Plugged Into Insurance @ Hinman Straub – October 12, 2018

Fines and Penalties Imposed by the NY DFS

We are often asked by clients about fines and penalties which may be imposed by the NY Department of Financial Services (“DFS” and “the Department”). Questions include whether the Department will impose a penalty and, if so, what is the likely amount of the penalty?

The DFS will typically impose a monetary penalty where a violation of the NY Insurance Law or Department regulations is identified (whether by self-reporting by the licensee, via a complaint or inquiry from another licensee or a member of the public, discovery by the Department resulting from their daily regulatory activities or from an examination by the DFS of a licensee). The specific facts of each circumstance will determine the Department action, which may include remediation where customers have been harmed and there is a reasonable methodology for correcting the improper action and providing appropriate relief, such as a return of any excess premiums charged to the policy owner.

In determining the extent of a monetary penalty, the DFS considers many factors including the number of instances that a violation occurred. NY Insurance Law Section 109 authorizes the DFS to impose a monetary penalty of up to $1,000 per offense, and each occurrence may be considered a separate instance of the violation. Thus, if a violation involves group life certificates, for example, the DFS has the authority to impose a maximum penalty of $1,000 for each instance in which the certificate including the violation was delivered or issued for delivery. Other important factors which are considered in determining the amount of a penalty include the level of cooperation by the licensee in resolving the problem, whether the violation was self-reported, whether the transgression is a repeat violation by the licensee, the extent of substantive harm and any remediation of that harm required by the DFS, whether the licensee has been previously fined by the DFS, etc.

The DFS attempts to maintain comparability among the fines it imposes, although that may be a difficult task due to the various facts and circumstances of each situation.

We are available to assist DFS licensees in working with the DFS to reach appropriate resolutions where violations are alleged by the Department.

For more information and assistance on this topic, please email Fred Bodner or call 518.689.7296.

Regulatory Requirements Concerning Certain Group Insurance Certificates Deemed To Be Delivered In New York

New York Insurance Law Section 3201 (b) (1) provides that certain group life, group accident, group health, group accident and health or blanket accident and health insurance certificates insuring New York residents will be deemed to have been delivered in New York regardless of the state of actual delivery. Specifically, certificates insuring New York residents will be deemed to have been delivered in New York irrespective of where they were in fact delivered under group policies that are issued to multiple employer trust groups in different industries, association groups, financial institution groups, discretionary groups and groups that are not recognized under New York law. New York Insurance Regulation 123 (“Regulation 123”) was promulgated under the authority of New York Insurance Law Section 3201 (b) (1) and provides further detail in terms of the filing and other requirements that apply to certificates deemed to be delivered in New York.

Regulation 123 requires certificates deemed to be delivered in New York to be filed and approved by the New York Department of Financial Services (“DFS”). These certificates must provide New York resident insureds with “protections substantially similar” to the protections provided by group policies and certificates delivered in New York. This means that these certificates must: (i) provide all mandated coverage at a reasonable level of benefits, but not necessarily at the same level prescribed by law for policies and certificates actually delivered in New York; (ii) include conversion rights and continuation rights prescribed by law for policies and certificates actually delivered in New York; (iii) comply with laws and regulations which prohibit a specific benefit or policy provision; (iv) comply with benefit ratio standards set forth in the regulation; (v) include provisions which are at least as favorable as provisions contained in policies and certificates delivered in New York; and (vi) provide readable language in certificates, with full compliance with statutory readability standards applicable to policies and certificates actually delivered in New York. Regulations 123’s minimum benefit ratio standards, monitoring and reporting requirements differ somewhat between types of group coverage but essentially the regulation requires insurers to (i) monitor compliance with the benefit ratio standards set forth in the regulation; (ii) report issues requiring insurer action to DFS and (iii) implement, where appropriate, corrective action plans upon DFS approval.

Additionally, the benefit ratio and monitoring standards also apply to certificates insuring New York residents that are issued under certain group and blanket policies actually delivered in New York. In this regard, group life policies delivered in New York to association, financial institution or discretionary groups, group accident and health policies delivered in New York to multiple employer trust groups in different industries, associations, financial institutions and discretionary groups and blanket accident and health policies delivered in New York to discretionary groups must adhere to the benefit ratio and monitoring requirements in Regulation 123.

It is important to note that DFS often reviews compliance with Regulation 123 in the context of product and rate filings and market conduct examinations. DFS has imposed corrective action plans on insurers which amount to tens of millions of dollars in credits to consumers that have overpaid for their coverage due to the insurer’s failure to comply with the benefit ratio requirements.

For more information and assistance on this topic, please email Sandra McDermott or call 518.689.7224.

Record Maintenance and Retention Requirements

Insurers must maintain records pertaining to complaints, claims, policies, rating, underwriting, marketing, financial condition and producer licensing as well as “such other records subject to examination by the superintendent”. Section 243.1 of Regulation 152 defines “records” as books, records, files, securities, data compilations and other documents. While the regulation contains some guidance regarding the specific types of records that must be maintained for examination purposes, it does not purport to provide an exhaustive list of all records that must be maintained. Generally, records must be maintained for the longer of 6 calendar years or until after the filing of a report on examination in which the record is subject to review.

