The National Rifle Association has agreed to pay a $2.5 million penalty to the New York Department of Financial Services (DFS), and the NRA is banned from doing insurance business in New York for five years, according to a press release issued Nov. 18 by Linda A. Lacewell, the superintendent of Financial Services in New York.
On Feb. 5, DFS served a statement of charges and notice of hearing to the NRA over violations of New York insurance law. The consent order resolves the case, bringing to a close the DFS’s three-year investigation.
The investigation by the DFS is but one of several attempts by New York politicos to quash the NRA. New York Attorney General Letitia James has filed a lawsuit against the NRA seeking to dissolve the not-for-profit corporation in fulfillment of a campaign promise. And New York Gov. Andrew Cuomo has lashed out at the NRA as well, disparaging “second amendment types.”
For its part, the NRA has returned fire by filing lawsuits against Cuomo and James, alleging unfair treatment from them.
DFS, NRA consent order
The terms of the DFS consent order stipulate that the NRA must pay the $2.5 million penalty by Dec. 13 and shall not claim, assert or apply for a tax deduction or tax credit with regard to any federal, state or local tax directly or indirectly.
In addition to being banned from marketing insurance in New York, the NRA is banned from receiving compensation in connection with any newly issued New York insurance policies for five years, irrespective of whether the NRA obtains a producer’s license.
In its investigation, the DFS said it found that, despite lacking a license to conduct insurance business in New York, the NRA violated various New York insurance laws and regulations by, among other things, acting as an insurance producer without a license in participating in efforts to solicit and market the sale of insurance products, including NRA’s Carry Guard insurance program, according to the consent order dated Nov. 13.
The NRA is a New York not-for-profit corporation incorporated in 1871, with its principal place of business in Fairfax, Virginia, and describes its mission as “firearms safety, education, and training and advocacy on behalf of safe and responsible gun owners.” The NRA is not and never has been licensed by DFS, according to DFS.
“The NRA operated as an unlicensed insurance producer and broke the New York insurance law by soliciting insurance products and receiving compensation,” Lacewell said. “Even worse, the NRA violated the New York insurance law by soliciting dangerous and impermissible insurance products, including those within its Carry Guard program that purported to insure intentional acts and criminal defense costs. The department will continue to protect the integrity of the insurance market for the purposes of safety and soundness and the good of all consumers,” she said.
From 2000 to 2008, the NRA worked with Lockton Affinity, LLC to offer a variety of insurance products to NRA members, their families and affiliated businesses in New York. The NRA endorsed these products, the DFS contends, as well as played a role in marketing them to its members through NRA-affiliated websites and emails, despite the fact that the NRA did not hold an insurance producer license from the DFS. In return, the NRA received compensation, including royalties based on a percentage of the insurance premiums paid by its members. The NRA thus acted as an insurance producer under New York insurance law, thereby requiring it to be licensed and regulated by DFS, the DFS said in a news release.
More than 28,000 NRA-endorsed policies were placed in New York through Lockton. The NRA participated in marketing, and received compensation for, the Carry Guard insurance program. Between about April 1, 2017, and Nov. 17, 2017, Carry Guard was marketed and sold throughout the United States, with about 680 policies issued to New York residents. In the consent order, DFS said the Carry Guard program offered coverage that is unlawful in New York State, namely coverage for losses and costs associated with the aftermath of the purposeful use of firearms, including defense costs in a criminal prosecution. Under New York law intentional acts cannot be insured.
According to the consent order, the terms and conditions of the Carry Guard insurance included up to $1 million of insurance protection against civil lawsuits; immediate access to supplemental funds for bail, attorney retainer fees and other criminal defense costs; up to $150,000 in criminal liability reimbursement upon an acquittal, and automatic protection for a spouse at no extra cost.
The NRA has maintained that it relied on Lockton Affinity, a licensed broker, to review and approve Carry Guard promotional materials and ensure the program’s coverage and marketing were lawful, the consent order states.
The written agreement between Lockton and the NRA with respect to the Carry Guard program provided that the NRA was to receive compensation that included, among other things, a royalty amount of 21.92 percent of the premium paid by NRA members who purchased Carry Guard insurance, as well as certain profit-sharing revenues.
