Procedural Updates

TO: REGULATED PERSONS AND ENTITIES, INCLUDING ALL INSURANCE COMPANIES, CORPORATIONS, EXCHANGES, MUTUALS, RECIPROCALS, ASSOCIATIONS, LLOYD´s, HEALTH MAINTENANCE ORGANIZATIONS, MULTIPLE EMPLOYER WELFARE ARRANGEMENTS, THIRD PARTY ADMINISTRATORS, INDEPENDENT REVIEW ORGANIZATIONS, VIATICAL/LIFE SETTLEMENT PROVIDERS, BROKERS, AND OTHER ENTITIES REGULATED BY THE TEXAS DEPARTMENT OF INSURANCE AND AUTHORIZED OR ELIGIBLE TO DO BUSINESS IN TEXAS; AND TO THEIR AGENTS AND REPRESENTATIVES AND THE PUBLIC GENERALLY

RE: The Use of Electronic Signatures and Records in Connection with Marketing and Selling Insurance and Related Products or Engaging in Other Business Regulated by the Texas Department of Insurance.

This Bulletin is intended to provide information to individuals and entities regulated by the Texas Department of Insurance (TDI) and to prompt discussions between the regulated community, consumers and TDI about transacting business electronically.

Advances in electronic technology are allowing businesses, including those regulated by TDI, to integrate various elements of electronic commerce into their operations. The Internet and electronic commerce have resulted in increased conveniences and opportunities for consumers and the industry.

Texas UETA

The 77th Texas Legislature passed and Governor Rick Perry signed SB 393 adopting the Uniform Electronic Transactions Act (Texas UETA). Texas UETA became effective January 1, 2002, and is codified as Chapter 43 of the Texas Business and Commerce Code. In accordance with federal law, Texas UETA qualifies as a statute that will “modify, limit, or supersede the provisions of section 101” (15 U.S.C. §7001) of the federal Electronic Signatures in Global and National Commerce Act (E-Sign). See, 15 U.S.C. §7002; Tex. Bus. & Com. Code §43.019. However, SB 393 does not modify the consumer disclosure provisions of section 101(c) of ESign. See, Tex. S.B. 393, §6(a), 77th Leg., R.S. (2001).

Texas UETA creates a statutory structure in Texas that supports the use of electronic signatures and electronic records in everyday public and business undertakings. Texas UETA addresses the effect of electronic transactions as follows:

1. A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.
2. A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
3. If a law requires a record to be in writing, an electronic record satisfies the law.
4. If a law requires a signature, an electronic signature satisfies the law.

Tex. Bus. & Com. Code §43.007. An “electronic signature” is defined as “an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.” Tex. Bus. & Com. Code §43.002(8). Texas UETA also provides for electronic notarization. Tex. Bus. & Com. Code §43.011; see, also, Tex. Civ. Prac. & Rem. Code §121.004; Tex. Gov´t Code §406.013. Therefore, certain insurance transactions may be conducted through electronic means.

Careful Review of Texas UETA

TDI encourages regulated persons and entities to carefully review Texas UETA and other applicable laws in connection with the use of electronic signatures and records in their business. Regulated persons and entities should develop responsible strategies to address the issues inherent in conducting business electronically. Regulated persons and entities that wish to incorporate the use of electronic commerce should conduct their own review of legal issues and technical capabilities. Regulated persons and entities may also wish to review their current forms and procedures to determine whether they need to be revised to accommodate electronic commerce. In addition, record retention procedures should be reviewed to ensure proper maintenance, security and privacy of electronic documents.

