On November 16, 2018, an Article 78 legal proceeding was filed in the Albany County Supreme Court jointly by both Big I NY and PIA NY, acting together, to challenge the First Amendment to NY Insurance Regulation 187; the title of the Amended Regulation is Suitability and Best Interests in Life Insurance and Annuity Transactions.^[1] The purpose of the Article 78 legal proceeding is to have the court declare that the First Amendment to the Regulation that was promulgated by the New York Department of Financial Services (“NYDFS") is invalid and should be stricken.  The First Amendment to Regulation 187 was approved by NYDFS Superintendent Maria T. Vullo on July 17, 2018, and it will take effect on August 1, 2019.  In this issue of the E&O Report we will review some of the key elements of the First Amendment to NY Insurance Regulation 187 and the various legal arguments that have been made concerning why the Amended Regulation should be annulled.

There are six separate and distinct legal arguments that have been made in support of the petition to annul the Amended Regulation.  A brief summary of each of the six legal arguments contained in the Petition are set forth below.  If you are interested in reading the Amended Regulation or the full legal arguments that have been made, copies of both the Regulation and the pleadings that have been filed with the Albany County Supreme Court are available on the Big I NY website under a tab titled “Regulation 187 Resource Page."

The Six Legal Arguments

To Annul the Amended Regulation

1)  The Amended Regulation Conflicts with the Governing Statutory Scheme and Well-Established New York Caselaw and is Therefore Beyond DFS's Authority to Impose

The First Amendment to NY Insurance Regulation 187 redefines insurance agents and brokers as “Producers" in contrast to the significant distinctions between “agents" and “brokers" that are set forth in the NY Insurance Law.  The Amended Regulation also imposes a “best interests" standard on a Producer when dealing with a customer.  In addition, it drastically changes the duties and obligations owed by NY insurance agents and brokers, including to whom those duties are owed, in contradiction to the duties that have been well defined by both the courts in the caselaw and by the Legislature in the Insurance Law.  The Amended Regulation also requires that the insurance Producer act as a fiduciary to the customer. 

2)  The Amended Regulation Constitutes Improper Regulatory Policymaking

 The second legal argument is that the NYDFS exceeded its authority when it promulgated the First Amendment to the Regulation.  Simply put, the NYDFS Superintendent improperly acted as a super-legislature enacting policy without the authority of the Legislature to do so.  The Legislature has actually considered taking action similar to what the Superintendent has done with the Amended Regulation, but so far, the Legislature has chosen not to legislate a “best interests" standard for NY insurance agents and brokers.    

3)  The Amended Regulation Violates the Requirements of the State Administrative Procedures Act   

The State Administrative Procedures Act (“SAPA") sets forth certain specific procedures that a Regulator must follow before enacting or amending a regulation. The First Amendment to Regulation 187 was not promulgated by the NYDFS in accordance with the various requirements of SAPA.  Most critically, there was no meaningful analysis or consideration of the potential costs of the Amended Regulation on the public, insurance agents/brokers, or the harm that it may cause to small businesses.   

4)  The Amended Regulation is Unreasonable, Arbitrary and Capricious and Lacks a Rational Basis

The Amended Regulation is both arbitrary and capricious and is destined to harm the very consumers that it supposedly was intended to protect. The NYDFS moved ahead with the enactment of the Amended Regulation without an understanding or a study regarding the potential costs of the Amended Regulation.  There was also no record justification for the unprecedented new obligations that the Amended Regulation imposes on NY insurance agents and brokers.  Furthermore, the NYDFS did not consider the significant negative impacts that the Amended Regulation will have on agents, brokers, consumers, or the general public.  

5)  The Regulation is Unconstitutionally Vague as Key Terms and the Standard of Conduct are Unclear and Subjective

In order for a regulation to be valid it must comply with the requirements of both the US and NY Constitutions.  Unfortunately, the Amended Regulation does not.  As drafted, the Amended Regulation is unclear as drafted regarding to whom insurance agents and brokers owe duties, what the duties are that they owe, and what exactly constitutes a “recommendation" to consumers as the Amended Regulation requires a Producer to provide to a customer.  As a result, NY insurance agents and brokers are not provided with sufficient notice as to what conduct is required of them. Additionally, the regulators that are charged with enforcing the Amended Regulation cannot make objective determinations as to whether conduct is violative of the Amended Regulation, due to its lack of clarity.    

6)  The Regulation Improperly Creates a Continuing Duty to the Consumer Even After the Insurance Policy is Issued in Contravention of Longstanding Common Law Rules

The NY Court of Appeals has clearly defined the duties and obligations of insurance agents and brokers as requiring them to obtain the insurance coverage that is specifically requested by a customer or advise the customer of the inability to do so. However, the Court of Appeals has further stated that there is no continuing duty to advise, guide, or direct a customer regarding coverage.^[2] In contravention of this well-established caselaw, the Amended Regulation requires that the insurance Producer continue to provide coverage advice to the customer well after the insurance contract is procured.    

CONCLUSION

Big I NY and PIA NY decided to work collaboratively and commence the legal proceeding against the NYDFS in order to protect the interests of both insurance agents/brokers and also insurance consumers.  We are confident in our legal arguments and we believe that we are in a very strong position to have the court annul the Amended Regulation.  We will continue to keep you advised of the status of the legal challenge to NY Insurance Regulation 187 as the litigation progresses.  However, if any Big I NY member has a question regarding the legal challenge, please contact Big I NY's Director of Government Relations, Scott Hobson, at shobson@biginy.org

Submitted by:

James C. Keidel, Esq.
Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham, LLP        

[1]               The caption of the Article 78 Petition is Independent Insurance Agents and Brokers of New York, Professional Insurance Agents of New York State, Inc., et al. v. The New York State Department of Financial Services and Maria T. Vullo; The Albany County Supreme Court Index Number for the action is 907005-18.

[2]               See, Murphy v. Kuhn, 90 N.Y.2d 266 (1997); Hoffend & Sons, Inc. v. R&K, 7 N.Y.3d 152 (2006). ​

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker's errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at jkeidel@kwcllp.com. The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island, Philadelphia, Pennsylvania, Williston, Vermont and Naples, Florida.