The sale of Carry Guard was discontinued in the state of New York after only a few months due to the DFS’s investigation, the consent order says, and the NRA received royalties of about $21,000 on the 680 policies that were issued to New York residents.
DFS’s investigation also found that the NRA had aided unauthorized insurers in participating in efforts to market insurance in New York State, as well as called attention to unauthorized insurers in violation of the New York insurance law, the DFS said in its news release.
The Carry Guard insurance policies were placed through New York’s excess line market with Illinois Union Insurance Company, which served as underwriter for Carry Guard, the consent order explains. Illinois Union is a subsidiary of Chubb Ltd. and is an unauthorized insurer in New York that is eligible, under certain circumstances, to write excess line insurance in the state.
According to DFS, the Carry Guard marketing material focused on Chubb as underwriting the coverage.
Although it did not possess an insurance producer license from 2000 to 2019, the NRA posted and disseminated electronic communications, authored by its insurance brokers, which marketed and solicited numerous additional insurance products. According to the consent order, the NRA deployed bulk emails and ran banner ads on its websites, which were administered by third-party insurance brokers. The emails and banner ads urged NRA members to purchase insurance.
The NRA maintains that it relied on its licensed insurance brokers to develop the solicitation materials and language and ensure compliance with applicable laws, the consent order states.
For the other insurance programs, the NRA was compensated via royalty percentages that varied from one program to another, but most ranged between 13.67 percent and 21.92 percent. According to DFS, the NRA received more than $1.8 million in royalties between 2000 and 2019 from the property and casualty portion of the affinity program, as well as profit-sharing distribution from the affinity program.
In an earlier consent agreement with Lockton, DFS says that Lockton represented that the NRA received $21,198 in royalties on the Carry Guard program.
If the NRA obtains a license, offers insurance after the five-year bar and receives compensation, the terms of the consent order prohibit the NRA from representing that it has negotiated insurance coverage at the lowest possible cost to members.
In addition, the NRA is barred from denying, directly or indirectly, the propriety of the consent order or expressing the view that the consent order is without factual basis.
The consent order is the result of a multi-year investigation that resulted in several prior settlements.
DFS settles with Lockton
DFS fined Lockton Companies and its affiliate, Lockton Affinity, $7 million for serving as the producer and administrator of various NRA-branded insurance products. Lockton agreed to the fine and to cooperate fully with the DFS investigation in a consent order dated May 2, 2018. In addition to the Carry Guard program, Lockton Affinity and the NRA offered at least 11 programs to new and existing NRA members in New York and elsewhere, according to the Lockton consent order.
The other NRA-endorsed programs included:
-Retired Law Enforcement Officer Self-Defense Insurance, which provided coverage for criminal and civil defense costs, and bodily injury and damage caused by the use of a firearm;
-ArmsCare Plus Firearms Insurance, which provided coverage for legal firearms and attached accessories against loss, damage, flood, fire and theft;
-No Cost ArmsCare Firearms Insurance, which provided free coverage to NRA members in good standing for legal firearms and their attached accessories, up to $2,500 in value against loss, damage, flood, fire and theft;
-Firearms Instructor Plus Liability Insurance, which provided coverage for injuries or damage the insured caused while acting as an instructor during a lesson, medical expenses up to $5,000, legal expenses from lawsuits related to injuries or damage, and professional liability coverage that protect the member from allegations of negligent training;
-Personal Firearms Protection Insurance, which provided coverage for any unintentional injuries or damage an insured caused while hunting or trapping on public or private land, shooting in competitions or shooting at private shooting ranges, with a firearm, air gun, bow and arrow or trapping equipment, and coverage for lawsuit defense costs;
-Gun Collector Insurance, which provided coverage for certain firearms and their attached accessories against loss, damage, fire and theft;
-Gun Club Insurance, which provided coverage for loss or damage to any assets the gun club rents, leases or owns, coverage for general liability plus medical payments, coverage for claims of false advertising, and optional coverage for business income, boiler and machinery, glass, computers, valuable papers and records, and accounts receivable;
-Hunt Club Insurance, which provided coverage for hunt clubs and the landowners to protect against injury and damage, provided host liquor coverage, and provided hired and non-owned auto coverage. In addition, an insured could select coverage for personal and advertising, products/completed operations, and medical expenses up to $5,000 for any one person;
-NRA Business Alliance Insurance, which provided coverage for a firearms-related business, including coverage for loss or damage to any assets the insured business rents, leases or owns, coverage for general liability plus medical payments, coverage for claims of false advertising, gunsmith coverage and optional coverage for business income, boiler and machinery, glass, computers, valuable papers and records and accounts receivable;
-Gun Show Insurance, which provided coverage for the insured’s liability arising out of the insured’s occupation as a gun show promoter, and
-Home-Based Federal Firearms License Insurance for gun dealers and gunsmiths, which provided coverage for the insured’s business location, equipment and tools, and gear entrusted to the insured by the insured’s clients, against theft, damage and other loss and provided general liability coverage, including products/completed operations liability to insure the insureds finished work against later claims.