Other Applicable Law

Transactions subject to Texas UETA are also subject to other applicable law. Tex. Bus. & Com. Code §43.003(d). Regulated persons and entities should refer to the other applicable law when seeking to integrate elements of electronic commerce into their business operations. For example, regulated persons and entities should consider the following:

• Electronic transactions must comply with the privacy requirements of the federal Gramm Leach Bliley Act (GLBA), the federal Health Insurance Portability and Accessibility Act (HIPAA), and related state statutes and rules.
• Any person or entity that wishes to do the business of insurance in Texas, or engage in other business activities regulated by TDI, in any form, including electronic commerce, must be properly licensed, registered or otherwise authorized to conduct such business in the State of Texas. Surplus lines business must be properly eligible as required in Article 1.14-2 of the Texas Insurance Code.
• Any Internet site marketing insurance or other regulated products to Texas residents must comply with Texas advertising statutes and rules.
• Laws requiring that information be produced or made available to TDI also apply to information maintained electronically and information regarding electronic transactions.
• Contracts, policies and other products marketed to Texas residents by electronic commerce must meet applicable legal requirements, including the following:
  • requirements regarding free look periods;
  • formatting requirements including pagination and type size, as well as requirements that certain language be conspicuous or be placed in a certain location within a document;
  • requirements regarding prior approval; file and use subject to review and/or approval; file for information; and/or exemption from review.

Regulated persons and entities are encouraged to discuss with TDI how these statutory and regulatory requirements may be satisfied.

Voluntary Electronic Transactions

Although transactions may be conducted electronically, Texas UETA provides that the use of electronic records and signatures is voluntary. Texas UETA “does not require a record or signature to be created, generated, sent, communicated, received, stored, or otherwise processed or used by electronic means or in an electronic form.” Tex. Bus. & Com. Code §43.005(a). Likewise, a person who has consented to conduct one transaction electronically, may refuse to conduct subsequent transactions electronically. Tex. Bus. & Com. Code §43.005(c).

Information Filed With TDI

With regard to information required to be filed with TDI, Texas UETA allows Texas state agencies to determine the extent to which the agency will accept, send, create, store, process, use and rely upon electronic records and signatures. Tex. Bus. & Com. Code §43.017. In addition, Texas UETA authorizes the Texas Department of Information Resources (DIR) and the Texas State Library and Archives Commission (SLAC) to adopt rules regarding the acceptance and use of electronic records by Texas governmental entities. TDI is carefully monitoring the activities of DIR and SLAC in implementing Texas UETA.

With regard to information currently required to be filed with TDI, the sole electronic method for rate and form filing is through the System for Electronic Rate and Form Filing (SERFF). The electronic filing of agent appointments may be processed through the National Insurance Producer Registry´s Producer Information Network (PIN). The enactment of Texas UETA does not alter these designations.

Other Issues

There are emerging issues involved in conducting business electronically which will only be clarified over time as the result of court decisions and administrative actions. We look forward to discussing the issues raised by electronic transactions with consumers, agents, companies and other regulated persons and entities in an effort to provide greater market access for the consumer.

Any questions regarding this Bulletin or related issues should be directed to Ann Bright, Section Chief, Agency Counsel Section, Legal & Compliance Division by telephone at (512) 463-6411 or by electronic mail at ann.bright@tdi.state.tx.us

Sincerely
José Montemayor
Commissioner of Insurance

Lone Star Lines
Volume 8, January – March

Lone Star Lines
Special Report

Lone Star Lines
Volume 7, October – December

IMPORTANT FILING NOTICE

New rules adopted by the Texas Department of Insurance December, 2000 (28 TAC § 15.20) and by the Comptroller’s Office March, 2001 (34 TAC §3.822) require some significant changes in reporting of certain policies to the Stamping Office. These changes begin with policies you file on or after November 1, 2001 and are discussed below.

