In the December 2018 E&O Report, we advised you of the Article 78 legal proceeding that was filed in the Albany County Supreme Court, challenging 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] In this month's E&O Report, we provide an update regarding the status of the Amended Regulation and the continued legal challenge to it by Big I NY.
The goal of the Article 78 legal proceeding that was commenced is to have the court declare that the First Amendment to Regulation 187, 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 and signed by NYDFS Superintendent Maria T. Vullo on July 17, 2018. Pursuant to the Superintendent's directive, the Amended Regulation would take effect on August 1, 2019 for annuity transactions and six (6) months thereafter (February 2020) for life insurance transactions.
In the Petition in support of the Article 78 legal challenge, we raised six (6) separate and distinct arguments as to why the Amended Regulation should be held to be invalid by the court.[2] The six (6) legal arguments that were made are as follows:
1) The Amended Regulation conflicts with the governing statutory scheme and well-established New York caselaw and is beyond the NYDFS's authority to impose;
2) The Amended Regulation constitutes improper regulatory policymaking by the NYDFS;
3) The Amended Regulation violates the requirements of the State Administrative Procedures Act;
4) The Amended Regulation is unreasonable, arbitrary and capricious and lacks a rational legal basis;
5) The Regulation is unconstitutionally vague as key terms and the standard of conduct are unclear and subjective; and,
6) The Regulation Improperly creates a continuing duty to the consumer after the insurance policy is issued in contravention of longstanding common law rules.
On July 31, 2019, Honorable Henry F. Zwack, the New York State Supreme Court Justice assigned to the case, rendered his decision in connection with the Article 78 legal challenge.[3] Unfortunately, the judge ruled in favor of the NYDFS and denied the Article 78 Petition. Due to the fact that the judge's decision denied the legal challenge, the Amended Regulation took effect on August 1, 2019. As of today, the Amended Regulation is in effect for annuity transactions and it will take effect for life insurance transactions on February 1, 2020.
If you handle any annuity transactions in New York State at the current time, or both annuity and life insurance transactions after February 2020, make certain that you are compliant with the numerous requirements of the Amended Regulation to show that the annuity transaction is suitable for the consumer and also that you are acting in their best interests. The NYDFS has already started reviewing annuity transactions for compliance with the requirements of the Amended Regulation and has imposed fines in connection with non-compliance with it. For example, in September 2019, the NYDFS directed that six (6) insurance companies reimburse $1.15 million to New York customers and pay $673,000 in penalties to the Department for failing to comply with Regulation 187 and Regulation 60 in connection with the sale of deferred annuities to customers.[4]
The Big I NY Board of Directors and the association employees continue to be extremely concerned about the onerous requirements of this Amended Regulation and how it will not only adversely affect New York insurance agents and brokers, but the very consumers that it was supposedly enacted to protect. There is also concern that the requirements that are contained in the Amended Regulation relating to annuity and life insurance transaction may ultimately be extended to other insurance, such as property and casualty insurance sales. Accordingly, the Big I NY Board of Directors made the decision to proceed with an appeal of Justice Zwack's decision to the appellate court. Although the Article 78 challenging the Amended Regulation was brought jointly by both Big I NY and PIANY, unfortunately, PIANY decided not to join in the appeal. Despite this fact, Big I NY is continuing the legal challenge, along with one individual insurance agent. Also, NAIFA (the National Association of Insurance and Financial Advisors) is not pursuing an appeal of the lower court's decision denying its Article 78 petition.[5] On September 10, 2019, a Notice of Appeal of the lower court's decision to the Appellate Division Third Department was filed with the court by Big I NY.
We remain confident in our legal arguments and we believe that we are in a very strong position to have the Appellate Court annul the Amended Regulation. We are in the process of preparing our appellate brief and supporting record and we hope to have the papers filed with the court soon. 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 Amended Regulation or the legal challenge, please feel free to contact us (our contact information is below) or 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] If you are interested in reading the Amended Regulation, or the full legal arguments that were made, copies of both the Amended Regulation and the pleadings were filed with the Albany County Supreme Court are available on the Big I NY website under a tab titled “Regulation 187 Resource Page."
[3] A copy of Justice Zwack's July 31, 2019 Decision is available on the Big I NY website under a tab titled “Regulation 187 Resource Page."
[4] See, Insurance Business America, September 25, 2019, “NY Regulator Fines Six Life Insurers for Ill-Advised Annuity Swapping."
[5] NAIFA commenced a similar Article 78 challenge to Regulation 187 in the New York County Supreme Court under the caption National Association of Insurance and Financial Advisors v. New York Department of Financial Services, Index No.: 160701-2018. NAIFA's matter was subsequently consolidated with the action brought by Big I NY and PIANY in the Albany County Supreme Court.