On Aug. 1, 2019, New York's first amendment to Regulation 187 went into effect. Insurers and producers must comply with the regulation immediately for any annuity-contract transaction and by Feb. 1, 2020, for any life-insurance-policy transaction.

Regulation 187 regulates recommendations made by a producer in the sale of a policy or certain in-force transactions. Most recently, some industry players filed a legal challenge, claiming that the best interest standard and other requirements imposed by the regulation are impermissibly vague and confusing. Two separate actions were filed and consolidated, but the challenge was dismissed. Currently, one of the two actions in the consolidated matter is being appealed. The regulation will remain in effect until a decision is made on appeal.

This article addresses the most significant aspects of the final adopted regulation and its impact on insurers and producers.

Insurers and Producers Must Act in the Best Interest of the Consumer. The final regulation imposes a "best interest" standard on insurers and producers, which requires them to consider multiple factors when making a recommendation for the purchase of a policy or changes to certain in-force transactions. While the regulation does not identify an exclusive list of those factors, some factors relevant to this analysis include the policy benefits, price and financial strength of the insurer:

(c) In making a recommendation, a producer, or an insurer where no producer is involved, may weigh multiple factors that are relevant to the best interests of the consumer including, but not limited to, the benefits provided by the policy, the price of the policy, the financial strength of the insurer, and other factors that differentiate products or insurers.

Additionally, the regulation requires the recommendation to the consumer to reflect the "care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances then prevailing." The insurer or producer must also have a "reasonable basis" to believe that the consumer has been informed of various features of the policy, including potential consequences, both favorable and unfavorable, before making a recommendation.

Insurers Are Required To Train Their Producers on Their Products. Further, the regulation imposes training and supervisory obligations on insurers. The regulation requires insurers to adequately train their producers on the insured's products. "An insurer shall be responsible for ensuring that every producer recommending any transaction with respect to the insurer's policies is adequately trained to make the recommendation in accordance with the provisions of this Part, but an insurer shall not be required to warrant that a producer is acting in the consumer's best interest."

While the regulation does not specify how the training must be provided, common forms of training might include seminars, tests, instruction, company courses and product design materials, with much discretion left to the insurer on how to satisfy the regulation's requirements. This broad discretion was recently recognized by the New York court in its ruling on the motion to dismiss the action challenging the regulation. See The Independent Insurance Agents and Brokers of New York v. The New York State Department of Financial Services, RJI: 01-18-ST9984, Index No. 907005-18 (Sup. Ct., Albany July 31, 2019) ("The Amendment does not impose on insurers any specific form, system, or procedure which must be followed in developing a procedure to monitor their workforce, and the same is true for education and training.").

For many insurers, this training requirement may not impose additional obligations since many insurers already commonly provide product training to producers. However, to the extent that an insurer does not provide this training—i.e., in those instances when the insurer requires the producer to self-educate on the insurer's products—the regulation may now require affirmative action on the part of the insurer to provide this training.

Insurers Have a Duty To Supervise Sales and In-Force Transactions. Further, the regulation imposes supervisory obligations on insurers. For example, an insurer is prohibited from effectuating a sales transaction unless there is a "reasonable basis" to believe that the sales transaction is suitable based on the suitability information provided by the consumer. Accordingly, while an insurer is not required to warrant that a producer is acting in the best interest of a consumer, it nonetheless has the responsibility to not effectuate a sales transaction unless it believes that the sales transaction satisfies the best-interest standard. However, this responsibility does not apply to a sales transaction that results from the exercise of a contractual right in a policy. Thus, absent applicable exemptions, carriers will want to have a system in place to ensure compliance with the supervision aspect of the regulation.

The regulation also requires insurers to establish, maintain and audit a system of supervision that is reasonably designed to achieve the insurers' and producers' compliance with the regulation, including standards and procedures for the collection of a consumer's suitability information, documentation and disclosure of the basis for any recommendation for sales transactions, review of complaints received by the insurer about recommendations inconsistent with the best interest of the consumer, and the auditing and/or contemporaneous review of recommendations to monitor producers' compliance with the regulation. Critically, the regulation refers to "establish, maintain, and audit." This means that the insurer must establish a system that is reasonably designed to achieve the requirements, maintain the system and have a procedure in place to audit that system. The regulation does not identify the exact method by which this must be achieved, leaving discretion but also ambiguity on how best to implement such a system. The exact parameters and structure of the effective and appropriate system will vary significantly based on each insurer's specific mix of products, distribution system(s), company structure and other relevant factors.

Lastly, the regulation provides for several exemptions where its obligations do not apply, including purchases of policies in response to a generalized offer by the insurer by mail, at the worksite, or by other methods without producer involvement; policies used to fund employee pension or welfare benefit plans; nonqualified deferred compensation arrangements; and any corporate or bank-owned policies. The full list of exemptions may be found in 11 NYCRR 224.2.

Patrick Gennardo is a partner, Rachel Naor is a senior associate, and Jonathan Kim is an associate at Alston & Bird.