New York Big "I" Challenges Compensation Disclosure Regulation in Court

Proposal would impose sweeping disclosure and compliance burdens on agents and brokers operating in New York.

The Independent Insurance Agents & Brokers of New York (IIABNY) filed a much-anticipated legal challenge this week to the implementation of Regulation 194, the state’s highly controversial and burdensome compensation disclosure regulation.

The lawsuit—which was filed jointly with the Council of Insurance Brokers of Greater New York (CIBGNY)—challenges the legitimacy and legality of the prescriptive regulation on a variety of grounds and urges the trial court to annul the unnecessary mandates in their entirety.  In their filed petition, IIABNY and CIBGNY assert that the New York State Insurance Department lacked the statutory authority to issue the regulation and impose such sweeping mandates on the agent and broker community.  While insurance regulators have the power to enforce and (within limits) interpret the law, they do not have unfettered authority to engage in lawmaking and policymaking of this magnitude.  The lawsuit also argues that: 

• Regulation 194 represents an impermissible attempt to rewrite and revise the law on a subject matter that the legislature has specifically addressed in the past;
• Elements of the regulation “impose massive and unwarranted costs of compliance” on insurance producer brokers and constitute “an arbitrary exercise of regulatory power”;
• The regulation violates the rights of agents and brokers to due process and equal protection under the U.S. and New York constitutions.  

Regulation 194 is scheduled to take effect on Jan. 1, 2011.  If implemented in its current form, the regulation would impose sweeping disclosure obligations and excessive compliance burdens on nearly every licensed insurance agent and broker operating in New York, while offering questionable and unsubstantiated benefits to consumers.  There is no rationale, justification or need for the regulation, which imposes unnecessary regulatory costs and burdensome new requirements on the millions of insurance transactions that occur every year in the Empire State.  Achieving technical compliance with this cumbersome and imprecise proposal will require fundamental changes in the business operations of countless small businesses and will, among other outcomes, reduce an insurance producer’s ability to proactively respond to consumer needs.  In the eyes of many observers, this is a classic example of a regulatory solution in search of a marketplace problem.

Notably, IIABNY and CIBGNY are the only agent and broker organizations to challenge the regulation in court and actively defend producers who write all lines of business.  Other groups have offered encouragement from the sidelines and/or contemplated the possibility of undertaking similar legal action, but they unfortunately opted not to pursue such a path and have left the Big “I” and CIBGNY to bear the burden and responsibility of this important challenge.  While the participation of additional producer organizations would have presented a more united front and highlighted the fact that the regulation is strongly opposed by nearly all elements of the industry, their failure to participate will not adversely affect the court’s consideration of the legal issues at hand.  

Most reasonable people do not enjoy or relish challenging the actions of their regulators in court, especially since the outcome of litigation is always uncertain, but there are instances when legal challenges are absolutely appropriate and necessary.  For thousands of the agents and brokers who reside in New York or sell policies there on a nonresident basis, the principled challenge initiated by IIABNY and CIBGNY is one of those times.

Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.