at http://www.propertycasualty360.com/2013/08/14/who-you-gonna-call-insurers-aim-to-bust-ghost-brok.
6. See, e.g., id.
7. National Association of Insurance Commissioners, The Use of Social Media in Insurance (Dec. 20, 2011),http://www.naic.org/store/free/USM-OP.pdf.
8. Id.
9. Id. at 3.
10. NYSID OGC Opinion, Referral Fee to Websites (Feb. 13, 2003).
11. Id.
12. Id. See, also, NYSID OGC Opinion, Internet Solicitation and Licensing (July 14, 2000).
13. NYSID OGC Opinion, Internet Web Site (June 30, 2001). See, also,NYSID OGC Opinion Internet Advertising (May 24, 2004).
14. NYSID OGC Opinion, Internet Advertising (Sept. 26, 2003).
15. See Chapter 16 Social Media Revisions (June 3, 2013), available at http://www.naic.org.
16. Id.
17. Id.
18. Id.
19. In Re: FCHCN Insurance Agency, Inc., Docket No. INS-12-214 (Aug.22, 2012), available at http://www.maine.gov/pfr/insurance/consent_agreements/2010-2014/12214.html.
20. See, e.g., N.J. Offers Tips to Assist Consumers Who Purchase Auto Insurance Online, Insurance Journal (July 31, 2013) available at http://www.insurancejournal.com/news/east/2013/07/31/30013.htm;Purchasing Insurance Online, at http://www.insurance.ohio.gov/newsroom/tips/pages/onlinebuying.aspx;Buying Insurance on the InternetâShopping Tips and Dangers, at http://www.tdi.texas.gov/pubs/consumer/cb091.htm; Protect Yourself:Buying Insurance on the Internet, at http://www.michigan.gov/difs/0,5269,7-303-1 and http://www.insurance.utah.gov/auto-home/auto/.
21. Rose, supra note 5.
22. Supra note 20.-----------------------5