Manhattan Supreme Court and the Thurgood Marshall U.S. Courthouse Manhattan Supreme Court and the Thurgood Marshall U.S. Courthouse at Foley Square. Photo by Rick Kopstein/ALM

The state has appealed a decision that struck down regulations barring title insurers from passing along marketing and client-relations expenses to customers.

In a new filing, the state said Manhattan Supreme Court Justice Eileen Rakower misread a part of the state law that the Department of Financial Services used to create and enforce the rule.

The regulation was promulgated after a DFS investigation in 2015 found title insurance companies and agents spent millions each year marketing to attorneys and real estate agents. Those expenses, which could include meals, entertainment and other fees, were charged to consumers through premiums at closing, DFS said.

The agency said in October the practice contradicts part of the state’s insurance law that prohibits the exchange of a rebate, fee, or any “other consideration or valuable thing” as an inducement for business. DFS argued marketing and entertainment expenses fall under the latter category.

Rakower dismissed that argument and struck down the regulation last month, calling parts of it “irrational,” while saying the practice could instead be addressed by the Legislature. DFS argued in its new filing that the regulation is well within its statutory authority.

“Supreme Court’s disregard of the statute’s plain text led it to the absurd conclusion that DFS has no authority to prevent title insurers and agents from giving real estate professionals plainly valuable benefits such as lavish gifts, meals, and entertainment—despite DFS’s uncontested finding that such benefits had the purpose and effect of inducing recipients to place business with the title insurer or agent that provided these benefits,” the state said in the filing.

DFS also said Rakower ignored the agency’s authority and history of regulating insurance companies in New York, including title insurers, and its ability to interpret state laws giving it that power.

Another part of the regulation, for example, banned closers from accepting a gratuity. DFS said in its new filings that it should be able to enforce that provision because charging gratuity at closing goes beyond rates already approved by the agency.

“Requiring buyers to pay an additional gratuity for closing services already encompassed by the premiums they have paid is thus unlawful, and DFS properly prohibited it,” the filing said.

The lawsuit was sprung after attempts by lawmakers to reverse the DFS regulation failed before it took effect in February. Lawmakers had written to DFS and even introduced legislation to delegitimize the rule, but neither attempt yielded results. The lawsuit was filed in February.  

The New York State Land Title Association, which represents title insurers, has argued that passing on marketing expenses to customers, such as buying lunch with an attorney to maintain a professional connection, is just as much a part of their industry as any other.

Rakower agreed with that argument in her decision last month, calling a blanket ban on including marketing costs in premiums unnecessary. The legislature intended to prevent kickbacks through the law, not business costs, she said.

“To construe [the law] in this manner is to hold the Legislature intended to prohibit title insurance corporations from marketing themselves for business—an absurd proposition,” Rakower wrote.

The DFS has argued the expenses they uncovered went far beyond regular business costs. One insurer, for example, bought high-priced tickets to basketball games at Madison Square Garden for a client, DFS said. Another insurer paid for a client to frequent a “Gentlemen’s Club” on Long Island, according to the agency. Those expenses were then charged to consumers.

The regulation promulgated from the investigation was designed to prohibit title insurers from inducing business from an attorney or real estate agent through those expenses, which would be against the law, according to DFS.

Title insurers said there is not a widespread practice of using expenses to induce business from anyone in their industry. They are represented by Gibson, Dunn & Crutcher partner Mylan Denerstein, who previously served as Gov. Andrew Cuomo’s chief counsel, as well as associates Akiva Shapiro and David Coon.

“The court’s thorough decision was very clear: these sweeping regulations exceeded the scope of DFS’s statutory authority and should never have been adopted,” Denerstein said after last month’s decision. “As Judge Rakower explained, the regulations are internally ‘irreconcilable and irrational,’ and the notion that the legislature intended to ban the industry’s ordinary marketing activities is an ‘absurd proposition.”

A request for comment sent to the plaintiffs was not immediately returned Tuesday.