N.Y. Appeals Court Upholds Insurance Broker Compensation Rule

MATTER OF SULLIVAN FIN. GROUP, INC. v. WRYNN (N.Y. March 8, 2012)

In January 2010, the insurance department issued Regulation 194, which is entitled, “Producer Compensation Transparency” and codified at 11 NYCRR part 30. The regulation requires insurance producers — defined as insurance intermediaries such as brokers or agents who advise purchasers seeking to buy insurance (see Insurance Law §2101(k) — to disclose a description of their role in the sale of insurance, whether they will receive compensation from the insurer or a third party, and factors that may affect their compensation (11 NYCRR 30.3(a). The producer must provide additional disclosure if the purchaser requests detailed information about the compensation that the producer expects to receive through the insurer (11 NYCRR 30.3(b)(c)). The regulation is intended to “regulat[e] the acts and practices of insurers and insurance producers with respect to transparency of compensation paid to insurance producers and their role in insurance transactions in this State[,] and … to protect the interests of the public by establishing minimum disclosure requirements” with respect to the same (11 NYCRR 30.1).

Petitioners are licensed insurance producers or organizations that represent the interests of insurance producers. They commenced this CPLR article 78 proceeding seeking to annul 11 NYCRR Part 30. Supreme Court dismissed the petition and entered judgment in favorof respondent. Petitioners appealed, arguing that respondent exceeded the scope of his authority in issuing 11 NYCRR Part 30. The Appellate Division disagreed, noting: “It is settled that respondent ‘has ‘“broad power to interpret, clarify, and implement the legislative policy”’ in administering the Insurance Law” [citations omitted]. Id. at 4. The Appellate Division agreed with Supreme Court that respondent’s authority to issue 11 NYCRR Part 30 is grounded in Insurance Law Article 21, which vests respondent with authority over the licensing and discipline of insurance producers Id. at 5.

The Appellate Division further rejected petitioners’ contentions that 11 NYCRR Part 30 runs counter to provisions in the Insurance Law. The court further held that the regulation was not inconsistent with the duties owed by an insurance broker at common law. Id. at 9-10

Finally, the Appellate Division rejected petitioner’s argument that there was no rational basis for the regulation, finding: “[t]he regulatory impact statement for the adoption of 11 NYCRR part 30 indicates that the need for the regulation became apparent after a joint investigation by the Insurance Department and New York State Office of the Attorney General revealed criminal bid-rigging and steering schemes involving numerous insurers and producers. The investigation demonstrated that insurance producers regularly receive incentive-based compensation from insurers, and that these payments influence producers’ recommendations to their clients.” Id. at 10.

Impact: While insurance agent and broker organizations may not be pleased with the decision, insurance agents and brokers have a number ofresources through these organizations to help them implement this regulation. In addition, some insurance brokers have taken the position that they will not accept contingent fee commissions thereby avoiding the need to comply.