Policies Not To Be Reported

The following types of policies need not be reported to the Stamping Office:

1. 100% of premium is on exposures outside Texas.
   (Please note that under Article 1.14-2, Sec. 12(a) of the Insurance Code, agents could report premium on non-Texas exposures as if they were Texas risks and pay the tax to Texas. This option is still available to you, although there may be tax consequences in other states for the insureds.)
2. 100% of premium is exempt from tax (i.e., on risks located in federal or international waters, or under the jurisdiction of a foreign country).
   If any portion of the exposure can be allocated to Texas ( e.g., time spent in a Texas port or in Texas state waters), then that premium is taxable and the policy must be reported to the Stamping Office under the procedures outlined below.
3. 100% of premium is preempted from state tax by federal law and is on risks located entirely outside Texas.
   Federal preemptions exist for premium on policies issued to federally chartered credit unions, the National Credit Union Administration, and the Federal Deposit Insurance Corporation (FDIC) when acting as receiver of a failed financial institution that holds the property being insured. If any of the exposure is located in Texas, the policy must be reported. The Stamping Office will in turn process the premium as “non-taxable”, although there will be a stamping fee charged on the Texas premium.

Reporting of Allocated Premium

Beginning November 1, agents must report to the Stamping Office the gross amount of the policy premium, not just the Texas portion. You must allocate the policy premium according to whether the premium is on Texas exposures, on Other States exposures, or is Exempt from tax. (Again, the Insurance Code permits you to report all taxable premium as ‘Texas” if you desire.) As in the past, you should only charge a stamping fee on the premium allocated to Texas. The allocation requirement also applies to any premium-bearing item (endorsements, audits, cancellations, etc.).

You are required to maintain a record of the method you chose to allocate the premium. (28 TAC
§ 15.19) Methods of allocation are found in the Comptroller’s premium tax rule (34 TAC §3.822(c)) and include percentage of physical assets in Texas, percentage of sales in Texas, percentage of time insured’s conduct or property is exposed to coverage in Texas, or “any other method of equitable apportionment that is adequately described.”

To assist you in complying with TDI and Comptroller rules and in reporting a policy with allocated premium, we have revised both the Transmittal and Verification Slip (T &V) and the Policy Security Correction (green) T&V. These replace previous versions of the forms. We have also developed a new form to be attached to the relevant item. Copies of these forms are enclosed with this bulletin. When filing an allocated premium policy or other premium-bearing item, place an “X” in the box just to the left of the ”Named Insured” column for that policy on the new T&V. You will fill out all other parts of the T & V as you have in the past. The premium reported on the T & V is only the Texas premium. (Note: in our recently concluded agents seminars, we informed attendees that all the various premium allocations would also need to be listed on the T & V for each allocated policy. Following feedback from agents, we have decided this was duplicative and unnecessary additional work. X’ing the allocation box provides us sufficient information on the T & V.)

Next, for each allocated premium policy or other premium-bearing item, it will be necessary to use the new “Other States/Exempt Premium” form. On this form, you must show the policy number, then indicate next to each category the amount of premium that is Texas, Other States, and Exempt. Attach this form to the top of the relevant transaction in the batch you will send to the Stamping Office. Only use this form to report a policy (or other premium-bearing item) that includes non-Texas and/or tax-exempt premium in addition to the Texas premium.

To help you better understand how to use the forms, we have enclosed completed samples of both a T&V and an “Other States/Exempt” form for your review. Also, a specimen copy of each form is available for download from our website.

We know many agents are currently using a stamp on the dec page of the policy copy sent to the Stamping Office, on which you indicate the portion of a policy’s total premium that is allocated to Texas. We will consider your continued use of such a stamp to report allocated premium under the new requirements, instead of using our suggested “Other States/Exempt Premium” form. However, we ask that you call SLTX to discuss this possibility. We will not accept use of a stamp until you speak with our office.

