Insurance Provider Settles Case Due to Deficiencies in Electronic Signatures, Electronic Evidence, and Contract Drafting

By Mehmet Munur

A District Court in New York recently decided a case where the perfect storm of messy contract drafting, which left a key term undefined and ambiguous, lack of proper evidence to prove the date of formation of the contract, and deficiencies in electronic signatures forced a life insurance provider to settle the case. While the court held that the electronic signatures used to sign the life insurance application survived summary judgment, the definition of the term Participant was vague and could not result in summary judgment for the insurance company. The case highlights the importance of precisely defining terms in a contract, building appropriate procedures for proving the existence of electronic contracts, and procedures for identifying the person electronically signing documents.

Neil Dukoff, an AICPA member, and Shari Dukoff, as his dependent, entered into a group life insurance contract with Prudential Insurance for Mrs. Dukoff using an electronic application in 2004. After Shari Dukoff passed away in May 2006, Prudential refused to honor the insurance contract arguing that the insurance contract was based on material misrepresentations in the application related to Mrs. Dukoff’s cancer surgery. Both sides moved for summary judgment, both motions were denied.

I. Prudential’s Arguments for Summary Judgment

Prudential made two arguments for summary judgment. First, it argued that there was no valid contract because Mr. Dukoff was not a party to the contract. Second, Prudential argued that the contract was procured through fraud and was, therefore, invalid. In both cases, Prudential could have helped resolved the issues by properly defining and using the words “Participant,” “Dependent,” “I,” and “My.”

A. Parties to the Contract

The court denied Prudential’s motion for summary judgment on the ground that Mr. Dukoff was not a party to the contract because there was enough doubt as to whether Mr. Dukoff or Mrs. Dukoff signed the contract. The court also found that the contract was ambiguous as to who was the intended party.

Prudential argued that there was no contract because Mrs. Dukoff was in the hospital recovering from surgery during the time she was to have signed the contract. Prudential offered as evidence a computer printout showing that the contract was submitted on May 15, 2004, the date on which both parties agree that Mrs. Dukoff was recovering from surgery in the hospital. However, Mr. Dukoff stated under oath that the contract was signed around March or April 2004. The court held that this printout was not sufficient to accurately show that the date reflected was the date of submission.

Needless to say, this is far too small a digital footprint for a contract that was formed online. Prudential could have built systems that logged applications submitted on its servers. In this log, Prudential could have recorded the time, location by IP address, unique cookie information, and other information related to the submission of the application and produced this evidence in trial. Prudential could have sent an automatic confirmation email to the email address of the applicant right after the submission of the application online. Finally, Prudential could have shown that a confirmation letter was sent several days after the submission with welcome letters and the signed contract. It is likely that Prudential had one or more of these processes in place. However, Prudential did not present any of more evidence than the printed contract with the date. Counsel for Prudential may have been more worried about the ambiguities in the contract than the proving the exact date of formation of the contract.

The court then turned to the language of the contract to address these ambiguities. In at least one section, “the applicant state[d] that ‘I’ authorize Prudential to access ‘my’ medical records to determine eligibility for insurance.” Considering that Mr. Dukoff did not need to provide his medical records, the court concluded that this language pointed to Mrs. Dukoff as the party to the contract. The certificate of coverage was of no use because it stated both names on it. Adding apparent authority and ratification issues to the mix, the court decided that there was a genuine issue of material fact as to who were the parties to the contract.

B. Procurement through Fraud

The court then turned to Prudential’s second argument for motion for summary judgment: fraud. However, the court did not need to address the admissibility of the evidence related to Mrs. Dukoff medical records and fraud. Once again, there was a genuine issue of material fact as to whether Prudential challenged the validity of the contract in the appropriate time.

