OGC Op. No. 04-03-22

The Office of General Counsel issued the following opinion on March 24, 2004 representing the position of the New York State Insurance Department.

Re: Electronic Insurance Notices to Lenders

Questions Presented:

1) May an insurance company doing business in the State of New York send statutorily required notices electronically to a lender of insured property, who is identified in the insurance policy and who has agreed to accept such notices in an electronic format?

2) If a statutorily required notice is sent electronically by the insurance company to the lender, and the statute under which it was sent requires the insurance company to maintain proof of mailing of such notice, what kind of proof that the notice was given will suffice?

Conclusions:

1) Yes. Where an insurance company is required to provide a notice to a lender named in the policy, even where the statute specifies that a "written notice" be provided, sending such notice electronically to a lender who has agreed to accept notices electronically would be in compliance with the statutory requirement.

2) An electronic record that an electronic notice was sent by the insurance company to the lender would suffice as long as the electronic record is accurate and capable of verification.

Facts:

XYZ, Inc., acting on behalf of insurance companies, sends lien holder and mortgagee notifications to lenders of insured properties. These lien holders and mortgagees have lent money for the purchase of the properties insured under the insurance policies in question. The lenders have an interest in the insured properties as collateral for the loans.

XYZ, Inc. wishes to be certain that its operations conform to state law. Therefore, it has written to the Department to seek information as to the application of New York Insurance Law to such notices that are provided electronically.

Analysis:

New York State enacted the Electronic Security and Records Act ("ESRA") as part of Chapter 4 of the Laws of 1999 that added the State Technology Law as new Chapter 57-A of the Consolidated Laws, N.Y. Tech. Law §§ 101-109 (McKinney 2003). ESRA establishes a legal framework in New York for the conduct of electronic commerce. Pursuant to N.Y. Tech. Law § 105(3) (McKinney 2003), electronic records are given the same force and effect as records not produced by electronic means. Section 109 provides that the use of electronic records must be voluntary. An entity or person is not required to use an electronic record (or to accept the transmission of

a required notice electronically), unless otherwise provided by law. Thus, under New York law, electronic transactions in New York have the same force and effect as paper transactions, as long as the recipient agrees to accept electronic notice.

Section 102(2) of ESRA defines the term "Electronic record" as follows:

2. ‘Electronic record’ shall mean information, evidencing any act, transaction, occurrence, event, or other activity, produced or stored by electronic means and capable of being accurately reproduced in forms perceptible by human sensory capabilities.

A statutorily required notice, sent to the recipient electronically would constitute an electronic record under ESRA. As such, it is given the same force and effect as a notice not produced by electronic means. However, under ESRA a lender receiving a notice electronically must have agreed to such.

The federal "Electronic Signatures in Global and National Commerce Act" ("E-Sign"), 15 U.S.C.A. §§ 7001-7031 (West Supp. 2003), also provides that electronic records may not be denied legal effect, validity or enforceability solely because they are made electronically.

Section 3425(n) provides that, with respect to covered policies for which the insurance company submits bills for real property insurance premiums directly to a mortgage investing institution, or other such institution or agent as designated in writing by the mortgage investing institution under a real property insurance escrow account, the insurance company must send copies of notice of cancellation for nonpayment of premiums to both the insured mortgagor and the mortgage investing institution (i.e. lender).

New York Insurance Law §§ 3425 and 3426 do not contain a general requirement that notices of cancellation or non-renewal of personal or commercial property/casualty insurance policies be sent by insurance companies to lenders of the properties insured under the policies. However, if a particular policy were to name such a lender as an additional insured to whom notice of cancellation or notice must be given, then the insurer would have to give notice in accordance with the provisions of the policy.

As to a mortgagee under a policy providing fire insurance, New York Ins. Law § 3404(e) requires notice to the mortgagee. If a loss under the policy is made payable, in whole or part, to a mortgagee not named in the policy as the insured, the mortgagee’s interest in the policy may be canceled by giving them at least ten days’ written notice of cancellation. The statute does not require insurance companies to retain proof of delivery of such notice.

The Department construes laws that require "written notice" as encompassing electronic notices. In Circular Letter No. 33 (1999), which you may view on the Department’s Web site at www.ins.state.ny.us, the Department opined that where a statute requires written notice, notice sent electronically meets the statutory requirement. Accordingly, provided that the insured, lender or other loss payee, or mortgagee consents to receiving the notice in electronic format, there would be no prohibition against the insurance company providing the notice electronically. Electronic notices, as all electronic documents, must comply with all applicable requirements of the Insurance Law, including any applicable formatting and proof of mailing requirements.

As to motor vehicle liability insurance required under the New York Vehicle and Traffic Law, we suggest that you contact the New York State Department of Motor Vehicles for its interpretation as to whether insurance companies are required under that statute to provide notices of cancellation or nonrenewal to lienholders upon the insured motor vehicle.

Although the New York Insurance Law does not require insurance companies sending electronic notices of cancellation or nonrenewal of their policies to mortgagees or other lenders to retain proof of delivery, an insurance company may nevertheless wish to maintain proof of delivery in order to defend itself in potential litigation. As to what constitutes proof of mailing or delivery of a notice that is sent electronically, E-Sign, § 7001(d)(1), which addresses the retention of records, provides in pertinent part, as follows:

Thus, if a notice is sent electronically (necessarily implying that the recipient of the notice has consented to accept notices from the insurance company in electronic format), the proof of mailing and delivery could also be in an electronic format. It would be an electronic record of transmission. There is no requirement that proof of mailing or delivery of an electronic notice be in any particular format. However, in order to comply with E-Sign it should be accurate and capable of verification so as to be reliable proof that indeed such notice was sent to the intended recipient, whether the recipient be the named insured under the insurance policy, or a mortgagee or other lender of the property insured.

For further information you may contact Associate Attorney Barbara A. Kluger at the New York City Office.