Cell phones are ubiquitous and have become critical to social, professional,
and leisure activity. The cost of a smart phone is expensive, typically well
into the hundreds of dollars. To protect against loss, most manufacturers
provide a limited warranty to cover certain damages to cell phones, but often
it's for a brief period and may or may not cover perils that are introduced
outside of the cell phone's component parts.
For example, a manufacturer's warranty would likely cover a component
failure (e.g., the phone stops working) but not necessarily damage resulting
from juice or wine spilling on the device. The latter exposes consumers to
financial exposure that may not be covered without the purchase of a separate
insurance product that is outside the manufacturer's warranty or an
extended service contract.
Service Contracts and Extended Warranties
Under most state service contract laws, a consumer's electronic device
(the focus of this article is on cell phones) would have coverage if there was
a component part that failed to perform as intended; in other words, the device
breaks or has a mechanical failure. These types of losses happen, and the
industry pays out millions of dollars in losses to consumers (via repair or
replacement of the cell phone) annually. However, some states permit ancillary
benefits, such as damage, to be covered under a service contract, but the laws
are inconsistent across states and are not always clear.
Selling Insurance
Further compounding the dilemma, a producer's lines license is typically
required to sell any type of insurance. To sell insurance, however, a seller
must secure a producer's license with the applicable state and be appointed
by the insurer. Prior to portable
electronic insurance (PEI) legislation, this posed a problem because
retailers and data service providers did not have the appetite, nor the desire,
to secure such licenses for their sales associates, which are cumbersome,
expensive, and time-consuming to secure.
PEI Grass-Roots Effort
To solve both problems (providing loss, theft, and damage coverage for
consumers and thereby reducing the onerous licensing requirements for retailers
and data service providers), there was an insurance industry push to pass state
legislation to provide a consistent and clear structure around the product
development, distribution, and licensing requirements of PEI. As of the
publication date of this article, 49 states (all but Wyoming) and the District
of Columbia have passed PEI legislation in some form, which provides
much-needed clarity.
Defining PEI Legislation
In brief, the legislation outlines the requirements for those engaged in the
sale of insurance for the repair or replacement of portable electronics due to
theft, loss, or accidental damage.
The most beneficial aspect of the legislation is the relaxation of
requirements for a producer's license to sell this insurance. The following
are four types of producer licensing requirements.
- No licensing requirements—A handful of states do not
require any type of license to sell PEI. This means, therefore, that any
business or entity can sell this product to retail consumers.
- A business entity limited lines license—Approximately
half the states require a business entity to secure a license in the state it
is located and then all employees, subject to certain training and oversight
requirements, would be permitted to sell this product to retail
consumers.
- A single responsible person obtains an individual limited lines
license and then his or her employer secures a business entity limited lines
license—Approximately half the states and/or US territories require
an individual to secure first a limited lines individual license before the
limited lines business entity can be secured. The rationale is that a human
being needs to be identified as the overseer of the program and that
individual's name is required on the limited lines business entity
license.
- A specialty limited lines individual license—Only
Wyoming still has not passed PEI legislation, indicating that a specialty
limited lines license is required before this product may be sold.
PEI Loss Coverage Scenarios
With loss, theft, and damage coverage, there is more expansive coverage than
under a standard service contract, which typically only covers product failure
or mechanical breakdown. Under PEI, coverage can include any of the
following.
- Loss coverage—If a consumer were to lose his or her cell
phone while shopping at a local mall, they would have a valid claim under the
"loss" protection afforded by PEI coverage. A replacement product
would be secured on the consumer's behalf, assuming no other limitation,
exclusion, or condition applied.
- Theft coverage—If a consumer's purse were stolen,
and his or her cell phone was in the purse, the consumer would have a valid
claim under the "theft" protection afforded by PEI coverage. A
replacement product would be secured on the consumer's behalf, assuming
no other limitation, exclusion, or condition applied.
- Damage coverage—If a consumer spilled a glass of wine on
his or her cell phone, the consumer would have a valid claim under the
"damage" protection afforded by PEI coverage. The product would be
repaired—or replaced if it could not be repaired—assuming no other
limitation, exclusion, or condition applied.
Final Thoughts
PEI is a critical product for consumers in light of the escalating costs of
cell phones. With the unexpected loss, theft, or damage to a cell phone, a
consumer's life can become incredibly disrupted, exposing them to moderate
to extreme inconvenience. Having insurance protection—via PEI—can be an
effective risk-transfer mechanism for consumers to help alleviate the
challenges of a missing, lost, stolen, or broken device. Without the advent of
PEI legislation, consumers would have limited or no access to this valuable
product.