Pursuant to written agreements with Lloyd’s and the NRA, Lockton Affinity served as the administrator for the 11 other NRA programs, which entailed marketing and binding the insurance, collecting and distributing the premiums and delivering policies to insureds, according to the Lockton consent order. Also pursuant to written agreements, Lockton Affinity, Lloyd’s and Alea London Ltd. served as the underwriters for the programs. Lockton placed the policies through New York’s excess line market.
In the Lockton consent order, DFS outlines the illegality of the other programs, including the fact that Lockton failed to secure three declinations from the standard market before placing each policy in the excess market. Instead, Lockton obtained declinations from three authorized insurers once annually for a single policy, and then relied on those declinations with respect to all other insureds.
Following the initiation of DFS’s investigation in October 2017, Lockton Affinity suspended the Carry Guard Program on or about Nov. 17, 2017, according to the Lockton consent order.
From January 2000 through March 25, 2018, Lockton Affinity collected premiums from the Carry Guard and other NRA programs amounting to approximately $12,056,627, according to the consent order. Also, Lockton Affinity collected approximately $785,460 in administrative fees from insureds under the Carry Guard and other NRA programs.
As part of its consent order, Lockton agreed not to enter any arrangement with the NRA to participate in any affinity-type insurance program.
Lloyd’s signs consent order
On Dec. 20, 2018, certain underwriters at Lloyd’s of London and the DFS signed a consent order in which the underwriters at Lloyd’s agreed to pay a $5 million fine for underwriting NRA-branded insurance policies. The consent order tracks the Lockton consent order in the DFS’s allegations of illegality and the terms of the agreement. The 10 syndicates which signed the order were managed by Tokio Marine Kiln Syndicates Limited, Atrium Underwriters Ltd., S.A. Meacock and Company Limited, Canopius Managing Agents Limited (two syndicates), Chaucer Syndicates Limited, Argo Managing Agency Limited, AmTrust Syndicates Limited, Brit Syndicates Limited and Liberty Managing Agency Limited.
Chubb fined too
Finally, Chubb subsidiary Illinois Union Insurance Company was fined $1.3 million May 7, 2018, for underwriting Carry Guard. In addition to the fine, Illinois Union agreed to refrain from participating in the Carry Guard Program in New York and from providing Carry Guard or a similar program for or to New York residents regardless of where the policies are written; refrain from entering any other agreement involving a contract of insurance with the NRA; refrain from offering liability insurance for any act of intentional wrong doing or offering legal services insurance in a civil or criminal proceeding, and refrain from issuing or delivering insurance policies providing expenses for psychological counseling because Illinois Union is not authorized to provide such insurance. Illinois Union also agreed to cancel all Carry Guard insurance policies within 90 days and return the policyholders’ premium.
Cuomo directs DFS to urge insurers and banks to sever ties to NRA
On April 19, 2018, New York Gov. Andrew M. Cuomo directed the DFS to urge insurance companies, New York chartered banks and other financial institutions to “review” any relationships they have with the NRA and similar gun promotion organizations. Upon this review, Cuomo wanted DFS to encourage financial institutions to “consider whether such ties harm their corporate reputations and jeopardize public safety,” according to a news release issued by DFS at the time.
