New York best interest rule for annuity, life insurance sales upheld by state court

The New York State Supreme court upheld a state regulation imposing a tougher standard on agents and brokers selling annuity and life insurance policies, on the eve of the rule taking effect.

Acting Supreme Court justice Henry F. Zwack said July 31 that the New York State Department of Financial Services, which issued the regulation, and former department superintendent Maria T. Vullo properly exercised their powers to promulgate the rule, which was neither “arbitrary” nor “capricious.”

The rule, Insurance Regulation 187, issued in July 2018, establishes a uniform standard of care for agents and brokers that requires them to act in the best interest of consumers when making a recommendation with respect to a proposed or existing annuity or life insurance policy. The annuity portion took effect Aug. 1 and the life insurance standard takes effect Feb. 1 of next year.

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Two parties of plaintiffs sued to overturn the rule in November and this ruling addresses their consolidated complaints. The two parties are the National Association of Insurance and Financial Advisers – New York State Inc. and its president, and the second is 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 broker.

Mr. Zwack supported defendants’ argument 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. Insurers submitted 44,624 policy forms to the Department of Financial Services for approval between 2011 and 2017, due largely to new features and riders being added on permanent life insurance products, said Mr. Zwack, who cited department figures.

“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.

He also said plaintiffs “are asking the Court to discount market studies, DFS experience, emerging research and recommendations by consumer advocates that a mere disclosure rule is not enough.”

Gary Svirsky, an attorney representing NAIFA-New York and its president, didn’t return a request for comment. Howard Kronenburg, an attorney representing the other plaintiffs, also didn’t return a request for comment.

New York’s insurance rule has language similar to the Department of Labor’s now-defunct fiduciary rule establishing that salespeople must act without regard to their own interests, said Kevin Walsh, a principal at Groom Law Group. If interpreted literally by courts, the rule’s language “could really disrupt the insurance market,” he said.

“I’d be very surprised if the industry doesn’t appeal the ruling,” Mr. Walsh said.

Other state and federal regulators are concurrently working to increase standards for the sale of financial products by brokers. The Securities and Exchange Commission in June issued an investment-advice rule governing broker conduct, which has received the industry’s blessing but has fallen short among consumer advocates’ wishes. The National Association of Insurance Commissioners is working to finalize a rule to address conduct regarding annuity sales. Massachusetts, New Jersey and Nevada are in various stages of rolling out fiduciary standards for investment advice.

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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.