New York Trial Court Endorses Fiduciary Standard for Insurance Sales

New York’s expanded “best interest” standard took effect on August 1st for annuity contracts and will take effect February 1, 2020, for life insurance policies. In a new decision, the New York Supreme Court calls the expansion “a rational and reasonable movement towards consumer protection.”

A ruling issued by the New York State Supreme Court strongly sides with the state’s Department of Financial Services’ (DFS) effort to expand the state’s fiduciary rules to cover the sale and service of annuities and life insurance products.

Notably, the Supreme Court of the State of New York is the trial-level court of general jurisdiction in the New York State Unified Court System, rather than the state’s top court. 

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The ruling addresses two distinct applications for a declaratory judgement by the state’s high court, one submitted by the Independent Insurance Agents and Brokers of New York and the other by the National Association of Insurance and Financial Advisers – New York State. The applications ask the Supreme Court to halt the expansion of the fiduciary duty in New York such that it now applies to annuity sales and will soon apply to insurance brokerage business.

The text of the decision includes a substantial recounting of arguments made both for and against the fiduciary rule expansion. However, in drawing its conclusions, the New York Supreme Court unequivocally sides with the Department of Financial Services.

Neither Arbitrary Nor Capricious

“The Court finds that the Amendment is a proper exercise of the powers granted to the DFS Superintendent, that it is not an attempt by DFS to improperly legislate, and that is nether arbitrary or capricious,” the decision states.

By way of context, back in July 2018, New York’s Department of Financial Services approved an amendment to its insurance regulations to impose a “best interest” standard on the sale of life insurance and annuity contracts. The amendment took effect on August 1, 2019, for annuity contracts and will take effect February 1, 2020, for life insurance policies.

Financial services industry analysts and attorneys have called this development a “sea change,” at least for advisers and brokers operating in New York with some interest in selling or servicing insurance products. They note how the regulation not only heightens the standard of care owed by the sellers of life insurance products, but how it also vastly expanded the breadth of the products covered from annuities to all life insurance products, including term-life insurance.

Among other arguments, challengers to the fiduciary rule expansion suggested the approach taken by DFS violated the State Administrative Procedure Act (SAPA). On this point, the Supreme Court is skeptical and sides entirely with DFS.

“The record establishes that—albeit the petitioners attempt to argue otherwise—DFS has complied with SAPA in adopting the amendment,” the decision states. “The Amendment, initially proposed in December 2017, went through two rounds of changes before it was promulgated, and in response to all the same issues raised in the petitions. DFS issued a Regulatory Impact Statement (RIS), a Regulatory Flexibility Analysis (RFA) and a statement in lieu of a Job Impact Statement (JIS), receiving 36 comments.”

No SAPA Violation

Turning to the petitioners’ argument that SAPA was violated because DFS did not provide a valid cost analysis, the Court finds that the efforts of DFS in this regard “are amply sufficient.”

“The petitioners have provided no specifics to back up their own cost estimates, and most of the petitioners’ statements regarding the cost increases on insurers and the industry are vague and inconclusive,” the decision concludes. “DFS explains that the costs associated with the implementation of the Amendment are deminimus, because it is a principles-based approach allowing producer and insurer flexibility, and that this flexibility makes it impossible to estimate the costs of compliance.”

According to the New York Supreme Court, DFS asserts, and the record supports, that the Amendment does not impose any particular system, forms, or procedures for meeting the requirements of the Amendment. It further provides that compliance procedures can be minimal, and may be as simple as briefly documenting why a recommendation is being made.

“Costs that consumers incur when they are sold products that do not fit their needs—wasted premiums, loss of needed benefits—far outweigh any costs to the insurer,” the decision states. “Revenues lost from recommending products which are not in the consumer’s best interests is not a viable insurer ‘cost’ for the purposes of a reasonable SAPA analysis.”

The Supreme Court turns next to the petitioners’ arguments that the Amendment is “arbitrary, capricious, irrational, and an abuse of discretion on the part of the respondents.”

“The Amendment, which is directed at providing guidelines for trustworthy and competent producer practices, and preventing self-dealing by producers at the consumer’s expenses, falls squarely within the provisions of Financial Services Law and the Insurance Law,” the decision concludes. “Against a backdrop of legitimate concerns for consumers, the burgeoning market of increasingly complex insurance and annuity products, and the rather remarkable lapse rate the market is experiencing, the Amendment is interstitial—consistent with underlying statutory purposesand reflects a rational and reasonable movement towards consumer protection.”

Read the full text of the decision here.

*Editor’s note: This article was updated after publication to reflect the fact that the Supreme Court of the State of New York is in fact the trial-level court of general jurisdiction in the New York State Unified Court System, rather than the state’s top court.