SNR Denton continues to track New York's controversial producer compensation disclosure regulation which went into effect January 1, 2011. (See also, New York Insurance Department Issues Final Rule On Producer Compensation Disclosure, February 11, 2010). Regulation 194 is "intended to provide a means to address conflicts of interest that arise due to the incentive-based compensation an insurer pays to its producer in the least invasive manner possible--by requiring that insurance producers make certain disclosures to insurance customers about the producer's role in the insurance transaction and their compensation arrangements with the insurer." N.Y. Dept. Ins. O.G.C. Opinion No. 10-11-01 (Nov. 4, 2010). The regulation is a by-product of the joint investigation conducted by the New York Insurance Department and the New York Office of the Attorney General in 2004 of bid rigging and steering schemes where undisclosed incentive compensation became an issue. Sullivan Financial Group, Inc. v. Wrynn, 2010 WL 4702281 (N.Y. Supp.) at *2 (Nov. 17, 2010).

Regulation 194 Requirements

Regulation 194 applies in the context of the sale of an insurance policy, surety bond, contract of guarantee, and annuity contract, but does not apply to the placement of reinsurance or insurance with a captive. N.Y. Comp. Codes R. & Regs. tit. 11, § § 30.1(d) and 30.5 (5)(a and b). It also does not apply to producers who have no direct sales or solicitation contact with the purchasers of the insurance such as wholesale brokers or managing general agents. N.Y. Comp. Codes R. & Regs. tit. 11, § 30.5 (c and d).

Compensation is defined broadly to mean "anything of value, including money, credits, loans, interest on premium, forgiveness of principal or interest, trips, prizes or gifts, whether paid as commission or otherwise." N.Y. Comp. Codes R. & Regs. tit. 11, § 30.2 (a). A de minimis exception exists for tangible goods having an aggregate value of less than $100 per year and which contains the insurer's name, logo or other advertisement. Id.

Regulation 194 requires two (2) separate disclosures: the initial disclosure and disclosures made upon a request for more information.

Initial Disclosure

At or prior to the time of an application, a producer must disclose orally or in writing: 

  1. a description of the producer's role in the transaction; 
  2. whether the producer will receive compensation from the insurer or a third party based in whole or in part on the sale of the insurance contract; 
  3. that the compensation paid may vary depending on a number of factors which may include the contract and insurer selected, the volume of business the producer provides the insurer, and the profitability of the business; and 
  4. that the purchaser may request information about not only the compensation the producer is expected to receive as a result of the sale of the insurance contract, but also the compensation expected to be received by the producer on any alternative quotes presented by the producer to the purchaser. N.Y. Comp. Codes R. & Regs. tit. 11, § 30.3 (a).

The New York Department of Insurance (the "Department") has indicated that the term "application" will be interpreted only as applications used for binding an insurance contract and not applications that are used by a producer to merely solicit multiple quotes. N.Y. Dept. Ins. Circular Letter 2010-18 (Nov. 15, 2010).

Disclosure Upon Request for More Information

A second disclosure must be made if the customer makes a request for additional information about the compensation.

  • Timing. If the request for more information is made prior to the issuance of the insurance contract, additional disclosures must be made at or prior to the issuance of the insurance contract, unless the time is of the essence to issue the insurance contract in which case the disclosure must be made within 5 business days of the request. N.Y. Comp. Codes R. & Regs. tit. 11, § 30.3 (b). However, if the request is made after issuance, but within 30 days of issuance, the producer must make the disclosures within 5 business days of the request. N.Y. Comp. Codes R. & Regs. tit. 11, § 30.3 (c).
  • Content of disclosure. The following information must be disclosed: (1) description of the nature, amount and source of any compensation; (2) description of any alternative quotes; (3) description of any material interest the insurance producer (or affiliate) has in the issuing insurer (or affiliate); (4) a description of any material interest the issuing insurer (or affiliate) has in the producer (or affiliate); and (5) a statement whether the producer is prohibited by law from altering the amount of compensation received from the insurer based in whole or in part on the sale. N.Y. Comp. Codes R. & Regs. tit. 11, § 30.3 (b). If the nature, amount or value of any compensation is not known when the disclosure must be made, the producer must provide a description of the circumstances that may affect the receipt or amount of compensation, and a reasonable estimate of the amount of the compensation. N.Y. Comp. Codes R. & Regs. tit. 11, § 30.3 (d).
  • Renewals. Producers are not required to make disclosures to purchasers in the case of renewals unless the purchaser makes a request for more information less than 30 days prior to renewal or less than 30 days after renewal. N.Y. Comp. Codes R. & Regs. tit. 11, § 30.5 (e).

The Department has issued three Office of the General Counsel ("O.G.C.") Opinions and a Circular Letter with respect to Regulation 194. One such O.G.C. opinion even reviews and approves a sample disclosure that was submitted. N.Y. Dept. Ins. O.G.C. Opinion No. 10-09-06 (Sept. 14, 2010). The circular letter clarifies that there is no required format, but if the disclosure is included in other written materials the disclosure must be prominent. N.Y. Circular Letter 2010-18 (Nov. 5, 2010). The Department also indicated that in the first six months, the Department's enforcement efforts will focus on violations that are willful, or egregious or demonstrate a pattern or practice of wrongdoing. Id.

Regulation 194 Survived First Legal Challenge

Regulation 194 recently survived a challenge by three licensed producers and two producer professional associations: the Council of Insurance Brokers of Greater New York, Inc. and Independent Insurance Agents & Brokers of New York, Inc. Sullivan Financial Group, Inc. v. Wrynn, 2010 WL 4702281(N.Y. Sup.)(Nov. 17, 2010). Petitioners argued that the Superintendent lacked statutory authority to promulgate Regulation 194. The court found that Regulation 194 was not inconsistent with N.Y. Ins. Laws. § 2119, which requires that compensation received by a producer from the insured be based on a signed writing, because Regulation 194 addressed the financial relationship between the producer and the insurer, whereas N.Y. Ins. Laws § 2119 addressed the financial relationship between the producer and the insured. Sullivan, 2010 WL 4702281 at *5. The court also found that Regulation 194 was not inconsistent with Article 21 of the New York Insurance Laws, which provides for licensure and regulation of insurance producers, because there was a "sufficient nexus between the Superintendent's regulatory authority to prevent licensees from operating under undisclosed conflicts of interest and his statutory responsibility to protect the public from untrustworthy licensees." Id. at *6. The court also rejected arguments that the Superintendent lacked a rational basis for promulgating Regulation 194 and acted in an arbitrary and capricious manner. Id. at *8. The court did note that while the regulation imposed "real and significant burdens on producers", the petitioners did not demonstrate that the "regulatory burden will be so severe as to render Regulation 194 arbitrary or irrational." Id. *9.

On December 23, 2010, the Council of Insurance Brokers of Greater New York, Inc. and Independent Insurance Agents & Brokers of New York, Inc. filed a notice of appeal to the New York Supreme Court Appellate Division, Third Department in Albany, New York. This notice preserves the groups' right to file a formal notice of appeal at a later date. The two groups are on record stating that they will spend the next several months building the strongest case possible. While it appears likely that an appeal will be forthcoming, producers are still required to comply with Regulation 194 until and unless the regulation is overturned by the courts.

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