Most people think of a “contract” as a paper document signed by both parties to be charged. Since the advent of the electronic signature, however, that no longer applies in all cases. The purpose of this article is to alert agencies to a possible risk arising out of electronic signatures in making an inadvertent contract through an electronic transaction. There have been two reported Massachusetts cases where a party to an email communication has inadvertently created a binding contract.
For insurance agencies, besides the risk that all businesses have of making an inadvertent commercial agreement, there is the risk that the agency may create an E&O exposure through an inadvertent electronic signature creating a binding undertaking to provide coverage.
Electronic signatures became valid through federal and state statutes
Electronic records and electronic signatures have become an important part of the Massachusetts insurance industry. All of these advances have resulted primarily from two laws. The federal E-Sign act effective October 1, 2000, and the Massachusetts Uniform Electronic Transaction Act (“MUETA”) effective February 18, 2004. The purpose of these two acts were to validate electronic signatures, contracts and other records for most commercial transactions.
Except for consumer disclosure procedures required by the federal act, the Massachusetts act applies to electronic transactions in the commonwealth.
Electronic signatures can cut both ways in the insurance agency business
For most agencies, electronic applications with an insured’s electronic signatures have become a relatively commonplace part of the insurance selling process. However, in the course of obtaining electronic signatures from insureds and implementing electronic signatures one may forget that the purpose of the law allowing electronic signatures is to have any parties to an electronic communication assent to an agreement electronically. Under MUETA, an “electronic signature” means:
…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.”
Any type of symbol that the sender intends to use to “sign the record” will suffice to create a valid electronic signature.
Once a party creates a valid electronic signature under MUETA, the assent evidenced by that electronic signature can lead to an “agreement”which is defined by MUETA as: “the bargain of the parties in fact, as found in their language or inferred from other circumstances and from rules, regulations, and procedures given the effect of agreements under laws otherwise applicable to a particular transaction.” Such an agreement falls under the definition of a valid and enforceable contract defined as: “the total legal obligation resulting from the parties’ agreement as affected by [MUETA]and other applicable law.”
In a fairly recent lawsuit, a simple response in an email reply sufficed as a an electronic signature and as an assent to a contract under MUETA that satisfied the written contract provision of the statute of frauds in a real estate transaction gone wrong.
Court holds email’s “signature block” or “From” line can satisfy MUETA signature requirements
In Massachusetts, all contracts for the sale of real estate or any interest in or concerning real estate is not valid unless there is a an agreement or some memorandum “in writing and signed by the party…” or an authorized agent.
In a 2012 Superior Court case, the lawyer for a real estate buyer had emailed a revised offer to purchase property that included the purchase price and the closing date to the seller’s attorney. The seller’s attorney returned an email the next day stating that the seller needed a written approval from the bank by the close of business that day which the buyers provided. The email concluded with the statement, “I think we are ready to go.”
When the sale subsequently fell through and the seller refused to proceed, the buyer sued the seller for specific performance. The seller’s defense was that the emails could not satisfy the statute of frauds as they did not constitute the required statutory writing under the statute of frauds.
The superior court judge noted that the lack of guidance on “the intersection between the 17th‑century statute of frauds and 21st-century electronic mail”.
However, the judge applied MUETA and found that the statute of frauds did not apply because there was a sufficient writing evidencing the agreement in the emails between the attorney and the assent by the seller’s attorney to the deal.
The Superior Court judge found that the email “signature block” or the “from” portion of the email in question could suffice as electronic signature under MUETA.
Because there was no appropriate disclaimer in the seller attorney’s email the court found that there was an agreement to conduct negotiations under MUETA and that the statute of frauds had been satisfied. Thus, through the inadvertence the seller’s attorney’s email formed a legally sufficient contract because of his electronic signature.
Inadvertent contracts through emails have also caught large corporations. In the Massachusetts Appeals Court case, Basis Technology Corporation v. Amazon.com, Inc. 71 Mass. App. Ct. 29 (2008), Amazon’s attorney replied to an email that stated the material terms of a lawsuit’s settlement stating that the parties would “take all reasonable steps to memorialize in a written agreement…” along with “such are the terms that are reasonably necessary to make these terms effective.” Amazon’s attorney responded with an email stating the single word, “correct.”
When the parties could not agree on the other terms “reasonably necessary” to the written agreement, the case went back to court and the Superior Court and then the Appeals Court ruled that Amazon’s attorney’s email reply to the original email outlining the settlement that contained the single word “correct” was sufficient to create a binding settlement agreement based on the terms of the original email.
