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Beware Of Title Insurers Bearing Gifts

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  • Posted on: Jan 18 2019

On January 15, 2019, the New York State Supreme Court, Appellate Division, First Department rendered a decision in In re: New York State Land Title Association, Inc. v. New York State Department of Financial Services, in which the Court, inter alia, upheld certain provisions of the Insurance Law and related regulations promulgated by the Department of Financial Services (“DFS”) designed to “explicitly prohibit the practice of kickbacks from insurers to title closers, attorneys, and other agents in the real estate market.”  Land Title at *1.

Section 6409(d) of New York’s Insurance Law provides, in pertinent part:

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 to any applicant, or to any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or the prospective owner, lessee, or mortgagee of the real property or any interest therein, 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, nor shall any applicant, or any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or of the prospective owner, lessee, or mortgagee of the real property or anyone having any interest in real property knowingly receive, directly or indirectly, any such rebate or other consideration or valuable thing.  (Emphasis added.)

Part of the reason for the creation of the DFS was to “promote the reduction and elimination of … unethical conduct by … insurance … institutions and their customers.”  See Financial Services Law § 102(k).  After a lengthy five-year investigation, the DFS determined that some of practices of the title insurance industry “resulted in higher premiums and closing costs for consumers [and, therefore,] violate Insurance Law § 6409(d).”  Land Title at *2.  Specifically, DFS found that title insurers were spending “excessive” amounts of money on gifts, trips, entertainment, meals and the like (“Inducements”) to attract title insurance business from those able to direct title insurance business to a particular company and that such expenses were directly impacting the amount that consumers were paying for title insurance premiums.  Land Title at *2.

DFS determined that the title insurance industry’s practices violated Insurance Law § 6409(d).  Thus, “[t]o prevent such practices and to protect consumers from exorbitant costs, DFS promulgated Insurance Regulation 208.”  Land Title at *3; Insurance Regulation 208 (11 NYCRR 228).  In determining the necessity of Insurance Regulation 208, the DFS recognized that:

Consumers of title insurance usually rely upon the advice of real estate professionals, including attorneys or real estate agents, who order the policy on their behalf.  Consumers also typically pay any invoice presented at the closing without seeking documentation or further clarification….

See 11 NYCRR 228.0(a); Land Title at *3.

Insurance Regulation 208 expressly recognizes that Insurance Law § 6409(d), among other provisions, prohibits title insurers and others acting on their behalf from “mak[ing] any rebate, directly or indirectly, or pay[ing] or giv[ing] any consideration or valuable thing, to any applicant, or to any person, firm or corporation acting as an agent, representative, attorney or employee of the actual or prospective owner, lessee, mortgagee of the real property or any interest therein, as an inducement for, or as compensation for, any title insurance business, including future title insurance business, and maintaining existing title insurance business, regardless of whether provided as a quid pro quo for specific business.”  See 11 NYCRR 228.2(a); Land Title at *3.  The Regulation, which specifies permissible and impermissible practices, prohibits offering Inducements for title insurance business.  See 11 NYCRR 228.2(b); Land Title *3-4.  Regulation 208, however, does permit certain expenditures for things such as advertising, promotional items of de minimus value, marketing events open to the general public, and the like.  See 11 NYCRR 228.2(c); Land Title at *4.

In 2018, the Land Title petitioners commenced an Article 78 Proceeding seeking to annul Insurance Regulation 208.  The court below granted the petition [here] finding, inter alia, that the language “or any other consideration or valuable thing,” in Insurance Law § 6409(d) was ambiguous.

The First Department, in modifying Supreme Court’s order, held that the “other consideration” language from Insurance Law § 6409(d) is unambiguous.  Thus, the First Department found that:

The plain text of Insurance Law § 6409(d) unambiguously prohibits an insurer from “offer[ing] or mak[ing], 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” …. The statute repeatedly states that a proscribed exchange may be done “indirectly.” After listing specific types of consideration such as commissions, the legislature elaborates and plainly expands the statute’s parameters to “any other consideration or valuable thing, as an inducement for, or as compensation for, any title insurance business” (Insurance Law § 6409[d]) …. The use of the word “any” unambiguously indicates that this legislative prohibition was intended to be broadly construed, allowing for DFS to define “any other consideration or valuable thing,” provided, of course, it had a rational basis to do so.

Moreover, the phrases “an inducement” and “any title insurance” need not refer to a quid pro quo concerning one specific act of doing business, but may reasonably be applied to a more longstanding arrangement in which insurers regularly spend vast sums of money on extravagant gifts for referral sources, who are tacitly expected to return the favors by providing a reliable stream of referrals.

Land Title at *6, 7 (emphasis supplied).

The Land Title Court found that in enacting Regulation 208 “DFS reasonably sought to put an end to” the “ethically dubious scheme” of giving “lavish gifts” in anticipation of receiving title insurance business “unbeknownst to and at the expense of consumers, who ultimately pay higher premiums as a result.”  Land Title at *7.  This, the Court found, was “impermissible” under Insurance Law § 6409(d).  Land Title at *7.  DFS’ efforts were the result of a five-year investigation of the title insurance industry, the findings of which went a long way to support the notion that there was a rational basis for DFS’ promulgation of the related regulations.

It is worth noting that the Land Title Court addressed other aspects of Regulation 208 and agreed with Supreme Court that there was no rational basis for DFS to promulgate same.  Thus, the First Department agreed that “there is no rational basis for DFS to impose an absolute ban on the collection of certain fees by in-house closers while permitting independent closers to collect the same fees as long as the fees are reasonable, and the requisite notice is provided to consumers.”  Land Title at *8.

Similarly, the First Department agreed that there is no rational basis for “capping fees for certain ancillary searches at 200% of the out-of-pocket costs of those searches or 200% of certain other measures in the absence of any out-of-pocket costs.”  Land Title at *8.

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