Prudential contested the validity of the insurance policy after more than 2 years of its effective date. However, Prudential argued that the contract allowed it to contest its validity using Mrs. Dukoff’s statements 2 years after her death. The court found that the undefined term “Participant” made the language related to challenge within 2 years ambiguous. The contract and the certificate of insurance stated:

Incontestability of Dependents Life Insurance
This limits Prudential’s use of a Participant’s statements in contesting an amount of Dependents Life Insurance for which the Participant is insured with respect to a dependent. These are statements made to persuade Prudential to accept you for insurance.
They will be considered to be made to the best of your knowledge and belief. These rules apply to each statement:
(1) It will not be used in the contest unless:
(a) it is in a written instrument signed by the Participant; and
(b) A copy of that instrument is or has been furnished to the Participant or the Participant’s Beneficiary.
(2) If it relates to the dependents [sic] insurability, it will not be used to contest the validity of Dependents Life Insurance which has been in force, before the contest, for at least two years during the Participant’s lifetime.

The court held that the term Participant was not expressly defined and could refer to either Mr. Dukoff or Mrs. Dukoff. On the one hand, the terms “Participant Insurance” and “Dependent Insurance” appropriately and respectively referred to Mr. Dukoff and Mrs. Dukoff. On the other hand, the sentence above relating to “statements made to persuade Prudential accept you for insurance” suggested that Mrs. Dukoff was the Participant.

Most importantly, the last statement quoted from the contract above suggested that the Participant’s statements would not be used to contest validity of the Dependent’s life insurance for at least two years during the Participant’s lifetime. However, the lack of definition of the words “Dependent” and “Participant” resulted in ambiguity in deciding whose words could be used against whom. Therefore, the court returned to basic contract interpretation and sought extrinsic evidence, considered the New York statute where the language was supposed to have come from, and lacking additional evidence to the parties’ intent, rejected Prudential’s motion for summary judgment.

Such key terms should have been appropriately and clearly defined, especially if they were capitalized. Additionally, Prudential might have been better served by inserting the required language directly from the statute, which referred to “statements made by any person” instead of the complex Participant and Dependent scheme that Prudential created.

II. Mr. Dukoff’s Arguments for Summary Judgment

In its motion for summary judgment, Mr. Dukoff argued, among other things, that the statements related to Mrs. Dukoff’s health were not signed due to the failure of the electronic signatures scheme that Prudential used. The court held that particular information used in the application was sufficient to identify her as the person signing the application; therefore, Mr. Dukoff was not entitled to summary judgment on the issue.

The insurance contract prohibited the use of statements made by the insured that was not “in a written instrument signed by the [insured]” to contest the contract. Thus, Mr. Dukoff argued that Mrs. Dukoff did not sign her statements. In return, Prudential argued that the electronic signature on the application satisfied the NY Electronic Signatures and Records Act as well as the contractual requirement for written statement and signature. The New York law states that electronic signature “shall have the same validity and effect as a signature affixed by hand.” The law also defines electronic signature as “an electronic sound, symbol, or process, attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the document.” The court then turned to Prudential’s application process to determine whether it complied with NY law.

Prudential used a “standard” click through that included the following language at the end:

*I agree By submitting this form, I hereby request coverage under the CPA Spouse Life Insurance Plan. I have read the Conditions Applicable to This Subscription on this web site and agree to those statements and conditions. I also hereby subscribe to the AICPA Insurance Trust in accordance with Member’s Subscription and agree to the applicable conditions.

The applicants also had to enter home address and social security numbers. Prudential argued that this click-through agreement and the use of the identifiers satisfied the definition of electronic signature under NY law.

Not finding any case that invalidated a contract based on electronic signatures, the court turned to State of New York Insurance Department opinions. One particular Opinion stated that, generally speaking, a checked box on an electronic form on the Internet constitutes a valid electronic signature so long as it abides by the definition of electronic signature under the New York law. However, the opinion then added that such technology must be “capable of verifying that the person providing the electronic signature is actually the party to be charged. “ The Opinion further stated that “without such verification measure in place, the Department would not consider a checked box to be a valid signature.” Based on this Opinion, Mr. Dukoff argued that Prudential did not have the means to verify the identity of the person electronically signing the document.