The E&O risk of inadvertent electronic contracts under MUETA
A number of Agency Checklists’ articles have discussed the potential errors & omissions liability of insurance agents. These articles have shown that under Massachusetts law insurance agents as a general rule are insulated from many errors and omissions claims by two important principles:
- The first is that absent special circumstances insurance agents” have no general duty ‘to ensure that the insurance policies procured by the insured provide coverage that is adequate for the needs of the insured.’” “Agency Checklists,” October 25, 2014, “Appeals Court Reaffirms That Neither Agents Nor Companies Liable For Failure To Advise Insureds As To Adequacy Of Insurance Coverage.”
- The second is that the Supreme Judicial Court has reaffirmed that the insured has the duty to read a policy when received and request changes if the policy does not meet his or her coverage needs. “Agency Checklists,” September 16, 2013, “Agent’s E&O Exposure Limited by Mass. Supreme Judicial Court Case
Neither of these rules apply if an insured suing an agent for negligence can “show that special circumstances prevailed that gave rise to a duty on the part of the agent to ensure that adequate insurance was obtained.” Special circumstances have been held to include “assertion, representation and reliance.”
However, the rules of electronic contracts under MUETA create the real possibility that an email exchange between the agency and an insured could create a binding contract to obtain insurance.
The issue has not arisen, as yet, in Massachusetts. However, the ease of inadvertently contracting to obtain a specific policy or coverage under MUETA make such a possibility very real. For example, a hypothetical situation might be one where an insured emails an agent and requests a specific policy or coverage. If the agent responds in a manner that could be reasonably interpreted as an undertaking to obtain that specific coverage there could be a binding contract. The agent’ s assent to the contract could be evidenced by a statement in a reply as simple as “We can take care of that” or similar language of assent. When coupled with some symbol “executed or adopted by [the agent] with the intent to sign the [reply email], the agent has put his electronic signature under MUETA on the email and the contract.
If for whatever reason, the agency inadvertently made this contract and did not place the coverage the insured believed was contractually required, and uncovered loss could create a serious E&O exposure.
How does an agency avoid making an inadvertent contract under MUETA?
It is almost a universal practice of agents to put on their voice mails and on the voice mail messages of their staff the mantra to the effect: “Coverage cannot be bound via email, fax or voicemail. Insurance coverage cannot be bound without a written binder from our office.”
A leading insurance agency professional liability carrier recommends that insurance agencies “Include disclaimers on voice mails, out of office automatic emails, websites and social media sites.” The draft disclaimer for emails this company recommends has a confidentiality provision and then states:
Also for your protection, coverage cannot be bound or changed via voice mail, email, fax or online via the agencies website, and is not effective until confirmed directly with a licensed agent.”
This particular format does nothing, in my opinion, to avoid the possibility of an unintended contract under MUETA.
A better disclaimer for emails and for all electronic transactions may be one that uses the specific terms of MUETA to opt out of creating an electronic contract. MUETA provides in §5 (b) that it:
…applies only to transactions between parties each of which has agreed to conduct transactions by electronic means.”
The statute continues stating that:
Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.”
Based on this provision of MUETA there are any number of possible disclaimers that might be attached to the signature block or an existing disclaimer block of an email to state that the author of the email does not agree that the emails between the parties should be considered a “transaction by electronic means” subject to MUETA.
Disclaimers proposed by various commentators on avoiding inadvertent contracts have had various formulations. One directed its language to the findings of the Superior Court decision mentioned above regarding ‘signature block” and the “From” email address suggesting:
The sender of this email expressly opts out of the Massachusetts Uniform Electronic Transactions Act (M.G.L. chapter 110G), and intends that the “signature block” and “from” portion of this email not be construed as an “electronic signature” or evidence of an intent to be bound as provided in the Act.”
Another suggested “one can include in one’s standard email signature block a disclaimer stating[:]”
[This] email is not intended and shall not constitute an electronic signature giving rise to a binding legal contract, unless expressly stated otherwise in the body of the email by the sender.”
Finally, a third suggested:
Emails sent or received shall neither constitute acceptance of conducting transactions via electronic means nor shall create a binding contract in the absence of a fully signed written agreement.”
I might use something more tailored to the opt out provision of MUETA, such as:
The sender does not intend that this email, including any related emails, to be a transaction or transactions by electronic means subject to the Massachusetts Uniform Electronic Transactions Act.”
If agents reading this article believe that inadvertent contracts or undertakings under MUETA pose an E&O risk, then they may wish to consult with their own counsel to craft a disclaimer. Also, agents or agencies that operate in multiple jurisdictions should seek legal advice as to each such jurisdiction for appropriate language for an electronic signature disclaimer or electronic means transaction disclaimer.