The “best interest” standard proposed by New York State exposes insurance/annuity writers to liability risks that exceed the Department of Labor rule, a prominent law firm concluded.
Announced early this month, the New York proposal imposes “burdensome compliance obligations” and “certain requirements that appear impractical,” the law firm Drinker Biddle & Reath concluded in its analysis.
Likewise, the New York standard exceeds the model law prepared by the National Association of Insurance Commissioners, the law firm added. NAIC model laws are usually the standards that states defer to when adopting insurance regulation.
While the NAIC law applies a “best interest” standard to annuity sales only, the New York proposal applies to sales of both insurance and annuity products.
“With the Proposal, New York further cements itself as a unique playing field for the life insurance industry,” Drinker Biddle lawyers wrote.
New York’s best-interest proposal covers "all sales of life insurance and annuity products, beyond the types of advice covered by the DOL rule,” Gov. Andrew Cuomo said.
The proposed amendments are subject to a 60-day notice and public comment period. If adopted, New York would become the second state to pass its own best-interest standard. Nevada passed a law that Gov. Brian Sandoval signed in June.
Both states cited the lengthy delays of the DOL rule, the final parts of which are on ice until July 2019.
The New York standard would continue to exempt policies/contracts used to fund qualified retirement plans, ERISA plans, and employer-sponsored IRAs. The proposal also would not apply to sales of mutual funds or other securities, unless related to an annuity or life insurance product.
For all other sales, the proposal would require licensees to apply a standard very similar to the DOL’s “best interests” standard, as well as the ERISA “prudent person” rule.
As such, a recommendation is in the best interest of a consumer if it furthers the consumer’s needs and objectives, and is made “without regard to the financial or other interests of the producer, insurer or any other party.”
However, parts of the New York regulation appear significantly restrictive, Drinker Biddle wrote.
For example, “all producers involved in a transaction are subject to all of the requirements of the Proposal, even if they have no direct contact with the consumer (and thus would not have made a recommendation to the consumer).
The provision could be interpreted to apply to a non-resident producer who is not licensed in New York, Drinker Biddle concluded.
‘Continuing Duty to Monitor’
The New York proposal “might be construed to create a continuing duty to monitor and provide advice after the sale,” Drinker Biddle said. “In contrast, the DOL rule allows the person making the recommendation to limit or disclaim a duty to monitor.”
The New York rule “could be interpreted to potentially impose a fiduciary obligation on insurers/annuity writers, even if the producer did not have actual or apparent authority to act on behalf of the insurer/annuity writer – and when the alleged conduct occurs after the point of sale,” the law firm said.
“This may create more exposure for insurers/annuity writers in litigation relating to a producer’s alleged misconduct,” the alert said.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.
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