The following Middle Market Insight* originally appeared in the North Carolina Bar Association’s Insurance Law Newsletter.
Lawyers across the state have increasingly incorporated laptops, smart phones and tablet computers into the tools of the legal trade. Judges too use laptops from the bench, and will admit that they increasingly read court papers on tablets, as opposed to carrying around a thick sheaf of printed briefs. The proliferation of portable electronic devices on the market, both among the general public and the business user, has spawned a new category of insurance: portable electronics insurance. Whether you are purchasing an Amazon Kindle for your personal use, an Apple iPhone for your law practice, or advising individual or business clients about Android business tablets, it is worth knowing about this new type of insurance.
What is Portable Electronics Insurance?
Statutes authorizing portable electronics insurance have either been enacted, are pending, or have been proposed, in over 45 states and in Washington D.C. This type of insurance is similar to traditional inland marine insurance and covers a wide variety of electronic devices from a wide variety of causes of loss. The definition of an included device is typically broad; it certainly includes a digital camera, a laptop, a tablet computer, a smart phone, and a handheld GPS unit.
The majority of states have passed these portable electronics insurance statutes in the last several years. North Carolina’s version was passed in 2011 and is codified at N.C.G.S. § 58-44A-1, et seq. The goal of such legislation was to balance consumer protection with insurance regulatory burden. The statutes provide a layer of consumer protection and oversight to the selling of these specialty consumer contracts – typically add-ons for an additional monthly fee at the point of purchase – without subjecting the manufacturers and retailers to the full burdens of becoming admitted insurance carriers or fully licensed insurance producers.
North Carolina defines portable electronics insurance to be insurance coverage for the repair or replacement of portable electronics which may include coverage for loss, theft, and inoperability due to mechanical failure, malfunction, damage, and other similar causes of loss. N.C.G.S. § 58-44A-1(5). This definition is similar to the definition adopted in many other states. The statutes passed across the country clarify the relationship between the seller of the insurance and the insurer issuing the policy. See, e.g., N.C.G.S. § 58-44A-15. This includes which party will collect the premiums, what disclosures must be made, how to file a claim, and what the termination conditions are. See, e.g., N.C.G.S. § 58-44A-10(a)(1)-(5).
The legislation, both in North Carolina and in all other states which have passed similar statutes, was designed to rein in the “Wild West” atmosphere that included both manufacturer-supplied contracts, retailer-supplied contracts, and third-party contracts purporting to cover loss or damage to devices. Under nearly all versions of the statute, sellers of portable electronics insurance are required to have a limited lines insurance license, certain written materials must be available to consumers, vendor employees must be trained according to certain guidelines but are not required to each hold insurance producer licenses, and requirements for billing, cancellation, and refunds are established. The process for a business to obtain the limited lines insurance license in order to sell portable electronics insurance is relatively simple and only requires the payment of a fee, the submission of an application to the Commissioner of Insurance, and a certification from the issuer of the insurance. N.C.G.S. § 58-44A-25.
North Carolina’s statute, like those in other states, require particular types of written materials to be available where portable electronics insurance is sold. N.C.G.S. § 58-44A-10. Additionally, the seller must disclose that purchase of the insurance is not required to activate service on the device and must summarize the coverage (including the identity of the insurer, whether there is any deductible amount and what that amount is, what are the benefits of coverage are, and the key terms and conditions of coverage including whether it includes repair or replacement with either new or remanufactured parts. N.C.G.S. § 58-44A-10(a)(3)-(5). The claims process must also be explained to the customer. N.C.G.S. § 58-44A-10(b). Unlike most states, North Carolina does not include special termination requirements in the statute. The adverse action terms – such as termination or modification of coverage – are only required to be set forth in the policy but are not established by statute. See, e.g., N.C.G.S. § 58-44A-10(d).
The statute does not state anywhere that there are limitations on remedies for aggrieved consumers. Providers or sellers of portable electronics insurance are not exempt from either N.C.G.S. § 58-63-15 or N.C.G.S. § 75-1.1.
Who needs it?
Nearly every American consumer who has purchased a portable electronic device has been offered an extended warranty or insurance plan, either from the manufacturer, the retailer, or an aftermarket third-party seller. One purpose of the portable electronics insurance regulations is to clarify that the purchase of such a policy may duplicate existing coverage that the consumer already has.
Among the mandatory disclosures, the seller is required to state that the coverage offered may be a duplication of coverage which the insured already has under a homeowner’s or renter’s policy or service contract. See, e.g., N.C.G.S. § 58-44A-10(a)(1). Prior to this disclosure requirement, many purchasers of these contracts were paying additional charges each month for insurance on their portable devices and may not have realized that the device was already covered under their existing policies.
Of course, there are numerous valid reasons to purchase specific portable electronics insurance even if those items are already covered under a policyholder’s homeowners or renters policy. Among them, the deductible on a homeowner’s policy may be higher than the value of the portable device (a cell phone or GPS unit which has a replacement cost of less than $250 in many cases) and a separate policy avoids having to file a small personal property claim against a homeowner’s policy.
An additional point to consider is that while the legal definition of portable electronics insurance includes coverage for theft or simply losing the item (see, e.g., N.C.G.S. § 58-44A-1(5)), many of the popular manufacturer-provided policies only provide coverage for physical damage. In order to obtain coverage as broad as legally-allowed – coverage that includes losing the device itself or having it stolen – the consumer would have to consider either retailer or third-party provided policies.
