Online Outlaws.

With hundreds of Web sites selling insurance online, state regulators face stiffer challenges to catch those that defy the law.

In June, Marti Cox of Oklahoma's Department of Insurance stumbled across an online insurance company that was doing business in the state without the proper licenses.

Cox, the assistant general counsel with the department, went online after receiving a complaint about a radio commercial that mentioned the site. She received a quote for life insurance and a sales solicitation.

The company, Life Quote Holdings Inc., is a bona fide company based in Miami that has been in business for nearly two decades. For the past five years, it has conducted business online. Although it had met all licensing requirements in its home state of Florida, Life Quote was inadequately licensed to do business in Oklahoma because it lacked a corporate license, which is required in Oklahoma but not in Florida.

Once this licensing problem was discovered, Oklahoma Insurance Commissioner Carroll Fisher slapped a cease-and-desist order on the company and its Web site, LifeQuote.com. "We can and we will enforce the insurance laws of Oklahoma, even in cyberspace," Fisher said in a statement. "An insurance sales message transmitted to Oklahoma via the Internet is still governed by Oklahoma law."

Once the department issued the cease-and-desist order, Life Quote filed for the additional licensing it needed, and the company was not fined, Fisher said. But the case illustrates how even a well-intentioned company promoting its services on a Web site may not keep up with 50 sets of state regulations--and how easy it is for an online insurance solicitor bent on deceiving the public to escape regulatory detection.

At least for now, consumers need to be wary when shopping online.

"If a buyer doesn't do his due diligence and buys on the Internet by price alone, he might find out when he files a claim that he doesn't have anything," said Fisher, who was an agent for 35 years. "What's going to happen is that we'll have some horror stories. People will be duped out of their savings without having an agent. Somebody could be selling insurance in Taiwan over the Internet, and the insured might not realize his coverage is worthless until he files a claim 25 years down the line."

Most states have a hit-or-miss approach for monitoring insurance Web sites. If regulators don't gain a secure handle on Internet transactions, the consumer fallout may not surface for many years.

LifeQuote.com is just one example of an Internet company struggling to comply with the rules of every state in which its Internet presence penetrates, said Life Quote President Eugene Gordon. LifeQuote.com provides price comparisons and sells life insurance products, predominantly term life. And federal and state governments face a challenge in trying to regulate the Internet, Gordon said.

For example, he said, some states require insurers that advertise through aggregators to have individuals working for them who are licensed in each state, but often they don't require the aggregators to have a corporate license.

"State departments are overburdened, overworked and trying to do good things for people," Gordon said. "Then along comes the Internet, and it takes them out of their state realm and puts them into a world realm. It's a very difficult task to get your arms around. Some uniform set of rules would make that easier, but corporate rules vary from state to state, so that would be a very difficult procedure for them."

Insurance Sites Proliferate 

In the world realm, online insurance businesses can pop up overnight. About 800 Web sites purport to sell insurance online, said Jeff Herr, a vice president of FinanCenter.com, which publishes research on rates, fees, features and customer-satisfaction levels for financial products and services online. But much of what is offered by insurers online is "brochureware"--that is, information about insurance--rather than interactive services, Herr said. Far fewer provide quotes, allow the user to explore insurance options and offer insurance in at least 20 states, which are FinanCenter's requirements for inclusion in its evaluation.

Herr said there are 48 interactive sites selling term life insurance, 14 for homeowners, 12 for renters and 17 for automobile. Some "exciting new entrants" to the insurance marketplace have come online in the past year, he said.

Growth is fast. FinanCenter of Tucson, Ariz., anticipates that 120 more online insurers will appear by the end of the year and another 370 by the end of next year, Herr said. Then there are bank sites (an estimated 3,300 to be online by the end of next year) and credit unions (more than 4,000 are projected to be established), and personal finance sites are No. 2 behind pornography sites as the fastest growing on the Internet, Herr said.

"It's exciting to see how the insurance industry can turn so quickly when it sets its sights on this," Herr said. "For the consumer, this is more challenging. To find the right fit is becoming more and more difficult, which is why we've set in place the comparative-shopping product."

