As you may recall from several of our prior E&O Reports, for the past four years Big I NY has been fighting a legal challenge against the New York Department of Financial Services (“DFS") concerning Amended Insurance Regulation 187.  Unfortunately, on October 20, 2022, the legal challenge came to an end when the New York Court of Appeals issued its ruling in favor of the DFS.  In this issue of the E&O Report we will review the background of the litigation related to the Amended Regulation and also provide some guidance on what New York insurance agents and brokers should do to comply with it.

Background of Amended Regulation 187

In 2018 the DFS amended Regulation 187 creating a new regulation with expanded duties for insurance Agents, Brokers and Producers, (collectively “Producer" herein), when procuring life insurance or an annuity for a customer. The Amended Regulation 187 requires the “Producer" to act in the “Best Interests" of the customer. It also requires that the Producer make a “suitability" “recommendation" based on an analysis of their “needs." 

A Producer who does not comply with the mandates of the Amended Regulation is subject to potential Regulatory action by the DFS.  There is no private right of action that may be brought against a Producer for the failure to comply with the Amended Regulation.

Litigation – Lower and Appellate Court Decisions

The Amended Regulation creates a heightened duty for New York Insurance Producers that is well beyond that imposed by the common law.  Additionally, the Amended Regulation does not clearly define any of the terms contained in the Regulation or set forth clear standards for compliance.  Based upon these factors, we challenged the Amended Regulation and sought to have it voided on numerous grounds; some of which were constitutional.

The Albany County Supreme Court, where the Article 78 petition was brought, denied our challenge. However, the appellate court for that venue, the Appellate Division Third Department, disagreed and reversed in a unanimous decision. The Third Department found that the terms of the Regulation were so vague that no Producer could know what to do, or not to do, to be in compliance. The Court also used the same logic by saying that the Regulation failings would not allow the DFS to implement it against Producers in any uniform way so that everyone would be treated alike.

Litigation – The Court of Appeals

The DFS, (represented by the New York Attorney General's Office), appealed the Third Department decision to the Court of Appeals, the highest court in the New York State court system. Oral argument was held on September 8, 2022. On October 20th the Court issued its decision reversing the appellate court and finding that the Amended Regulation was not unconstitutionally vague.  Furthermore, it held that the New York DFS: 1) had authority to issue the Amended Regulation 187; 2) substantially complied with the State Administrative Procedures Act in enacting the Regulation; and 3) the Amended Regulation 187 is not arbitrary or irrational.  Therefore, the judgment of the Albany County Supreme Court was reinstated.

Our Position

Needless to say, we strongly disagree with the decision issued by the Court of Appeals.  At a minimum, the Court of Appeals believed that closer regulation of life insurance and annuities is a good thing, and that in that limited situation, insurance Producers should be compelled to act in the best interest of the customer.  More broadly, this decision could also be interpreted as a result-based decision designed to bolster the authority of the DFS to address any issues that it observes in the insurance industry. 

Frankly, the decision suggests to us that if the DFS decides to act in a regulatory manner, anyone will have a nearly insurmountable burden before the Court of Appeals to successfully facially challenge its rulemaking, even if a unanimous Appellate Division disagrees with it.  Indeed, the Court of Appeals wrote a 20-page decision that appeared to be taken in many respects from DFS's briefing without real consideration of our arguments, factual observations or concerns. 

Obviously, the Court of Appeals does not appear to have the same concerns related to the unfettered discretion of the DFS to enforce this regulation as we do.  In support of its decision, the Court of Appeals emphasized the following: 1) the lengthy regulatory record; 2) the statutes cited by the DFS from other states (related to annuities only); and 3) the observations of DFS in the marketplace.  Simply stated, this is not an instance where the Court of Appeals will substitute its judgment related to a regulation for that of the DFS, and the Court is clearly willing to trust the DFS to act in a reasonable fashion in enforcing the Regulation.

