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Regulation and Compliance

Insurance Protection on My Cell Phone

Aaron Lunt | September 2, 2016

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Smartphone with a shield in front of it

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.

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