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Insurers File Article 78 Proceeding Against DFS Over New Title Regs

[caption id="attachment_14326" align="aligncenter" width="620"] Maria Vullo of the New York state Department of Financial Services. Photo credit: Rick Kopstein. [/caption] ALBANY—Several title insurance companies are asking the state Supreme Court to strike down newly enacted regulations from the New York Department of Financial Services, arguing that the new rules will result in companies shuttering and layoffs. The New York State Land Title Association Inc.—which represents the industry—along with the Great American Title Agency Inc. and Venture Title Agency filed an Article 78 petition with the Manhattan Supreme Court on Tuesday afternoon, claiming that the new regulations by the state’s banking and insurance regulator “wreak havoc on title insurance corporations, title insurance agents, and title closers across the state of New York.” The DFS regulations “will result in company closures, layoffs and reduced services for consumers, hitting small businesses hardest. DFS must be stopped before more companies are forced to close or lay off employees and consumers are harmed across the state,” the title insurance companies said in court documents filed Tuesday. The title insurance companies are being represented by Gibson, Dunn & Crutcher partner Mylan Denerstein, who previously served as Gov. Andrew Cuomo’s chief counsel, as well as associates Akiva Shapiro and David Coon. Reached for comment Tuesday evening, the New York State Land Title Association referred questions to the court documents. A DFS spokesman  did not immediately respond to a request for comment. In October, the Department of Financial Services issued final regulations aimed at stopping “unscrupulous practices” in the title insurance industry. The regulations clarify the rules around marketing expenses, including meals, entertainment and other fees that title agents or title insurers may charge a customer at closing. The regulations were born from a 2015 investigation by the department, which found that insurance companies, real estate agents and others who order title insurance on behalf of clients spent millions on incentives to attorneys and real estate agents that were charged to consumers as marketing costs. The incentives, according to the DFS, are a violation of the state’s anti-inducement provision of the state’s insurance law. The trio of title insurance companies are asking the state Supreme Court to strike down the regulation, arguing that it is “inconsistent” with state insurance law, which only prohibits quid pro quo inducements for businesses, not ordinary marketing activities that “are critical for the success of the industry,” court documents said. The title insurance companies also argue that a portion of the new regulations imposes a rate reduction as a retroactive penalty for conduct that had been previously permitted and that it “imposes unconstitutionally vague restrictions on political and charitable contributions and advertising activities—in violation of due process—by barring spending that is 'lavish or excessive’ and not 'reasonable and customary,’ which are ambiguous standards that are not defined,” lawyers for the title insurance companies wrote.   The title insurance regulations represent “improper regulatory overreach and is arbitrary and capricious,” lawyers for the trio of title insurance companies wrote, adding that the court should declare Insurance Regulation 2018 void and unenforceable. Since the DFS finalized the regulations in October, it has been fraught with concerns. In mid-December, just days before the regulations were to go into effect, a trio of state lawmakers asked the department for a six-month delay, saying they had “serious concerns” over the insurance regulations. In a letter to DFS Superintendent Maria Vullo, Democratic Assemblyman Kevin Cahill, who chairs the insurance committee, said that the regulations on how insurers and agents will be able to market themselves, the requirement that for insurers to restate the last six years of their expenses and certify their compliance with the new regulations or implement a 5 percent rate reduction for all title insurance policies “will significantly destabilize an industry that has stability, reliability and predictability at its very core.” Five days after the trio of lawmakers sent the letter to Vullo urging the regulator to slow down the implementation of the regulations, the department announced that it would begin enforcing a certain section of the regulation that deals with prohibition on inducements for future title insurance business and permitted expenses on Feb. 1, 2018, rather than the scheduled date of Dec. 18, 2017. Despite the delay in implementation, the Republican-led state Senate passed legislation in mid-January that would undo the title insurance regulations. The legislation, sponsored by Republican state Sen. James Seward, the head of the Senate insurance committee, was also approved unanimously during last year’s legislative session. The proposal to undo the regulations has a companion bill in the Democratic-dominated Assembly, but the chamber has yet to take it up for a floor vote. In an affidavit in support of the Article 78 filing, the former New York insurance superintendent, Gregory Serio, argued that the regulation goes “far beyond DFS’ statutory authority by prohibiting marketing expenses that are not otherwise a quid pro quo prohibited by Insurance Law Section 6409(d).” Serio, a partner and managing director of lobbying and government firm Park Strategies who leads the firm’s risk and insurance management practice group, was hired by the New York State Land Title Association to review the DFS regulations. “The regulation fails to provide regulated parties with specific guidance and certainty as to what is prohibited, and impermissibly provides regulators with discretion to subjectively enforce its provisions,” Serio said in his affidavit.

aria Vullo of the New York state Department of Financial Services.