What lawyers need to know about it.
For lawyers representing manufacturers, sellers, or other providers of portable electronics insurance, the fact that nearly every state has a similar statute based on a model act may seem like a godsend. However, certain key provisions of these statutes vary widely from state to state. The regulatory scheme set up by portable electronics insurance continues to be patchwork and regulatory lawyers and those advising businesses will still have to conduct 50-state surveys.
The statutes, including in North Carolina, are not limited to only personal or household use, and would apply to all manner of electronic devices purchased or used for business or commercial uses. In North Carolina, the statute simply states that it covers “electronic devices that are portable in nature, their accessories, and services related to the use of the device.” N.C.G.S. § 58-44A-1(4). This concise definition would include everything from a simple flashlight to the most complex piece of engineering, surveying, or portable scientific equipment. Other states have adopted definitions which provide detailed lists. In California, portable electronics insurance is insurance for “personal, self-contained, easily carried by an individual, battery-operated electronic communication, viewing, listening, recording, gaming, computing, or global positioning devices, including cell or satellite phones, pagers, personal global positioning satellite units, portable computers, portable audio listening, video viewing or recording devices, digital cameras, video camcorders, portable gaming systems, docking stations, automatic answering devices, their accessories, and service related to the use of those devices,” and any other electronics device which is portable in nature and approved by the insurance commissioner. California Insurance Code, § 1758.69 (d)(1)(A),(B).
Another reason for the variation among states are the exclusions. Many, including the North Carolina statute, exclude from the definition of “portable electronics insurance” any “service contract or extended warranty providing coverage limited to the repair, replacement, or maintenance of property for the operational or structural failure of the property due to a defect in materials, workmanship, accidental damage from handling, power surges, or normal wear and tear.” N.C.G.S. § 58-44A-1(5)(a). When reviewing a contract, the lawyer has to first determine whether the contract can be treated as an extended warranty or service contract, and is thus outside the regulatory scope of the portable electronics insurance provisions.
The practitioner must fully understand the law of service contracts and extended warranties to determine whether a particular device or contract is subject to a state’s portable electronics insurance statute or falls within the existing regulatory scheme for service contracts. This can be a tall order because while nearly all states have adopted a mostly-uniform portable electronics statute, the law on service contracts and extended warranties is widely varied, vague, and often under-developed. Service contract and extended warranty law typically originated with automobile extended warranties and has been (or has not been) extended to appliances and other personal property. Not only is there variation between protecting only consumers for household use or extending the protection to business and commercial users as well, but certain states require service contracts to be backstopped by a commercial insurance policy from a rated carrier, while other states do not regulate service contracts at all.
North Carolina regulates portable electronics insurance in the same way as many other states, however our state has not adopted the model Service Contracts Act. As a result, if a lawyer is reviewing a contract to determine whether it is a portable electronics insurance contract (subject to Chapter 58 and the Department of Insurance’s oversight) or a service contract (excluded from regulation and licensure), exclusion has vastly different outcomes in North Carolina compared to other states. In some states, service contracts are regulated in great detail, including mandatory language in the contract, requirements regarding the financial stability of the service contract provider (minimum net worth, deposit of a bond with the Department of Insurance, or the purchase of a commercial insurance policy to backstop the service contracts) and certain mandatory terms of the contract. See, e.g., Connecticut General Statutes § 42-260; Mass. Chapter 175, Section 149M.
Another difference for the practitioner to note is that no state expressly provides in its portable electronics insurance statute for the provision of indemnification for consequential losses. Historically, the quintessential example of a consequential loss was the freezer that fails which resulted in the spoilage of all of the food which was kept in the freezer. Certain states allow the seller of the freezer to indemnify the purchaser for the value of the lost food under warranty or service contract law.
As applied to the electronic device world, can a seller of a device indemnify the buyer for losses which result in the failure of the device? If the contract is determined to be one for portable electronics insurance, the answer is probably not. Under the portable electronics act as adopted in nearly every state (including North Carolina) providers are not permitted under the limited lines license to make a contract with a customer that provides for additional indemnification that results from the loss or destruction of the electronic device. Contrast this with service contracts, where some states expressly permit, or leave it to the discretion of the insurance commissioner, as to whether the contract can include indemnification for consequent losses. Ark. Code § 4-114-103; California Business and Professions Code, § 9855-9855.9; Mass. Chapter 175, Section 149M.
Additionally, the status of any particular contract a lawyer reviews is further uncertain because there are no cases construing or applying any of the Portable Electronics Insurance Acts from any states. At the same time, there is only limited and sporadic caselaw across the country regarding service contracts and warranties for non-automobile personal property. Thus, even in light of the implementation of a mostly-uniform portable electronics insurance act across the country, the continued ambiguities of service contract law and the uncertain application of it means that a lawyer faced with reviewing or applying a particular contract may still have an onerous process.
What we do know is that portable electronics insurance, like traditional insurance, is that it is subject to state law, including judicial construction and regulations promulgated by the insurance commissioner. If advising business clients regarding a contract they would like to offer, the lawyer must closely examine the contract and determine whether the contract is offering portable electronics insurance, a service contract, or neither, to avoid regulatory violations, fines, and other potential liability. If advising consumers, the lawyer must be able to fit the contract within the applicable regulatory framework to understand what types of obligations the seller has to one’s client and what types of remedies are available.