‘Best-interest’ amendments declared unconstitutional—What comes next?

The Appellate Division Third Judicial Department of the New York Supreme Court ruled last week that amendments to Regulation 187—which created a suitability and best-interest standard for the sale of life insurance—were unconstitutionally vague. This is a significant—although likely temporary—victory for the insurance industry.

The case stemmed from the introduction of amendments to the existing Regulation 187 titled, Suitability and Best Interests in Life Insurance and Annuity Transactions. These amendments created an increased standard on insurance producers when selling life insurance products and required all recommendations to be made in the best interests of the consumer without regard for producer compensation. The amendments went into effect Feb. 1, 2020, for life insurance transactions.

Case summary

In a brief decision, the court addressed only one of the petitioner’s (IIABNY) arguments regarding the constitutionality of the amendments. The court focused solely on whether the amendments were unconstitutionally vague. In order to make this determination, the court applied a two-part test. First, it looked at the amendments to see if they were sufficiently clear so that insurance producers that need to comply with them are not forced to guess the meaning of regulatory terms. The court found that, as written, the amendments failed to provide “sufficient concrete, practical guidance for producers,” to determine what conduct would satisfy the amendments. Furthermore, the court found that the amendments lacked sufficient detail regarding the suitability information producers must obtain from the consumer and what suitability consideration must be disclosed.

Second, the court looked at the amendments to see if they provided clear standards for enforcement to avoid resolution on subjective basis. Again, the court found the amendments did not provide clear standards.

The court stated that the ambiguous language found in the amendments—combined with its lack of clear standards for how the provisions will ultimately be enforced—gave the Department of Financial Services “virtually unfettered discretion,” in determining whether a violation has occurred. As a result, the court held the amendments to be unconstitutionally vague.

What happens next?

The two most likely scenarios are an appeal and revised amendments. The DFS has the option to appeal this decision to the New York State Court of Appeals, the highest court in New York state. In conjunction with an appeal, the DFS also could petition for a stay of the Appellate Division’s decision. This would mean that the amendments would remain enforced until the Court of Appeals reaches a decision.

Another scenario—which could take place in tandem with an appeal—is that the DFS could revise the amendments to address the Appellate Division’s concerns. Since the court  ruled that the amendments were merely unconstitutionally vague—and not that the DFS exceeded its’ regulatory authority (a point raised by petitioners but not addressed by the Court)—the DFS could simply revise the amendments to make it more detailed. The court all but invited the DFS to do that. According to the court, consumer protection goals underlying the creation of the amendments is laudable, but in an effort to lower the costs of implementation, the DFS did not mandate any particular format or system intentionally, or require specific forms that producers must use to demonstrate compliance with the amendments.

The direction from the court is clear: to draft a regulation that mandates a particular format or system, and to prescribe specific forms for producers. Coincidently, a more detailed regulation could lead to an increased cost of implementation and compliance for the insurance industry. This decision may prove to be a hollow victory for the insurance industry if a more onerous regulation follows.