FinanCenter.com rates companies based on consumer surveys of satisfaction. Herr said it had no plans to screen companies on such regulatory matters as state licensing. "We can't provide assurance of any kind that a particular insurance company is in compliance on a state-by-state basis," he said. "We can't police the world and have no intention of doing so.

Missouri Investigator

To help combat unregulated online activity, the Missouri General Assembly last year created a position for an investigator dedicated to online insurance transactions. The new investigator, Dana Whaley, was previously a consumer-service specialist with the Missouri Department of Insurance. Whaley randomly looks at insurance sites to see if the companies are licensed, said Kathyrn Turner, the department's investigation supervisor Whaley has found about 10 sites through which improperly licensed companies sell insurance.

Others were legitimate businesses licensed in other states but not for doing business in Missouri, Thrner said. "But the way the Internet is, we encourage them to go ahead and start the licensing process here," she said. "We don't find that many that object to licensing in Missouri and that won't respond to us."

But some argue that they are based on the Internet, not in Missouri, and that they are licensed where they are located and don't need Missouri licensing. "My suspicion is they wouldn't turn down a prospect and say they're not licensed here," Turner said, "That's the main thing, convincing [the online insurers that] anyone in the world can access them, so they need to consider disclosure on their Web site about where they are licensed."

Religion vs. Insurance

Connecticut does not have anyone assigned to monitoring online insurance activity, but one online problem has come to its attention.

That problem involved Puget's Sound Agricultural Society Ltd., Winters, Calif., which bills itself on its Web site as "a Christian membership society." The department ordered it in August to stop selling auto insurance after the department received a complaint from the state Department of Motor Vehicles.

The motor vehicle agency was alerted when a motorist couldn't renew his car registration. He listed Puget's Sound as his insurer, but the company is not a licensed insurer in the state. A spokesman for Puget's Sound, James Kalfsbeek, responded to a call with a faxed statement: "Members of Puget's Sound Agricultural Society are Christian men and women responsible for their own actions (automobile liability) accidentally damaging others in accordance with the Scriptures (we are responsible for our own actions) and do collectively have automobile financial responsibility." The company's Web site says it offers "a low-cost alternative to other plans, such as commercially available insurance." The program costs $500 a vehicle and $250 a person.

The insurance department ordered the company to stop selling insurance in Connecticut and asked how many state residents had paid for its coverage. As of press time, it still had not received a response.

Jayne McLaughlin, the department's chief of staff, said the company had been fined, quoting the maximum fine for unauthorized insurance activity is $10,000 an occurrence.

On Aug. 30, the California Department of Insurance served the company with a cease-and-desist order preventing it from conducting any insurance business. Acting Insurance Commissioner J. Clark Kelso also issued an announcement to warn consumers who have sent money to Puget's Sound that they are not covered by insurance and are at risk. He urged consumers to contact the California insurance department to verify the license of a company or agent/broker before entering into a transaction.

New Regulations

Some states have made attempts to set down rules for online insurance companies whose solicitations reach customers in their states.

New York's Department of Insurance requires Web site addresses for all its licensees that have them, and the department "examines their Web sites as part of routine market-conduct exams, reviewing them for the adequacy of disclosure and other issues," Commissioner Neil Levin said in a written response to a request for an interview. "In addition, the department 'suds' the Internet for violations such as illegal solicitations and unlicensed operations of an insurance business."

In August, California enacted a law requiring online insurance companies to display their names as they appear on their state licenses, their license numbers and the state of domicile or principal place of business. It defines an online transaction as providing an insurance premium quote to a California resident, accepting an application for insurance from a California resident or otherwise communicating with a resident about the terms of an insurance policy. The bill states that an Internet presence maintained by or on behalf of an unlicensed insurer will be considered an advertisement and must comply with California laws relating to advertisements.

Florida has a similar law. According to insurance department spokeswoman Nina Bottcher, all state insurance code statutes and administrative rules governing the solicitation and transaction of insurance apply to Internet sales. These include the department's Life and Health Advertising Rules and its Insurance Unfair Trade Practices Act.

