Internet Insurance and State Regulation - Are You Within Their Reach?

The Internet, as a medium for business, has facilitated commercial relationships and transactions by allowing effortless communications and interaction on a global level. This has arisen due to the consensus that this new medium presents an opportunity for corporations to reach a great number of individuals for a relatively low cost. Thus, as boundaries increasingly become non-existent within the context of cyberspace, a struggle of some significance to develop and find new ways of dealing with traditional legal issues has resulted.

Understandably, the possibilities that this new medium creates also brings with it new legal quagmires. For the corporate layman, the development of a commercial website may seem innocent within the context of the promotion or sale of the corporation's products or services. However, certain legal pitfalls loom behind that simple mouse click. What rules should govern that anonymous communication in cyberspace? Where should a plaintiff file suit when his claim results from cyberspace activity? Which jurisdictions will require the entity to comply with its licensing laws based on the website? This last question is of particular importance to insurers and brokers.

To answer these questions a newly formed body of law is evolving that attempts to apply traditional legal principles of jurisdiction and morph them into new standards for the unique situations that the information superhighway presents. It can be argued that cyberspace jurisdiction is presently in a state of disarray. No special tribunal exists to decide cases arising out of internet activities, nor is there an international treaty that governs internet jurisdiction. Currently, courts are split on how and when contacts made via the internet are sufficient to confer jurisdiction and have been inconsistent in their analyses of minimum contacts and purposeful availment established via the Internet.

There is a general understanding that the activities of a website must be taken in their totality to determine whether a state can gain jurisdiction. While there is little case law or insurance department opinion on this matter, a test has been formulated which examines the aggregate of the corporation's activities to determine whether support could be found for finding permanent and continuous contacts with the State.

Jurisdictional decisions are currently being based on a sliding scale formulation which determines whether the activity of a website is sufficient to show that the corporation has purposefully availed itself of the forum. The determining factors for the formulation include the nature of the defendant's site, the level of interactivity and whether the site is commercial in nature.

The first level of this sliding scale encompasses websites used as billboards. A site such as this is simply used for the posting of information and is made accessible to users in almost any jurisdiction. Recent court decisions have found that such a passive website does not, from a commercial perspective, maintain grounds for the exercise of jurisdiction.

The middle ground of the sliding scale is occupied by interactive websites, which allow users to voluntarily exchange information with the company. In such cases jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs.

Interactive websites: Presently, this middle ground analysis is most important to corporations which are implementing a presence or are already present on the web. Features such as the ability to obtain a quote, request information via email or snail mail, preview a policy, complete an online policy, request customer support, make inquiries and review policy information may very well lead a corporation into having to defend itself in a forum in which it was not prepared to do so.

At the other end of the spectrum are companies that actively engage in business transactions over the internet. These websites have ordering features that allow insured's to prepare an application and actively purchase policies from the company. Such a commercially active website would inevitably be deemed to have availed itself of the privileges of doing business in the forum state resulting in jurisdiction.

In the context of the insurance industry, the various state insurance departments have followed the lead of the state courts in applying a sliding scale formulation to determine whether they would exercise jurisdiction and require licensure of an insurance entity (insurer, agent, broker, etcetera) or make it subject to its laws and regulations. It is apparent that the various states each apply this sliding scale with different degrees of severity. However, all insurance entities should be aware that the more interactive their website the more likely it is that they would be subject to a states laws and be required to obtain licensing in that state or submit to state regulation. Therefore, companies that operate a website that may be deemed to be interactive should weigh the costs involved in potentially having to comply with the various state laws against any perceived benefits or income that may be derived from the operation of the website.

John F. Larkin

Michael C. Giordano

Shawn R. Singh

New York