Indep. Ins. Agents & Brokers of N.Y., Inc. v. N.Y. State Dep't of Fin. Servs.

• Decision Date: 31 July 2019
• Docket Number: 907005-18
• Parties: In the Matter of the Application of The INDEPENDENT INSURANCE AGENTS AND BROKERS OF NEW YORK, INC., the Independent Insurance Agents and Brokers of New York, Professional Insurance Agents of New York State, Inc., Testa Brothers, Ltd., and Gary Slavin, Petitioners, For Judgment Pursuant to CPLR Article 78 v. The NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES and Maria T. Vullo, in her capacity as Superintendent of the New York State Department of Financial Services, Respondents. In the Matter of the Application of the National Association of Insurance and Financial Advisors—new York State, Inc., and Donald Damick, Plaintiffs-Respondents, v. The New York State Department of Financial Services and Maria T. Vullo, in her capacity as Superintendent of the New York State Department of Financial Services, Defendants-Respondents.
• Court: New York Supreme Court

65 Misc.3d 562
109 N.Y.S.3d 574

In the Matter of the Application of The INDEPENDENT INSURANCE AGENTS AND BROKERS OF NEW YORK, INC., the Independent Insurance Agents and Brokers of New York, Professional Insurance Agents of New York State, Inc., Testa Brothers, Ltd., and Gary Slavin, Petitioners, For Judgment Pursuant to CPLR Article 78
v.
The NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES and Maria T. Vullo, in her capacity as Superintendent of the New York State Department of Financial Services, Respondents.

In the Matter of the Application of the National Association of Insurance and Financial Advisors—new York State, Inc., and Donald Damick, Plaintiffs-Respondents,
v.
The New York State Department of Financial Services and Maria T. Vullo, in her capacity as Superintendent of the New York State Department of Financial Services, Defendants-Respondents.

907005-18

Supreme Court, Albany County, New York.

Decided on July 31, 2019

109 N.Y.S.3d 577

Keidel, Weldon & Cunningham, LLP, White Plains (Howard S. Kronberg of counsel), for petitioners.

O’Melveny & Myers, LLP, New York City (Gary Svirsky of counsel), for plaintiffs/petitioners.

Letitia James, Attorney General, Albany (C. Harris Dague of counsel), for defendants/respondents.

Henry F. Zwack, J.

109 N.Y.S.3d 578

65 Misc.3d 563

Before the Court are two applications, the first denominated as the "Independent Action", commenced by the petitioners The Independent Insurance Agents and Brokers of New York, Inc., The Independent Insurance Agents and Brokers of New York, Professional Insurance Agents of New York State, Inc., Testa Brothers, LTD, and Gary Slavin (collectively "Independent or Independent Petitioners"); and the second denominated as the "NAIFA Action", commenced by the plaintiffs-petitioners The National Association of Insurance and Financial Advisors-New York State, Inc., and Donald Damick (collectively "NAIFA or NAIFA Petitioners"), each against the defendants-respondents New York State Department of Financial Services ("DFS") and Maria T. Vullo ("Superintendent"). On March 15, 2019 the Court granted consolidation and a briefing schedule was completed. Both petitioners challenge the DFS' First Amendment to Regulation 187, 11 NYCRR 224.0 et seq. ("Amendment"). The defendants-respondents oppose and have cross moved to dismiss the NAIFA petition.

The Independent Action

The challenged Amendment is also titled "Suitability and Best Interests in Life Insurance and Annuity Transactions,"

65 Misc.3d 564

and was issued by DFS on July 17, 2018. The Amendment adopts a uniform standard of care which must be met by agents and brokers, which the regulation identifies as "producers," said standard being that all financial professionals who provide retirement planning and investment advice, both insurers and brokers dealing with annuities and life insurance, must act in the best interest of their clients. The Amendment applies to any transaction or recommendation with respect to a proposed or in-force policy. Prior to the adoption of the Amendment, this standard of care existed for financial professionals with regard to annuity contracts only. The best interest standard charges producers with exercising "care, skill, prudence and diligence," and requires, among other things, they consider "suitability information" for consumers, some 9 factors for life insurance sales and 14 for annuity contracts.