The Florida department does not have a separate and distinct Internet-monitoring unit, but existing regulatory units "routinely monitor" online insurance ads and related solicitations, Bottcher said. These watchdog units include Insurer Services, Agents and Agency Services, Division of Insurance Fraud, and Consumer Services.

Florida's most significant case of online insurance fraud occurred in May 1998, when a Miami insurance agent was arrested by the fraud division and accused of using the Internet to solicit people with HIV to take out life insurance policies and not disclose their medical conditions to the carrier, Bottcher said. The 45-year-old agent--who was licensed--was caught when a would-be client contacted fraud investigators after receiving a solicitation via e-mail. An investigator then posed as a prospect, and the agent filed an untrue application for a $50,000 policy with a life insurer in Kansas. The agent, who pleaded no contest to one count of filing a false insurance application, lost his license and was placed on two years' probation.

But Bottcher said it is difficult to make certain that a Florida resident or nonresident agent is the entity transacting insurance with state consumers. "The Internet also provides a greater opportunity for agents or unlicensed people to knowingly or unknowingly market insurance for unauthorized insurers to Florida consumers--and consumers in other states, for that matter," she said.

"Regulatory and law enforcement agencies are rapidly expanding their technological ability to monitor and detect violations in connection with Internet insurance sales," Bottcher said. "However, this marketing technique is growing very rapidly, and the mere volume of Internet solicitation and sales makes it difficult for agencies to detect all possible violations."

Badge of Honor

While individual state insurance departments have their own ways of regulating online insurance transactions or are in the process of developing them, the American Council of Life Insurers is developing an Internet certification program that is designed to help member companies use the Internet more effectively as a business tool.

If ACLI decides to formally launch the Assure Seal program, here's how it would work: Participating companies will add a small icon--a kind of seal of approval--to their Web pages. When a consumer double-clicks the icon, it provides information about how to know whether a site is legitimate. The icon page also will provide links to learning more about shopping for insurance and links to regulators.

"The fact that the seal is there provides a level of security, but there are additional things we can do, like hitting a link that stores the information in the consumer's computer records," Senior Counsel David Leifer said. "The idea is to not make this burden-some for consumers. We don't want to take them away from the company Web site."

The council has been at work on the project for about two years during which time it consulted with several vendors. Its main goals have been to give consumers a tool to feel sure that they know where they are on the Internet and to tell consumers how personal information is handled.

Leifer said the ACLI met with the National Association of Insurance Commissioners in August regarding Internet security. The NAIC was or is considering doing some of these things themselves, so we had a bit of a philosophical discussion on who is better suited to do it," he said. "We had a frank discussion. It was in keeping with our general view of government in this country, that to the greatest extent possible, industry should lead and government should backfill, like protecting children from pornography. We think government should let the industry try to come up with solutions."

More recently, Assure Seal developers have been working on screening for licenses by providing links or phone numbers to state insurance departments. Leifer said the NAIC is developing a national database of licensed producers and companies, but it doesn't exist yet. Once Assure Seal is up and running, ACLI might solicit licensure information and build its own database, Leifer added. He said there is some precedence: The National Association of Securities Dealers has a system through which consumers can check a database on registered brokers.

Though the Assure Seal program is slated for insurance companies on the Web, Leifer said it could eventually be made available to producers and large online aggregators like Quotesmith.com

The NAIC also wants to assure consumers that they are dealing with legitimate insurers and that the group is in the early stages of finding ways to authenticate Web sites. But a proper/casualty trade group, the Chicago-based. Alliance of Amencan Insurers opposes regulators having authority over every insurer's Web site, said Patrick Watts, assistant vice president for regulation, tax law and claims. The ACLI proposal ought to be given a chance to operate before a regulatory hand comes in," he said.

The Alliances basic stance is that there should be no regulatory constraints on electronic advertising that aren't also on paper advertising, said Charles Schmidt Jr., a spokesman the group.