On July 5, 2018, Justice Rakower of the New York County Supreme Court issued a decision annulling the recently-enacted and controversial Insurance Regulation 208. See New York State Land Title Association, Inc. v. New York State Department of Financial Services, 2018 WL 3306755 (N.Y. Sup. Ct. July 5, 2018). The New York State Department of Financial Services (“DFS”) issued the regulation after purportedly finding that title insurance companies, title agents, and title insurance closers employed practices that resulted in higher premiums and closing costs for consumers. Per DFS, these practices included calculating future title insurance rates by incorporating millions of dollars spent on “marketing costs” such as meals, entertainment, gifts, vacations, and free classes; encouraging consumers to pay gratuities and pick-up fees to title insurance closers for satisfying prior mortgages; and charging excessive ancillary fees.
DFS intended Insurance Regulation 208, inter alia, to (1) prevent marketing expenses from being passed on to consumers through increased premiums; (2) prohibit in-house closers—title insurance closers engaged by the title insurance companies or title agents—from receiving pick-up fees from consumers; and (3) cap the fees charged for ancillary services concerning residential real property closings, including Patriot searches and bankruptcy searches. The regulation ultimately placed restrictions on non-quid pro quo marketing expenses, barred in-house closers from receiving fees for their services from consumers, and placed a 200% of the out-of-pocket costs cap on ancillary fees. The title insurance industry considered these restrictions to be fundamentally misguided and economically devastating. Insurance Regulation 208 became effective on December 18, 2017.
In the case, the New York State Land Title Association, Inc., The Great American Title Agency, Inc., and Venture Title Agency, Inc. (collectively as the “Petitioners”) challenged Insurance Regulation 208 as inconsistent with Insurance Law § 6409(d) under which DFS promulgated the regulation. Insurance Law § 6409(d) states:
No title insurance corporation, title insurance agent, or any other person acting for or on behalf of the title insurance corporation or title insurance agent, shall offer or make, directly or indirectly, any rebate of any portion of the fee, premium or charge made, or pay or give . . . either directly or indirectly, any commission, any part of its fees or charges, or any other consideration or valuable thing, as an inducement for or as compensation for any title insurance business.
Petitioners argued that the statute only prohibited “quid pro quo inducements,” more commonly referred to as kickbacks; whereas, DFS argued the statute applied broadly to quid pro quo and non-quid pro quo inducements. Additionally, the Petitioners argued that the sections of Insurance Regulation 208 barring only in-house closers from receiving pick-up fees from consumers and setting a cap on fees for ancillary services, without any economic or other analysis supporting the limitation, were arbitrary and capricious.
The Court examined the legislative history of Insurance Law § 6409(d) and reviewed its statutory construction to interpret the law, and rejected each and every one of the DFS’s arguments. First, in an opinion highly critical of DFS, the Court held that the Legislature amended the law to “remedy the mischief of kickbacks, not marketing and entertainment expenses.” Indeed, the Court noted that the statute’s very title, “Filing of policy forms; rates; classification of risks; commissions and rebates prohibited,” supported its conclusion that the Legislature never intended to prohibit “ordinary marketing and entertainment expenses.” Further, the Court stated “[i]t is common sense that marketing is an inducement for business” and that it would be an “absurd” result “to hold that the Legislature intended to prohibit title insurance corporations from marketing themselves.” Finding that the current Insurance Law did not authorize DFS to regulate the ordinary marketing and entertainment expenses of the title insurance industry, the Court declared that the Legislature must pass new legislation if it intends to allow such regulation.
Second, DFS attempted to justify prohibiting in-house closers from receiving reasonable pick-up fees while allowing independent closers to charge pick-up fees for the remittal of a loan payoff as a “valid exercise of regulatory authority.” The Court rejected DFS’s exception for independent closers. It classified the regulation as “unreasonable and irrational” because DFS asserted that premium fees encompassed closer fees and, therefore, closer fees should be covered by the premium regardless of in-house or independent closer status. Likewise, if premium fees did not include pick-up fees, the regulation would not be rational.
Finally, Petitioners argued that the cap imposed on ancillary services regarding real estate property closings was arbitrary and lacked supporting economic or other analysis. In response, DFS argued that capping these fees was a valid exercise of regulatory authority and necessary to protect consumers from excessive fees. Nonetheless, in the absence of any record to establish that the 200% cap was based on sound reasoning and facts, the Court rejected the cap as arbitrary.
This decision overturning Insurance Regulation 208 in its entirety is a significant victory for the title insurance industry.