Independent argues that the Amendment must be annulled for several reasons; including that it conflicts with the governing statutory scheme and is beyond the respondent's authority to impose; constitutes improper regulatory policymaking; violates the State Administrative Procedures Act ("SAPA"); is unreasonable, arbitrary and capricious and lacks a rational basis; is unconstitutionally vague; and the Amendment improperly extends the agent/broker relationship. The petitioners also point out that the Amendment mirrors a fiduciary rule enacted by the United State Department of Labor and subsequently invalidated by the federal court.

More specifically, Independent argues that the Amendment improperly makes agents and brokers "producers," without distinction, and imposes upon them a uniform standard of care, that being that they must act in the consumer's "best interest." Independent points out that producers in fact have a narrow and simple duty, which

109 N.Y.S.3d 579

is to procure coverage. This expanded duty, they argue, is at odds with both common law — insurance law is not governed by a fiduciary standard — and statutory construct. The petitioners argue that DFS has overreached it's administrative duty into the legislative realm.

Independent further argues that an amendment was enacted in 1997 which establishes consumer protections to ensure life insurance purchasers receive accurate information on the cost and benefits of an insurance policy or annuity before the policy is purchased. It is also argued that is incumbent upon the Legislature, not DFS, which has no special expertise in this industry, to come up with a standard to regulate non-fiduciaries.

65 Misc.3d 565

Independent also asserts that the respondents violated SAPA 202-a(3)(c)(iv), in that DFS could not provide a best estimate of the cost for implementation and compliance, or the methodology by which it intends to estimate the same. The lack of a best estimate, Independent argues, demonstrates that the respondents did not consider the cost of implementation, compliance and associated potential costs, determining only that "..producers subject to this amendment likely will incur costs because of this amendment," and improperly concluding that the costs would be minimal. Independent claims that DFS did not conduct its own analysis of how a best interest standard will affect life insurance sales, it relied on a previous examination conducted by the United States Department of Labor in support of its promulgation of a fiduciary standard for products sold in relation to ERISA retirement plans.¹ Independent argues that the respondents have dismissed questions regarding the cost of compliance and adverse effects on the marketplace. Independent asserts, importantly, that DFS failed to consider the impact of the regulation on small businesses, with limited support and resources, who may choose to leave the market rather than bear costs associated with the Amendment.

Independent also argues that the Amendment is arbitrary and capricious, lacking any reasonable basis or an adequate record of documented, empirical assessment and evaluation. Independent characterizes DFS's reasoning as "rhetoric without substance" and devoid of any specific context. Further, by implementing this new standard, Independent asserts that litigation will ensue over what the highly subjective "best interest" standard entails, and that the risks and liabilities for failing to meet this undefined standard were not considered. According to the petitioners, the term "best interest" is not only vague and subjective, a question arises as to whose best interest is to be protected; and while the regulation gives examples of "best interests," they are merely examples and not defining criteria. It is also argued that the Amendment creates a fiduciary duty, and makes the producer to an insurance contract a guarantor.

Independent asserts that the term "recommendation" is likewise unconstitutionally vague, because any communication

65 Misc.3d 566

or information given by a producer could be considered a recommendation or advice; and that is not clear what information the producer must compile in order to make a suitable recommendation — financial situation and needs, financial time line, financial objective — as none of these terms as used in the Amendment are defined. It also argues the "best interest" standard

109 N.Y.S.3d 580

will likely result in lawsuits against insurance producers when a customer suffers an uninsured loss. It also notes insurance is a contract between the insured and the insurer, but the Amendment would place a continuing duty on the producer, who is not a party to the contract. According to Independent, the broker is a legal stranger to the contract, and prior to the Amendment, owed no duty, with the limited exception of when the insured makes a specific request for coverage, once the contract is signed. It is also asserted the Amendment is inconsistent with a primary tenet of insurance law (as recognized by all four New York Appellate Divisions) that one who signs an insurance contract is tasked with having read the same, absent fraud or wrongful conduct. Independent also argues that it is unreasonable for a broker to go line by line through a policy and "insure" the consumer fully understands the policy.

NAIFA Action/Article 78 and Declaratory Judgment

Each of the substantive arguments raised by Independent are also set forth in the NAIFA Verified Petition. NAIFA adds that its'...