We believe that all Producers will be at risk of regulatory action if they fail to offer a product without attempting to compile the “suitability information" required by Amended Regulation 187 and providing some level of advice related to the selection of a product that is designed in the “best interest" of the “customer" as defined by the Regulation.  As we have argued, the determination of what is in the “best interest" of the “customer" is an open question, which could potentially be abused by the DFS.  The Court of Appeals is willing to assume that abuse will not occur.    

We can contemplate examples where, arguably, Regulation 187 should not apply.  For example, if a Producer merely fulfills an order without providing any advice, such Producer may not be subject to Regulation 187.  However, in our collective opinions, such Producers would be living dangerously because the definition of “recommendation" supplied by Regulation 187 is extremely broad and includes actions that are not necessarily advice, like the presentation of a quote.

Pursuant to Regulation 187 at 11  N.Y.C.R.R. § 224.3(e), “Recommendation means one or more statements or acts by a producer, or by a producer or by an insurer where no producer is involved, to a consumer that:

• (1)   reasonably may be interpreted by a consumer to be advice and that results in a consumer entering into or refraining from entering into a transaction in accordance with that advice; or
  

• (2)   is intended by the producer, or an insurer where no producer is involved, to result in a consumer entering into or refraining from entering into a transaction.  A recommendation 'does not include general factual information to consumers, such as advertisements, marketing materials, general education information regarding insurance or other financial products and general administrative services to the customer.  A recommendation also does not include use of an interactive tool that solely provides a prospective customer with the means to estimate insurance, future income, or financial needs or compare different types of products or refer the customer to a producer, provided that the interactive tool is not used by a producer, or an insurer where no producer is involved, to satisfy any requirement imposed by this Part.

Thus, New York Producers, who sell life insurance or annuity products, are subject to the mandates of Amended Regulation 187, which requires that they provide customers with advice, despite existing New York caselaw which holds that that is not their legal duty.  Similarly, under Regulation 187, a producer who already sold a policy without any advice may become subject to the Regulation 187 via a customer who asks questions, even if the producer advised the customer against making a transaction that would result in additional commissions to the producer. 

Based upon the requirements of Amended Regulation 187 an insurance Producer should make certain that they gather all relevant “suitability information," and also carefully document the reasons for the presentation of a particular quote and the selection of coverage.  This will be crucial information for the Producer to have in the event of they are subject to regulatory scrutiny.  Without sufficient documentation regarding exactly what was done, it is likely that the DFS may find that the Producer violated Amended Regulation 187.

Conclusion

The key now is what a prudent insurance Producer should do to comply with the Amended Regulation and make certain that they are in a position to show what was done in connection with the insurance transaction.  The following are some ideas that Producers should keep in mind regarding this Amended Regulation.

• While you should always document every insurance transaction, due to the mandates of the Amended Regulation, you should make sure that you document all aspects of an insurance sale related to annuities or life insurance, and paper your procurement files, in excruciating detail.
  
  
• Keep in mind that given the nature of life insurance and annuities, any problem with the procurement is likely going to come many years afterwards. Thus, the retention of documentation related to the insurance transaction is crucial.
  
  
• Put the onus on the applicant to provide you with any and all documents that may be relevant to the areas of inquiry required by the Amended Regulation. Make sure that this communication with the customer is memorialized in writing and all documentation is then retained.
  
  
• Finally, feel free to notify us if you receive a complaint or an investigation from the DFS related to a potential violation of Amended Regulation 187.  We regularly handle regulatory matters before the DFS, and we can assist you in responding to any complaint or investigation that you may receive.

It is unfortunate that the Court of Appeals allowed the Amended Regulation to stand and refused to affirm the decision issued by the Appellate Division Third Department.  However, even though we did not ultimately prevail in this litigation, we believe that it was important for Big I NY to pursue this legal challenge over the past four years, through each level of the New York Court system, in order fight for the interests of its members.

Submitted by:
Howard S. Kronberg, Esq.          
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP       ​