New York Appellate Court Upholds Title Anti-Kickback Rules
A New York appellate court has held that an insurance law prohibiting the practice of kickbacks from insurers to title closers or other agents in the real estate market was unambiguous as to the term “other consideration or valuable thing,” and that most of the implementing regulation had a rational basis.
In 2017, the New York Department of Financial Services (DFS) implemented Insurance Regulation 208 pursuant to Insurance Law § 6409(d). Among other things, the Insurance Law prohibits title closers from providing “other consideration or valuable thing” as a kickback to various individuals who drive business referrals. Insurance Regulation 208 expounds upon this prohibition by providing a non-exhaustive list of both acceptable and prohibited acts. The Regulation also imposed an absolute ban on the collection of certain fees by in-house closers employed by title insurers, but permits independent closers to collect those same fees, as long as they are reasonable and requisite notice is given to consumers. Finally, the regulation prohibited an insurer from charging an applicant a fee of greater than 200% of the insurer’s out-of-pocket costs paid for various searches.
In re New York State Land Title Association, Inc. v. New York State Department of Financial Services was filed by regulated parties as an administrative proceeding against DFS seeking to invalidate Insurance Regulation 208. The parties argued, among other things, that its provisions were arbitrary and capricious, and it exceeded DFS’s regulatory authority in violation of separation of powers. The lower court granted the petition, reasoning that the language “other consideration or valuable thing” found in the Insurance Law was ambiguous as to its scope, as it had the potential to encompass legal expenses, such as marketing and entertainment expenses. Additionally, the lower court held that the regulations concerning fees collected by closers were irrational and internally inconsistent as the distinction between in-house and independent closers had no rational basis and was arbitrary. The lower court similarly found the fee cap of 200% to be arbitrary.
The issues on appeal were whether the language in the Insurance Law was ambiguous and whether the provisions of Insurance Rule 208 had a rational basis. The Appellate Division held that the Insurance Law is unambiguous as to the term “other consideration or valuable thing,” as it prohibits an insurer from offering or providing directly or indirectly any thing of value in return for title insurance business. As to the challenged provisions in Insurance Rule 208, the appeals court held that DFS did not have a rational basis for either the restrictions on payments to closers or the ancillary search fee caps. While DFS is allowed to publish regulations consistent with the Insurance Law as long as they are not irrational or unreasonable, here, the court found that DFS did not meet that standard as to these two provisions. The appeals court did, however, uphold the rest of the Regulation as a valid exercise of its rule-making powers to elaborate the Insurance Law. The case was remanded to permit consideration of any arguments for affirmative relief raised in the petition that the lower court had previously not needed to reach.
