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New York Court Upholds 2017 Regulation of Title Insurance Companies

In late 2017, the New York Department of Financial Services (“DFS”) promulgated Insurance Regulation § 208 in an effort to protect purchasers of title insurance from excessive rates and ensure reasonable charges for ancillary services provided by title insurance companies. Following enactment of the regulation, it was contested in court by the New York State Land Title Association, a not-for-profit corporation devoted to advancing the interests of title companies. While the lower court invalidated the regulation, the Appellate Division, First Department disagreed and recently upheld the law with a few notable exceptions.

Title companies are already subject to Insurance Law § 6409(d), which was enacted in 1984 and amended in 2014 to explicitly prohibit insurers from giving “kickbacks” to title closers, attorneys and other agents in the real estate market. However, after conducting an investigation of all title insurers in New York State for the years 2008 through 2012, DFS determined that Regulation § 208 was necessary because title insurers were spending excessive amounts in “wining and dining” attorneys, title closers and others involved in the real estate industry to the detriment of their customers. The DFS determined that because of these expenses the premiums charged to customers were inflated. Shortly thereafter, Regulation § 208 was promulgated to help stop such practices and to protect consumers from exorbitant costs.

In New York State Land Title Association, Inc. v. New York State Department Finance Services,the Petition asserted that certain language in Insurance Law § 6409(d) was ambiguous and that Regulation § 208 should be annulled on the grounds that enactment of the same was arbitrary and capricious and exceeded DFS’s regulatory authority. The Supreme Court agreed with Petitioner and annulled Regulation § 208 in its entirety. DFS appealed the lower Court’s finding.

The Appellate Court disagreed with the lower Court and not only found that Insurance Law § 6409(d) was not ambiguous but also that other than with two exceptions (noted below), Regulation § 208 was not arbitrarily or capriciously imposed and was rationally based and related to the purpose of the statute to which it was applicable.

The Appellate Court did uphold the lower Court’s annulment of sub-sections 11 NYCRR 228.5(d) (dealing with restrictions on payments to title closers) and 11 NYCRR 228.5(a)(1)-(3) (dealing with ancillary search fees) of Regulation § 208, finding that enactment of these provisions was arbitrary and lacked a rational basis. However, the Court held that annulling these two sub-sections had little bearing on the validity of the rest of the Regulation. As a result, the remainder of Regulation § 208 was not annulled.

If you are a title insurer, take careful note about what conduct is prohibited. Should you wish to discuss a real estate transaction or how the insurance law and regulations may impact the same, please contact us for a consultation.

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