New York Regulatory Action a Reminder That Insurers Cannot Outsource Their Regulatory Responsibilities
The New York Department of Financial Services’ (“DFS”) recently announced an extraordinary regulatory action in which two insurers have entered into a Consent Order with the DFS under which one of the insurers will pay a $15 million fine and the second insurer will provide approximately $40 million in remediation for alleged violations of New York insurance laws and regulations.
According to the DFS, the regulatory actions taken against the insurers were the result of a market conduct examination which found that required information such as premium notices, annual reports, cash surrender value notices, and annual privacy notices were not provided to approximately 15,000 policyholders from 2015 to 2017.
The DFS indicated the alleged violations were the result of one of the insurers ceding its life insurance business through several reinsurance agreements to a reinsurer and then entering into an administrative services agreement to have the reinsurer administer the policies. The reinsurer then outsourced the data system conversion and administration of the life business to an unaffiliated TPA.
Per a recent press release issued by the DFS, New York Insurance Superintendent Maria Vullo stated, “Insurers who outsource their responsibilities to third parties are still responsible to meet all of their obligations under the law…Given the increased frequency with which insurers use third party providers, insurers will be held accountable for any failures to meet their legal obligations even if that failure was the fault of a third party provider.”
This extraordinary and significant regulatory action taken by the DFS against these insurers is a reminder that even in a state like New York, in which the DFS doesn’t license and regulate TPAs, insurers cannot outsource their regulatory responsibilities and may be held strictly liable for alleged violations of insurance laws committed by TPAs or other third party providers.