A Framework for Designing an Effective e-Signature Process: Part I -- The Building Blocks

The Electronic Signatures in Global and National Commerce Act ("ESIGN") became effective in October 2000, but insurance industry participants have been slow to seize the opportunities created by this federal law. With significant developments in consumer broadband, e-connectivity options such as residential cable modems, WIFI and DSL, along with relatively flat growth in traditional new business channels, many in the industry think that now is the opportune time to adopt and employ an e-signature process. This article is the first installment of a three-part series that describes a framework for analyzing the legal risks associated with implementing an effective e-signature process. The e-signature process may be for new business opportunities, policyholder services, or even agent licensing and appointment. This installment covers the basic provisions of ESIGN that provide the foundation for implementing an e-signature process; the second installment will cover the significant risks in implementing such a process (including challenges unique to voice signatures) and potential mitigants to those risks; and the third installment will cover defending or enforcing electronic signatures in litigation.

ESIGN - The Federal Electronic Signature Law

Recognition of e-Signatures and e-Records

ESIGN does not require anyone to use or accept an electronic signature or record; however, the law specifically provides that a signature may not be denied legal effect solely because it is in electronic form. Electronic signatures are only one important element of the federal ESIGN law. The law also: (i) permits delivering documents, which are required to be in writing (even if no signature is involved), exclusively through electronic means; and (ii) permits companies to satisfy statutory record retention and retrieval requirements exclusively through electronic means. ESIGN excludes from the scope of its provisions certain bodies of law, such as domestic law and cancellation of life (not annuities) and health insurance policies. The specifically excepted areas tend to be specialized and the great majority of commercial transactions fall within the coverage of ESIGN.

Federal and State Law Interplay

ESIGN, the federal law, does not preempt entirely state laws dealing with electronic signatures. States may adopt their own versions of electronic signature laws based on the model Uniform Electronic Transactions Act ("UETA") as published by the National Conference of Commissioners on Uniform State Laws. As of the date of this article, at least 42 states have adopted UETA in one form or another. Not all of those states have adopted "pristine" versions of UETA, and therefore the state versions that are not pristine adoptions of UETA might be preempted in whole or part by ESIGN. With one exception, we have found the differences between the state and federal law on most issues relevant for insurance transactions to be insignificant, as a practical matter, in designing and implementing an effective e-signature process. That one exception relates to consumer disclosure requirements contained in ESIGN, but not UETA or state enactments of UETA. Consequently, the consumer protection provisions in ESIGN apply even in those states that have adopted a pristine version of UETA. This makes ESIGN particularly significant because it is one of the few federal laws governing the business of insurance. Further, with its broad preemption provisions and its interplay with similar state laws, ESIGN allows insurance firms to develop a national electronic signature strategy based on provisions of ESIGN.

What is an "electronic signature"? Selecting the method of electronically signing a document or record is the relatively simple element of an effective e-signature process. Under ESIGN (or the applicable state law), an electronic signature can be as simple or complex as:

• clicking "I Agree;"
• saying into a recording device, "I Agree;"
• using digital signature with PKI technology;
• using a peripheral device that records an image of one's signature; or
• other ways using an electronic sound, symbol or process attached to or logically associated with the document or record, which is executed or adopted by a person with the intent to sign.

  Verifications and Acknowledgements

  Verifications and acknowledgments required by law to be in writing, such as replacement notices required for sales of life insurance by various insurance codes, are expressly permitted to be delivered in electronic form under ESIGN in certain circumstances. ESIGN essentially provides that if a law requires a disclosure to be provided by a certain method that includes acknowledgment of receipt, that disclosure may be given electronically if, and only if, the electronic method for providing that disclosure also includes a process or method for capturing electronically an acknowledgment.

  "Statutorily Required" Disclosures.

  ESIGN expressly permits disclosures that are required by law to be provided to consumers "in writing" to be provided exclusively through electronic means if certain conditions are met. These conditions include: (i) obtaining the consumer's consent to receive the disclosures electronically; (ii) providing certain disclosures to the consumer to evidence the consumer's consent to receive the required disclosures electronically; (iii) receiving the consumer's consent to obtain disclosures electronically prior to when in the sales transaction the disclosure sought to be electronically delivered is required by statute to be given; and (iv) providing a mechanism for the consumer to later access the record of the disclosure that was the subject of the consumer's consent. Failure to comply with the ESIGN disclosure requirements does not render void or voidable the underlying transaction (for example, the application for insurance or the insurance policy ultimately issued), but could subject the company to regulatory sanctions for failing to provide the required disclosures (such as the replacement notice) in accordance with applicable law. There may also be civil remedies available to consumers if the disclosures are deemed to have not been given effectively. As will be covered in the second installment, satisfying the consumer disclosures requirements in telephone calls using voice signatures is complex and difficult.

  e-Record Retention

  ESIGN allows an archived electronic record to satisfy applicable statutory requirements that a contract or other document be retained "in writing," if the electronic record is maintained in a form capable of being retrieved by all parties for later reference. In addition, ESIGN recognizes that records of a transaction (whether completed electronically or not) may be archived exclusively through electronic means, but failure to archive the records in a way that allows the record to be accurately reproduced could result in the unenforceability of the agreement represented by the electronic record and regulatory sanctions for failing to maintain the proper records.

  The elements of ESIGN set out in this installment of our ESIGN series establish the basic building blocks for a legally compliant e-signature process. The next installment in our series will discuss issues commonly encountered when evaluating an e-signature process and possible ways to mitigate or otherwise effectively resolve those issues.

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  The authors practice in the Atlanta office of the law firm Lord, Bissell and Brook, LLP and can be reached at [email protected] and [email protected], respectively. Both authors concentrate a significant portion of their practice on issues involving electronic records, electronic signatures and electronic commerce. The authors' colleague Pat Hatfield made a contribution to the article.

  June 17, 2004 - Mock Trial on Electronic Signatures
  Register - www.lordbissell.com/mocktrial