The court deferred to the Opinion but it seemed puzzled by one finding. The NY legislature had removed a reference to a requirement for the electronic signature to include a unique identifier capable of verification from the law several years ago. More specifically, the NY law used to require a unique identifier “capable of verification, under the sole control of the person using it, attached to or associated with data in a manner that authenticates the attachment of the signature to particular data.” The court must have felt that the Opinion inserted back this unique identifier and verification requirement. Therefore, in its interpretation, the court changed the “actual identification” language of the Opinion to “reasonable identification” of the person. However, this being a motion for summary judgment, the court’s finding that “it is at least possible that Prudential satisfied this requirement” by using identifying information, such as address, social security number, and physical description, is excusable.

However, considering that the electronic signature in this case was supposed to be able to distinguish between a husband and a wife signing an application for a $500,000 life insurance, the click-through could not have satisfied the standard created by the Opinion. Under the circumstances, provision of the three pieces of information cannot actually identify the person signing the document. The technology supporting the electronic signature was required to identify the person signing the application to a higher degree of certainty than reasonable identification. Here, Prudential did not have the technology or the processes in place to ensure that Mrs. Dukoff and not Mr. Dukoff electronically signed the application. Considering the amount of money at stake, Prudential could have authenticated the signature by sending a password via text message to her cell-phone, via email to her email address, via mail to her home address, or using any other similar method. The first two methods would likely help distinguish between a husband and a wife signing a document under most circumstances. However, it is unlikely that any of these circumstances would help distinguish between the two when one of them is in the hospital recovering from surgery. This is probably one reason that other life insurance companies require applicants to sign their applications over the phone using a voice signature.

In sum, this perfect storm of electronic signatures that barely survived legal scrutiny, lack of evidence proving the date on which the contract was signed, and contract terms that were confusing even to the court to interpret resulted in Prudential having to settle the case shortly after it lost its motion for summary judgment. This case is just another reminder that companies must continue to pay attention to the fundamentals of contract drafting while at the same time paying particular attention to electronic signatures and electronic evidence relating to those contracts.

The case is Prudential Ins. Co. of Am. v. Dukoff, No: 2:07-cv-01080-ADS-MLO (E.D.N.Y. Dec. 18, 2009).

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Court Strikes Down Electronic Signature Due to Weak Security Procedures

By Mehmet Munur

The US District Court in Kansas held on February 19, 2009 that the data security procedures Dillard’s Stores had created to authenticate the electronic signature its employees used to execute an arbitration policy were not sufficient. While the case may have turned on its particular facts, Dillard’s could have avoided such problems by abiding by ISO 17799 procedures in operating its electronic signature systems.

The plaintiff, Yolanda Kerr, successfully kept her claim in court because she disputed the formation of the arbitration agreement. In 2005, Dillard’s started requiring current and new employees to sign an electronic arbitration agreement through its intranet system. In theory, Dillard’s associates executed their agreements using either a social security number or associate identification number and a unique confidential password followed by clicking an “I accept” button. The plaintiff refused to electronically sign the arbitration agreement for nearly six months despite alleged threats from supervisors and the store secretary that she would be fired if she failed to do so.

In April of 2006, the plaintiff missed a day of work. When she showed up for work on April 28, she told the store secretary that she had missed the day of work because she did not have access to the intranet site that contained her schedule. To give her access to the schedule, the secretary accompanied the plaintiff to a computer kiosk, reset her password to the default password, and demonstrated how to access the system. Then the store secretary took control of the computer again and navigated through various screens with the plaintiff beside her. Plaintiff alleged that the store secretary electronically signed the arbitration agreement at this point. After the interaction at the computer, the two left the break room together. Five minutes later, the system automatically sent the employee’s account an email confirming the execution of the arbitration agreement. The email stated that failure to reply to the email would deem agreement to the plaintiff’s electronic signature of the arbitration agreement. Someone opened the email but did not respond. Dillard’s later terminated the plaintiff for allegedly calling a supervisor a profane name. The plaintiff sued for discrimination and Dillard’s attempted to compel arbitration at court.

