On July 31, Acting Supreme Court Justice Henry F. Zwack upheld the New York State Department of Financial Services Regulation 187 on the basis that the state regulator properly exercised her powers to promulgate the rule, which was neither “arbitrary” nor “capricious.”The decision is linked here. Plaintiffs - the National Association of Insurance and Financial Advisers – New York State Inc. and its president, and the independent Insurance Agents and Brokers of New York Inc., Professional Insurance Agents of New York State Inc., insurance brokerage Testa Brothers and Gary Slavin, - an insurance brokers’ suits were heard on a consolidated basis. 

In response to the complaint, defendants’ argued that the rule was needed in part to address the increasing complexity of life insurance, which they claim has caused consumers to rely more heavily on brokers’ advice. “This, combined with the real life situation where the initial sale, and not ongoing payments or premium beyond four years, is what generates the most income for a producer, and the lapse rate of almost 50% after 10 years, point to real concerns for insurance market regulators,” Mr. Zwack said in his ruling. 

Regulation 187 is strikingly similar to the original federal Department of Labor proposed Conflict of Interest Rule. Indeed, Regulation 187, adopts a “best interest” standards for those licensed to sell life insurance and annuity products to protect New York State consumers from conflicted advice. The New York regulation requires insurers to establish standards and procedures to supervise recommendations by agents and brokers to consumers with respect to life insurance policies and annuity contracts issued in New York State so that any transaction with respect to those policies is in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction. Insurance professionals are, thus, required to act in their client’s best interests without regard to income earned by them as a result of the sale. While the new regulation currently applies to annuity contracts, it will apply to life insurance contracts within 6 months. 

Regulation 187 was intended by former Superintendent of the Department of Financial Services Mari Vullo to fill in regulatory gaps to protect New York consumers from the elimination of the federal Department of Labor’s Conflict of Interest Rule, which was abandoned after a ruling from the U.S. Fifth Circuit Court of Appeals. New York’s regulation also supplements existing consumer protections that already exist in New York , including setting reasonable limits on compensation and compensation transparency for the sale of a life insurance or annuity product in New York State. 

During the opening session of the National Association of Insurance Commissioner’s (NAIC) summer meeting in New York City on August 3, New York Superintendent of the Department of Financial Services, Linda A. Lacewell commented that “I am pleased that New York’s Insurance Regulation 187 was resoundingly upheld by the court. DFS is the first insurance regulator to implement a ‘best interest’ standard that requires sellers of annuities and life insurance to act in the best interest of consumers when providing recommendations. This ruling recognizes that DFS acted within its grant of authority when implementing the amendment. This is a common sense regulation and it is a step in the right direction to protect consumers by ensuring that only consumers’ needs and financial objectives are considered in any transaction.” Deputy Superintendent for Life Insurance, James Regalbuto encouraged consumers to buy their annuities in New York state where stringent regulation protects their interests.

Whether the insurance industry will be able to live with the new standard without market disruption is not yet clear. Carriers and their agency distribution sources struggle to understand the outer boundaries of the Regulation as well as to comply with its mandates. Indeed, the Life Insurance Council of New York Inc. said it’s too early to determine the effect of New York’s insurance rule. “Although we remain hopeful that its implementation will have a positive influence on the annuity market in this state, we don’t yet know what effect it will have, especially when taking into consideration that it appears likely that many states and the SEC will be taking a different approach,” said spokesman Ed Koller. 

Questions regarding the NY Regulation 187 or the recent court ruling should be directed to Cynthia Borrelli who leads Bressler’s Insurance Law Practice Group.

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