ACCESS TO RECORDS

Records must be readily available and easily accessible to the superintendent in accordance with Section 310 of the Insurance Law. Section 310 requires that examiners be given “convenient access at reasonable hours” to all records relevant to the examination, and that the insurer facilitate such examination and aid examiners “so far as it is in their power to do so”. Records must be maintained in a readable form and if they are maintained in a language other than English, they must be accompanied by accurate translations.

RECORDS MAY BE MAINTAINED IN ANY DURABLE MEDIUM

Records and indices of records may be maintained in any durable medium. Section 243.1 of Regulation 152 defines “durable medium” as a medium for maintaining a record where the properties of such medium provide reasonable assurances against tampering with the information contained in the original and the accuracy of any reproduction generated. A durable medium may include paper or facsimile; or photographic, micrographic, magnetic, optical, mechanical or electronic media.

ORIGINAL RECORDS

When transferring original records to a durable medium, the original record may be destroyed after assuring that all information contained in the original record, including signatures, handwritten notations or pictures, is contained in the durable medium. If the original record is not a paper document, an insurer must be able to produce information or data which accurately represents records of communications or accurately reflects transactions or events relating to the document. If an original paper record is not retained or if there was no original paper record, a duplicate or back-up system sufficient to permit reconstruction of the record must be established at a separate location.

RECORD RETENTION PLAN

Insurers are required to establish and maintain a “records retention plan” pursuant to Section 243.3 of Regulation 152. Such a plan must be available to the superintendent upon request and include a description of the types of records being retained, method of retention and safeguards to prevent alterations of the records. Any records provided in accordance with the record retention plan must be accompanied by a certification attesting to the accuracy of those records.

FAILURE TO MAINTAIN RECORDS

The superintendent is permitted to perform on-site visits to determine insurer compliance with record retention and maintenance requirements. An insurer must require a person authorized to act on its behalf, including a managing general agent, an administrator or other person or entity, to maintain records in accordance with regulatory requirements. Insurers will be held responsible if the designated person or entity fails to maintain the records in the required manner.

PRODUCTION OF RECORDS

Upon request of the superintendent, the insurer must provide a hard copy of the record or if the record is maintained in a medium used by the superintendent, the insurer may provide the record in that medium. Failure to produce and provide a record within a reasonable time frame is deemed a violation of Section 308 of the Insurance Law unless the insurer can demonstrate that there is reasonable justification for the delay.

For more information and assistance on this topic, please email Leanne Kontogiannis or call 518.689.7201.

Supplement No. 1 To Insurance Circular Letter No. 20 (2017) Insurance Producer Compensation For Accident And Health Insurance Policies And Contracts-Update

In response to the number of questions generated by the industry regarding Insurance Circular Letter No. 20 (2017) and accompanying Supplement No.1, DFS agreed to develop FAQs to provide further guidance. DFS is in the process of preparing the FAQs which we expect to be issued within the next month.

For more information and assistance on this topic, please email Leanne Kontogiannis or call 518.689.7201.

Electronic Applications on the Rise

As more and more consumers take to the internet to purchase life insurance, it is no surprise that insurers are racing to obtain approval of their electronic applications for use in the marketplace. Many insurers have found that the Insurance Law and Regulations lag far behind the fast pace of innovation in digital technology, making the approval process daunting for companies seeking to stay ahead of the curve (or even to remain current) in the digital domain.

The formatting of electronic applications varies widely among insurers. Some companies have chosen a simplified process, merely displaying a fillable PDF of their paper application form on the internet that, when completed, is electronically transmitted for manual underwriting. Other companies have elected to invest heavily in digital technologies and processes, devising entirely new electronic application formats. These more complex formats involve applications specifically designed for completion via desktop and/or mobile devices, often incorporating hundreds of reflexive question options and largely automated underwriting processes.

Regardless of their approach to the electronic application process, insurers continue to face particular challenges in complying with the requirements of N.Y. Insurance Law § 3209 (which requires delivery of the preliminary information and buyer’s guide at or before submission of the application) and Regulation 60 (which governs replacements). Many insurers have opted not to accept applications for replacement coverage via their electronic systems, but that does not exempt them from some Regulation 60 requirements that present stumbling blocks in digital applications. These include the completion and timing for delivery of the Definition of Replacement form, as well as programming requirements that “lock out” applicants seeking to thwart the Regulation 60 process.

For more information and assistance on this topic, please email Ben Bodner or call 518.689.7215.

Supplement No. 1 to Insurance Circular Letter No. 20 (2017) Insurance Producer Compensation for Accident and Health Insurance Policies and Contracts-Update

FAQs have been posted on the Department’s website. DFS is not enforcing the October 1, 2018 filing deadline for rate filings not in compliance with Supplement No. 1. An updated deadline for submission of the revised filings has not yet been provided.

For more information and assistance on this topic, please email Leanne Kontogiannis or call 518.689.7201.