Insurance Law Alert

The amended Regulation 187, Suitability and Best Interests in Life Insurance and Annuity Transactions (Regulation) took effect Aug. 1, 2019, for annuity sales, and began applying to life insurance sales on Feb. 1, 2020.  The amendment required recommendations to be in the best interests of the consumer, among other things and imposed substantial burdens on insurers and their distribution forces, including insurance Producers.  On April 29, 2021, In the Matter of INDEPENDENT INSURANCE AGENTS AND BROKERS OF NEW YORK, INC., et al., v. NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES et al., the Appellate Division of the New York Supreme Court unanimously ruled that the New York Department of Financial Services’(“DFS”) Amended Regulation 187 is “unconstitutionally vague.”  The court noted that  the Regulation uses “subjective terms,” “fails to provide sufficient concrete, practical guidance for producers,” and “provide[s] insufficient guidance with respect to how producers must conduct themselves in order to comply.”

The Regulations were intended to address concerns with respect to increasingly complex life insurance and annuity products, which in turn forced consumers to more heavily rely upon the advice of insurance professionals such as brokers and agents (“Producers”) to understand the products and further to mitigate abuses with respect to Producers whose compensation is dependent on sales and thus are incentivized to manipulate consumers into purchasing products without regard to a needs analysis. Thus, the amendment to Regulation 187 introduced a new, higher standard of care which applies to Producers’ recommendations to customers.  In making a recommendation, an insurer or Producer, among other things, is expected to compile and evaluate the relevant suitability information of the consumer, disclose to the consumer all relevant suitability considerations and product information and weigh factors, such as the benefits of the policy, price of the policy and financial strength of the insurer, such that he or she has a reasonable basis to believe that the transaction is suitable.  See 11 NYCRR 224.4 [a]-[k]; 224.6 [a].  The amendment also requires the insurer to, among other things, establish and maintain a system of supervision intended to ensure Producers' compliance with the amendment, including implementing procedures for the collection of a consumer's suitability information (see 11 NYCRR 224.3(g); 224.6(b)1(i) and the "documentation and disclosure on the basis for any recommendation" made to a consumer. See 11 NYCRR 224.6 (b)1.  Finally, the insurer is responsible for ensuring that Producers are trained to make appropriate recommendation. See 11 NYCRR 224.6 (e).  The Regulations became the subject of litigation shortly after their initial adoption.

In November 2018, petitioners Independent Insurance Agents and Brokers of New York, Inc., Professional Insurance Agents of New York State, Inc., Testa Brothers, Ltd, and Gary Slavin (the Independent Petitioners)  commenced a CPLR article 78 petition in Albany County challenging the amendment, alleging, among other things, that DFS exceeded its authority in promulgating the amendment, that the promulgation of the amendment violated the State Administrative Procedure Act, that the amendment lacked a rational basis, was arbitrary and capricious and otherwise unconstitutionally vague.  That same day, petitioner National Association of Insurance and Financial Advisors – New York State, Inc. (NAIFA) commenced a combined CPLR article 78 proceeding and declaratory judgment action in New York County seeking similar relief. NAIFA then filed an amended petition adding an additional petitioner.   The Independent Petitioners moved to consolidate the two matters and, while this motion was pending, respondents answered the NAIFA petition and sought its dismissal on the merits.  The New York Supreme Court granted the Independent petitioners' motion, and respondents answered the petition of the Independent Petitioners, asserting the same grounds for dismissal as set forth in response to the NAIFA petition.

On August 7, 2020, the New York Supreme Court issued a judgment dismissing both petitions on the merits, Determining that DFS complied with the State Administrative Procedure Act in promulgating the amendment, that it did not unlawfully usurp legislative authority when it did so and that the amendment was not arbitrary and capricious, irrational or unconstitutionally vague.  Two of the Independent Petitioners – Independent Insurance Agents of New York, an industry trade association, and Testa Brothers, one of its members appealed on the basis that the amendment violates their due process rights as it is unconstitutionally vague. The appellate court concurred.

Applying the two- part test, the Appellate Division of the New York Supreme Court evaluated the vagueness challenge.  First, the court considered whether the regulation is "sufficiently definite so that individuals of ordinary intelligence are not forced to guess at the meaning of [regulatory] terms", and have fair notice of the conduct that is prohibited.  Second, the court evaluated whether the regulation provides "clear standards for enforcement so as to avoid resolution on an ad hoc and subjective basis."  Although the court recognized the consumer protection goals underlying promulgation of the amendment are “laudable, as written”, the court also held that the amendment “fails to provide sufficient concrete, practical guidance for Producers to know whether their conduct, on a day-to-day basis, comports with the amendment's corresponding requirements for making recommendations and compiling and evaluating the relevant suitability information of the consumer” as required by 11 NYCRR part 224.  The court’s decision acknowledged that the Regulation did provide examples of what a Producer’s “recommendation”, triggering the “best Interest” analysis did not include, (marketing materials, general advertisements, and educational information), but the definition of “recommendation” was so broad  that it provided to the producer  no clear guidance as to what information or advice would not fall within the scope of the Regulation.

Additionally, once a recommendation is deemed to have been made, the guidelines with respect to the suitability information that Producers must obtain from the consumer and the suitability considerations that must necessarily be disclosed were deemed by the court to be “inadequate to the extent that they rely upon subjective terms that lack long-recognized and accepted meanings and provide insufficient guidance with respect to how Producers must conduct themselves in order to comply with the amendment.”  Ultimately, the court held that in view of  the ambiguous language of the regulation, unclear direction as to compliance, and unclear standards of enforcement, the Regulation failed both prongs of the “vagueness” test.

The Appellate Division of the New York Supreme Court is not the end of the judicial journey for Regulation 187 because  DFS could file an appeal to the New York Court of Appeals. However, even if an appeal is sought and granted, DFS is not likely to enforce the Regulation until a final decision is rendered.  That decision may not uphold the Regulation, leaving industry with little direction as to lawful sales practices.  A more productive course of action might be for the regulator to consult with industry groups to consider clearer examples of compliant  behavior and the  identification of a meaningful and identifiable standard of conduct for insurers and their Producers which ultimately could result in sales activity in the consumers’ best interests.   

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