Apparently, Cuomo takes a dim view of the NRA, blames the association for the New York’s violence and believes that pushing regulated financial institutions to shuck all ties with the NRA will lead to improved public health and safety.
“New York may have the strongest gun laws in the country, but we must push further to ensure that gun safety is a top priority for every individual, company and organization that does business across the state,” Cuomo said upon issuing the directive.
“I am directing the Department of Financial Services to urge insurers and bankers statewide to determine whether any relationship they may have with the NRA or similar organizations sends the wrong message to their clients and their communities who often look to them for guidance and support. This is not just a matter of reputation,” Cuomo said. “We can put an end to gun violence once and for all.”
At Cuomo’s urging Maria T. Vullo, the former superintendent of Financial Services, sent a memorandum of guidance on risk management relative to the NRA to the CEOs or equivalents of all insurers doing business in New York.
In the memorandum, Vullo said in part, “Our insurers are key players in maintaining and improving public health and safety in the communities they serve. They are also in the business of managing risks, including their own reputational risks, by making risk management decisions on a regular basis regarding if and how they will do business with certain sectors or entities.” The DFS encouraged regulated institutions to take prompt action to manage these risks and promote public health and safety (translate: quit doing business with the NRA).
New York AG sues to dissolve NRA
As a result of an investigation that began in February 2019 shortly after she took office, New York Attorney General Letitia James announced Aug. 6, 2020, that her office was filing a lawsuit seeking to dissolve the NRA corporation and arguing that the gun rights advocacy organization and its leaders funneled millions of dollars away from the charitable mission of the organization and used the money for personal enrichment.
The lawsuit, which was filed in Manhattan Supreme Court, alleges the NRA as a whole as well as its top executives, including CEO Wayne LaPierre, General Counsel John Frazer, former Treasurer and CFO Wilson “Woody” Phillips, and former Chief of Staff Joshua Powell, with failing to manage the NRA’s funds and failing to follow numerous state and federal laws, contributing to the loss of more than $64 million in three years.
James’s lawsuit alleges that LaPierre used millions of dollars of the NRA’s money on private air travel for himself and his family, along with other benefits such as free big-game hunts in Africa and South America provided by an NRA vendor. He visited the Bahamas by private air charter at least eight times in a three-year period with his family at a cost of more than $500,000; was gifted the use of a 107-foot yacht owned by an NRA vendor, and secured a post-employment contract for himself with the NRA, without board approval, currently valued at more than $17 million.
Phillips, who was responsible for managing the books and financial operations of the NRA, allegedly lied on financial disclosure forms and set up a deal that benefited his girlfriend. Shortly before his retirement in 2018, Phillips obtained a contract for himself worth $1.8 million for consulting monthly with the incoming treasurer. According to a statement from the NYAG’s office, the current treasurer knew nothing about the contract and confirmed that Phillips did not consult. As the NYAG describes it, Phillips allowed millions of dollars in entertainment and travel expenses incurred by NRA executives to be “fraudulently” billed to the NRA as disbursements by the NRA’s largest vendor, Ackerman McQueen, an Oklahoma-based advertising and public relations firm. Phillips also failed to “seriously” respond to whistleblower complaints about alleged financial improprieties.
Powell, who was the chief of staff to LaPierre, was terminated after 3.5 years for, among other things, misappropriating NRA funds during his tenure. Powell received sudden and substantial salary increases, the NYAG stated in a press release. Within a month Powell’s salary was doubled to $500,000 retroactively. After less than a year, his salary was increased to $650,000. In a little over two years on the job, his salary more than tripled from $250,000 to $800,000. LaPierre, Phillips and Powell signed off on hiring McKenna and Associates without going through any approval process. The NRA paid the company more than $5 million over five years. For all of 2018, according to the NYAG, Powell’s wife was hired as a consultant by McKenna and Associates. Her entire $30,000 monthly salary was passed through the NRA and was hidden from the NRA’s general counsel. Additionally, Powell requested an NRA vendor to add his father to a rotation of paid photographers, resulting in more than $90,000 in compensation to his father, an expense that was passed through to the NRA.
Frazer, who was corporate secretary and general counsel, failed to comply with board governance procedures and certified false or misleading annual statements, the NYAG alleged.