In analyzing the electronic signature, the court concluded that Dillard’s failed its burden to show through a preponderance of the evidence that the plaintiff knowingly and intentionally executed the agreement for two reasons. First, the court did not want to impute the electronic signature to the plaintiff due to the possibility, however minimal, that the store secretary may have fraudulently executed the agreement while plaintiff was standing beside her. Second, the court held that Dillard’s did not have adequate security procedures in place to restrict unauthorized access to the execution of the arbitration agreement. While the record showed that the employees were at the kiosk on April 28, it did not show that the plaintiff was at the kiosk precisely at 3:26:20. In other words, Dillard’s failed to show that the username, authentication, and the signature coincided with the employee’s log in. It is unclear whether Dillard’s systems had the capacity to log such information or if Dillard’s failed to produce such evidence. Nevertheless, the two factors persuaded the court hold that Dillard’s had not satisfied its obligation to show that there was an enforceable arbitration agreement.

In sum, Dillard’s electronic signatures system failed for two reasons. The systems failed to log associates’ access to the system and the system did not require that the associates change their default passwords immediately. In fact, both policies, are recommended under of ISO 17799 Information technology — Security techniques — Code of practice for Information Security Management. ISO Section 10.10.1 Audit Logging requires that “[a]udit logs recording user activities, exceptions, and information security events should be produced and kept” and include “dates, times, and details of key events, e.g. log-on and log-off.” Arguably, the formation of a legally binding agreement that compelled arbitration is such an event. Furthermore, ISO Section 11.2.3 User Password Management requires that “when users are required to maintain their own passwords they should be provided initially with a secure temporary password . . . , which they are forced to change immediately.” Here, it appears that Dillard’s system continued to operate and allow either the plaintiff or the store secretary to electronically sign the arbitration agreement. Implementing both of these procedures would have greatly helped Dillard’s satisfy its burden. However, it is unlikely that ISO 17799 would not have protected Dillard’s store secretary from fraudulently executing the arbitration agreement by either using the default password or using the plaintiff’s username while she stood by her side.

Unfortunately, the court was not too impressed with the security procedures that Dillard’s already had in place because they were violated. For example, associates were prohibited from sharing passwords and supervisors could only log into associate’s accounts if they reset their password to the default password. Dillard’s also posted notices regarding the confidentiality of passwords. Nonetheless, the two employees, in effect, shared their username and their password and the authentication failed because the system could not keep track of the actual person that signed the agreement. Such user failure combined with a weak logging and password feature resulted in the failure of the electronic signature.

The case is similar to Campbell v. General Dynamics, No. 03-11848-NG (D. Mass. June 3, 2004) where the court held that the employer could not prove an employee’s acceptance of an arbitration policy simply by sending a link to the policy in an email. There General Dynamics proved that the employee had opened the agreement but could not show that he had indeed clicked on the link or agreed in any other way. Furthermore, that email did not even mention the importance of the arbitration policy until its fifth paragraph. The court had noted that General Dynamics could have required the plaintiff to signify his acceptance by a return email he had read the email and accepted the conditions of the arbitration policy. In sum, both the employers in Campbell and Kerr failed to successfully use the technology they had available to them.

This case should set a good example for all employers using electronic signatures for policies. IT, HR, and Legal Departments may need to collaborate to ensure that established security procedures such as the ISO 17799 are used for variety of issues including authentication, accurate system audit logs, and password resets. Moreover, all industries depending on electronic signatures should focus on security procedures to preempt the argument that the electronic signatures they collect do not in fact belong to their system users.

The case is Kerr v. Dillard Store Services, Inc., No. 07-2604-KHV, (D. Kan. Feb. 17, 2009).

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