Electronic Signature Law Could Increase Internet Sales

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The U.S. House of Representatives passed legislation on Wednesday that would make it easier for companies to sell insurance and financial products directly to consumers through the Internet. The Senate also was expected to pass the legislation as soon as late last week, and President Clinton said he would sign it into law.

The Electronic Signatures in Global and National Commerce Act, S. 761, would allow electronic signatures -- unique codes that consumers could transmit through the Internet -- to be used instead of handwritten signatures to authorize contracts for mortgages, loans, insurance policies and other products and services that traditionally require pen-on-paper authorization. Consumers would be able to sign agreements through the Internet authorizing contractors to perform home improvement projects, for example.

The law, known as ESIGN, would cover interstate commerce nationwide. A few states already have approved electronic-signature legislation for transactions conducted within the state.

The federal legislation was expected to receive broad, bipartisan support after legislators spent months resolving their differences on the law. Some Democrats, backed by the White House, were pushing to include more protections for consumers in the bill, while some Republicans were pushing to make the bill favorable to businesses that conduct e-commerce, according to reports.

Several online insurance companies and lenders already offer their products online, though they have to include a step in which they obtain a physical signature on paper. That step adds cost to what otherwise would be a more efficient process, the companies say.

"What we're doing now to work around [the lack of electronic signatures] is use paper and wet signatures, and that stinks," said Jack Rodgers, executive vice president at Mortgage.com, Sunrise, FL. "The fact that Congress is looking at passing electronic-signature legislation that covers all 50 states has, potentially, the ability to increase our efficiencies tremendously."

With traditional mortgage arrangements, the approval process can take as long as six months, he said, in part because of paperwork.

"What this has the potential to do is take a mundane, $7-an-hour paperwork job and eliminate it, and then those savings could be passed along to the consumer," Rodgers said.

Many insurance companies, in a rush to take advantage of e-commerce efficiencies, have found ways to work around the lack of signatures in cyberspace.

For example, Geico, a leading direct marketer of auto insurance based in Washington, already issues policies through the Internet without a signature in most states. The company can issue a policy that is good for 30 days, complete with proof of insurance that consumers print out directly from their computers. During those 30 days, Geico investigates the applicant's driving record and sends through the postal service a new policy that the applicant must sign and return to the company.

Under a law allowing digital signatures, the process of sending the policy to applicants and obtaining their signatures apparently could be conducted entirely through the Internet.

A Geico spokesman said the company had no comment on the potential effect of the legislation.

Pat Hatfield, who has followed the legislation closely for the Atlanta law firm Morris, Manning & Martin LLP, said the key provision of the bill that benefits insurance companies is its pre-emption of any conflicting state laws.

"That's significant, because contracts are usually governed by states," he said. "But e-commerce is certainly national in nature."

ESIGN has exemptions for which electronic signatures would not be valid, including mortgage cancellations, will authorizations, and divorce and marriage contracts. The bill also would let consumers continue to use handwritten signatures for all contracts if they prefer.

The legislation would become effective Oct. 1.

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