Legislation proposed in the Maryland Senate (Senate Bill 786, introduced on Feb. 4, 2019) would impose fiduciary duties on insurance producers, such as agents and brokers, that are subject to licensure in the state. The bill comes at a time when sellers of insurance products are continuing to monitor federal efforts to impose heightened standards on certain sales of insurance products by broker-dealers and investment advisers. These efforts include an expected new fiduciary rule from the U.S. Department of Labor (DOL) later this year after its proposed 2016 fiduciary bill was vacated by a U.S. appellate court last year and an expected final “Regulation BI” later this year from the Securities and Exchange Commission (SEC) imposing a best-interest standard on certain securities sales, including those of variable insurance products. The Maryland bill also has a parallel in a regulation adopted last year by New York’s Department of Financial Services (NY DFS) imposing a best-interest standard on life insurance and annuity sales in that state. New York’s regulation begins to phase in later this year but is being challenged in court by industry.
The Maryland bill is not expressly limited to insurance products that are also regulated as securities, i.e., variable life policies and variable annuities, although this is likely the intent insofar as the provision would amend the state securities code. The bill refers to insurance producers generally without regard to the type of product solicited. Nor does the proposal distinguish between insurance producers acting on behalf of carriers and those acting for insureds.
The Maryland proposal, at Section 5 of the state Senate bill, states that “an insurance producer is a fiduciary and has a duty to act in the best interest of the customer without regard to the financial or other interest of the person or firm providing the advice.” The legislation incorporates the Maryland insurance law’s definition of “insurance producer” as a person who, with certain narrow exceptions, “for compensation, sells, solicits, or negotiates insurance contracts, . . . for: (i) persons issuing the insurance contracts; or (ii) insureds or prospective insureds.” The bill authorizes the securities commissioner of the Maryland Division of Securities to adopt regulations defining acts covered by the law and preventing practices or courses of business in violation of the provision.
The bill goes beyond insurance agent standards generally applicable in the various states as well as the National Association of Insurance Commissioners’ (NAIC) Annuity Suitability Working Group, which since 2017 has been tasked with promoting greater harmonization across the states on annuity sales standards.
Under the Maryland bill, a producer offering any insurance product in Maryland would become the fiduciary of the purchaser. By using the phrase “providing the advice,” the bill conflates an insurance product with the act of selling or negotiating the product. It is unclear at exactly what point in discussions between the producer and the customer the fiduciary would attach.
It is unclear to what extent the Maryland bill will achieve momentum in the Legislature or whether other states or the NAIC will look to it as a possible template. Financial industry participants will certainly be monitoring this and related federal and state developments (such as the DOL, SEC and NY DFS measures referred to above) that have the potential to impose substantial additional legal risk on sellers of insurance products.