Duty to Disclose Disciplinary Actions and Criminal Prosecutions

Numerous recent New York State Department of Financial Services (“DFS”) penalties against licensees involve a failure to disclose on DFS applications actions taken in other jurisdictions or failures to timely report administrative actions or criminal prosecutions by other agencies.

By way of background, New York Insurance Law § 2110(i) requires a licensee to “report to the superintendent any administrative action taken against the licensee in another jurisdiction or by another government agency in this state within thirty days of the final disposition of the matter.”

Notably, except in the case of an original application or renewal application, disclosure is only required after an adverse final decision is rendered. This means that if a complaint against an insurance producer is filed with another administrative agency, but the agency does not impose a fine or suspension or has not yet rendered a final adverse disposition, then no reporting obligation is triggered. Likewise, if an administrative proceeding results in a finding in the insurance producer’s favor, or in the case of a warning letter, there is no reporting obligation.

This disclosure requirement is not limited to disciplinary actions taken by other state insurance departments; DFS recently imposed penalties for failing to disclose a fine by the Financial Industry Regulation Authority, and for failing to disclose a seven-year-old fine by the National Association of Securities Dealers.

   

Similarly, many fines in 2017 thus far involved a failure to disclose a criminal prosecution as required under Insurance Law § 2110(j) (“[w]ithin thirty days of the initial pretrial hearing date, a licensee subject to this article shall report to the superintendent any criminal prosecution of the licensee taken in any jurisdiction”).

Unbeknown to many licensees, DFS interprets the Insurance Law to require disclosure within 30 days of the first time a licensee appears in court, even if the charges are subsequently dismissed. In other words, any arrest will require disclosure, not solely if the misdemeanor or felony charge results in a conviction.

Whether DFS takes further action after disclosure may depend, in part, on whether the crime involved dishonesty or breach of trust, given the fiduciary nature of relationships between licensees and insureds. DFS would also likely be concerned with reckless or egregious behavior. In any case, DFS will likely review the relevant court records and allow the licensee an opportunity to explain the circumstances.

When it comes to reporting, typically a letter to the DFS Licensing Bureau with a brief description of the matter along with accompanying legal documents will suffice. While this may seem cumbersome to insurance producers that hold licenses in numerous states, the National Insurance Producer Registry at www.nipr.com has an electronic reporting function wherein a licensee can log in, describe the action, and upload documents to the attachment warehouse. Notice will be automatically sent to participating states in which the insurance producer is licensed.    

Finally, it is imperative that individuals read each question on any original or renewal application carefully. When in doubt, lean on the side of full transparency. Applicants will typically be asked if they have ever “been convicted of” a misdemeanor or felony or are “currently charged with committing” a misdemeanor or felony. DFS will also inquire as to whether the applicant has “ever been named or involved as a party in an administrative proceeding including a FINRA sanction or arbitration proceeding regarding any professional or occupational license or registration.” As such, applicants should give thought to any other professional licenses they have ever held, such as a real estate license, Notary Public, etc. Further, careful review of the application’s definition of “involved” is significant, as the term even encompasses “the act of withdrawing an application to avoid a denial.”

Even inadvertent mistakes are subject to fines. A disciplinary action by DFS leads to a reporting obligation in other states where the producer is licensed and late notice or a failure to comply with disclosure can have a domino effect. This can be avoided with attention to detail and transparency. Indeed, it is very possible DFS and other state insurance departments may already be on notice of the action from other sources and is verifying an insurance producer’s honesty and trustworthiness, which is key to the reapplication and licensing process.

For any questions in reporting obligations, DFS investigations, consumer complaints, insurance transactions or other legal matters, contact Sari Gabay, Esq. at (212)941-5025 or gabay@gabaybowler.com