Lone Star Lines
Volume 7, July – September

TO: ALL INSURANCE COMPANIES, CORPORATIONS, EXCHANGES, MUTUALS, RECIPROCALS, ASSOCIATIONS, LLOYDS, HEALTH MAINTENANCE ORGANIZATIONS AND OTHER ENTITIES REGULATED BY THE TEXAS DEPARTMENT OF INSURANCE AND AUTHORIZED OR ELIGIBLE TO DO BUSINESS IN TEXAS; AND TO THEIR AGENTS AND REPRESENTATIVES AND THE PUBLIC GENERALLY

Re: Implementation of Privacy Provisions Required by Texas & Federal Law

The purpose of this bulletin is to provide information about the proposed Texas Department of Insurance (the Department) implementation of privacy legislation enacted by the 77th Texas Legislature. A federal law, the Gramm Leach Bliley Act (GLBA), requires state insurance authorities to adopt standards relating to the disclosure of nonpublic personal financial information applicable to the insurance industry. It is up to a state to determine the date by which insurers, HMOs, agents and other entities subject to the regulation by that state’s insurance authority must be in compliance with the standards adopted by the state. GLBA does not impose such a date. In response to GLBA, two bills were enacted during the 77th Legislative Session: SB 712, which relates to privacy of personal financial information held by entities regulated by the Department, and SB 11, which relates to privacy of personal health information, including information held by an entity regulated by the Department.

• SB 712 requires insurers, HMOs, agents and other entities regulated by the Department to comply with the GLBA requirements relating to the disclosure of nonpublic personal financial information. The intent of the bill is that the Commissioner adopt rules based upon a model privacy regulation developed by the National Association of Insurance Commissioners (NAIC) to aid states in adopting consistent privacy requirements for regulated entities. These rules must be adopted within thirty days of the bill’s effective date, which was June 14, 2001. In order to ensure that this deadline can be met, SB 712 expressly authorizes the Commissioner to adopt these rules on an emergency basis.
• In response to SB 712, the Department plans to adopt emergency rules no later than July 13, 2001. These rules, which will be effective immediately, will be patterned after the NAIC model privacy rules and will relate to personal financial information held by insurers, HMOs, agents and other affected entities licensed by the Department. This means that as of the effective date, affected entities must immediately begin to implement privacy policies and procedures consistent with the rules. However, the Department anticipates that the B-0030-01 Page 2 of 2 rules will state that affected entities will not need to provide any required privacy notices until sixty days after the effective date of the rules. The emergency rules will be posted on the Department’s website and published in the Texas Register.
• Contemporaneously with the filing of these emergency rules, the Department will publish proposed rules for public comment prior to final adoption. Since both sets of rules serve the same purpose and will be based on the NAIC model, it is anticipated that the proposal will be substantially similar to the emergency rules.
• SB 11, which takes effect January 1, 2002, provides separate privacy and disclosure requirements for personal health information and directs the Commissioner to adopt health information privacy rules. Accordingly, the Department will propose rules for health information patterned after the NAIC model rule. These rules must also be consistent with federal Health Insurance Portability and Accessibility Act (HIPAA) privacy regulations which apply to health care plans, and other entities regulated by the Department that conduct business relating to health care plans. Although the HIPAA regulations became effective on April 13, 2001, enforcement of the regulations will not begin until April 13, 2003. It is anticipated that the HIPAA regulations may change somewhat prior to their enforcement date. The Department will monitor any new developments concerning the HIPAA privacy regulations and will incorporate the final requirements of these regulations into its rules implementing SB 11.

The Department’s goal is to carry out the privacy mandates of the Texas Legislature by implementing fair and effective regulatory and enforcement requirements that protect consumer privacy and facilitate cooperation and compliance on the part of entities subject to these requirements.

The Department will continue to provide updated and more detailed information on its web site as privacy implementation continues to progress. We recognize the industry’s need for timely and pertinent information and we appreciate your patience as we work through these highly complex and very important issues.

Sincerely,
José Montemayor, CPA
Commissioner of Insurance

Lone Star Lines
Volume 7, April – June

Lone Star Lines
Volume 7, January – March

Lone Star Lines
Special Report

Lone Star Lines
Volume 6, October – December

Lone Star Lines
Volume 6, July – September