ALBANY, N.Y.—The Independent Insurance Agents & Brokers of New York Inc. and the Council of Insurance Brokers of Greater New York are seeking to annul New York state's insurance producer compensation disclosure regulation set to go into effect Jan. 1.

In a lawsuit filed last Monday in New York State Supreme Court in Albany against the New York State Insurance Department, the two associations, which were joined by three insurance agencies affected by the regulation, challenged the NYSID's authority and rationale in adopting the regulation as well as its exemption of certain producers.

Under the final regulation, which was published Feb. 10 in the New York State Register, producers operating in New York state must, among other requirements, disclose to clients their role in insurance transactions and whether they will receive compensation from an insurer based on a sale. Further information about the nature, amount and source of compensation must be disclosed to clients upon request.

The disclosure regulation does not apply to reinsurance placements, insurance placements within a captive insurance company, wholesale brokers, managing general agents and on renewals.

According to the legal action, known as an Article 78 proceeding, the agent/broker groups allege, among other things, that the NYSID does not have authority under state law to mandate disclosure of compensation. The regulation “represents an impermissible attempt to rewrite the insurance law on a subject as to which the (state) legislature has already specifically legislated,” the groups allege.

They also say the regulation violates a producer's right to due process under the U.S. and state constitutions and violates their right to equal protection because the regulation exempts “similarly situated” producers that have no direct sales or solicitation contact with insurance buyers.

“Managing general agents and wholesale brokers—who work closely with retail producers in obtaining coverage and who receive the same kind of compensation incentives from insurance companies as retail producers—have as much influence over the selection of the insurance company providing coverage as the producers who are subject to the regulation, even if they do not deal directly with the purchaser of coverage,” the lawsuit states.

Matthew Gaul, former special counsel and now deputy superintendent of life insurance at the NYSID, would not comment on the specifics of the lawsuit, but noted that the department is “surprised” the producer groups elected to take legal action, despite talking of doing so for months.

The IIABNY claims “to be in favor of transparency” since 2004 and said “they'd be willing to give out information about compensation when they were asked by their customers,” Mr. Gaul said. “Really, this regulation does nothing more than enshrine that policy position...At some point...you really have to ask the question, what it is that they're trying to hide about these compensation structures and what it is they are so fearful of having consumers know about the way they get paid by insurance companies?”

In a news release, the IIABNY acknowledged that in 2004 it called on insurance agents and brokers to voluntarily disclose to clients the existence and nature of all their compensation. The association, however, opposes mandatory disclosure as providing “little benefit to consumers” while being “burdensome for producers.”

Mahopac, N.Y.-based Sullivan Financial Group Inc.; Syracuse, N.Y.-based IAAC Inc.; and Albany, N.Y.-based Aurora Inc. joined the two groups in the suit.