New York Department of Financial Services to Have Authority Beyond Legacy Regulators; New Legal Risks Emerge for Insurers


The merger of the New York Insurance and Banking Departments gives the combined Department heightened enforcement and regulatory powers over previously unregulated financial products and services. Sutherland suggests that insurers and reinsurers that are domiciled, licensed or accredited in New York be aware of the new legal risks arising from the formation of a new New York Department of Financial Services, and consider the actions discussed in this Legal Alert. This Legal Alert is applicable to accredited reinsurers, notwithstanding Dodd-Frank.

It has been said that the lion shall lie down with the lamb, but the lamb won’t get very much sleep.1 There will be even less sleep for those responsible for overseeing and managing risks after the merger of New York State’s Insurance Department and Banking Department into one entity called the Department of Financial Services (DFS). The legislation that effected this merger, known as the Financial Services Law (FSL), was signed by New York Governor Andrew Cuomo earlier this month and takes effect on October 3, 2011.2

Under the FSL, the Superintendent of Financial Services (Superintendent) will have the authority to enforce the New York Insurance Law and the New York Banking Law, which will both remain largely intact. The Insurance Division and the Banking Division will each be led by a Deputy Superintendent.

Nevertheless, the FSL will bring important changes to the regulation of insurers in New York State. The Superintendent will have expansive new rulemaking authority and enforcement powers over previously unregulated financial products and services and the entities providing them. Further, the Financial Frauds and Consumer Protection Unit (FFCPU)3 of the DFS will have new powers to investigate financial fraud committed by insurers, banks and other entities and individuals (including insurance fraud committed by claimants). The Superintendent will be able to hold public hearings and levy civil penalties in amounts significantly greater than currently permitted under the New York Insurance Law. Any penalties levied as a result of a hearing may not be challenged in court. Instead, insurers will need to bring an Article 78 proceeding, which requires a showing that the Superintendent was arbitrary and capricious in his/her determination.4

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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