Ackerman McQueen paid for a variety of non-contractual, out-of-pocket expenses for LaPierre and other NRA executives and passed the expenses through to the NRA, a practice that continued until the two companies severed ties in 2019. The way the practice worked, according to the NYAG, is that expenses would be paid for by the NRA without written approvals, receipts or supporting business purpose documentation, in order to conceal travel and costs that were personal in nature. Ackerman McQueen would aggregate the expenses into a lump sum and provide no details when billing the NRA. The invoices typically included a one-line description that read “out-of-pocket expenses.” The expenses did not comply with IRS requirements, the NYAG alleges, and should have been included by the NRA in taxable personal income for LaPierre and other executives.
Ackerman McQueen was paid more than $70 million in 2017 and 2018 for public relations expenses and advertising services and “out-of-pocket” expenditures.
According to James, the NRA board’s audit committee was negligent. Specifically, the committee failed to assure standard fiscal controls, failed to respond adequately to whistleblowers, affirmatively took steps to conceal the nature and scope of whistleblower concerns from external auditors and failed to review potential conflicts of interest for employees.
In addition to seeking to dissolve the NRA, James asked the court to remove LaPierre and Frazier from their jobs, permanently bar all four individual defendants from serving as officers, directors or trustees of any New York nonprofit and directed the four men to pay restitution, including the return of salary received from the NRA.
The NRA sues James
The NRA filed a lawsuit against James in her professional and individual capacities on Aug. 6, 2020, in the U.S. District Court for the Northern District of New York, arguing that she has undertaken a “blatant and malicious retaliation campaign” against the NRA due to political disagreement with the NRA’s views.
According to the lawsuit, the NRA contends that James maligned the NRA as a “terrorist organization” and a “criminal enterprise” during her campaign for office. Essentially, James said “she would use her office’s dissolution power to seek a corporate death sentence for the NRA in order to silence its political advocacy,” the NRA said in its lawsuit.
The NRA amended its lawsuit on Oct. 9, 2020, in a 42-page complaint that seeks a declaratory judgment, demands a jury trial and requests relief.
In the amended complaint, the NRA said it is entitled to a declaratory judgment because allegations of executive misconduct do not constitute corporate fraud or criminality.
Among other things, the NRA points out in its lawsuit that James began her digging into the NRA’s finances, personnel, operations and political strategy shortly after taking office. She sought dissolution of the NRA, the NRA said, without ever making a meaningful effort to engage cooperatively with the NRA leadership or making a demand on the NRA board and giving it a fair opportunity to take appropriate action to address compliance issues raised by the NYAG and correct alleged deficiencies.
James seeks to dissolve the NRA based solely on the allegations of misconduct by four individuals, two of whom no longer work at the NRA, the NRA said, and one of whom the NRA fired for the same activities James alleged.
Believing it was operating in compliance and knowing a compliance audit was coming, the NRA undertook a review of its operations and governance. The process met with resistance from a handful of executives and vendors. Over the ensuing year, the NRA became embroiled in litigation with those it determined had abused its trust.
To the NRA’s knowledge, since at least 1999, the NYAG’s office has never sought dissolution of a non-profit on the sole basis of alleged self-dealing or related-party transactions engaged in by corporate executives.
In every one of the dozens of cases the NRA cited, the lawsuit says, “the NYAG considered the non-profit the victim and engaged in collaborative discussions with the organizations to implement measures designed to tighten internal controls.”
The lawsuit filed by the District of Columbia AG on the same day as the NYAG lawsuit made similar allegations against the NRA and one of its D.C.-domiciled foundations. The District of Columbia lawsuit does not seek dissolution of the D.C. foundation, the NRA said.
According to the NRA, former New York attorney general Eric Schneiderman, James’s predecessor, “defied his own party loyalties to warn the NRA that he was being urged to use his office in support of these politically motivated efforts.” He contacted an NRA director in mid-2017 and emphasized that while he opposed the NRA’s positions on the Second Amendment, he was “troubled by recent, extraordinary pressures being placed on him by Cuomo and others to weaken the NRA as a political force in 2020.”
Cuomo has a longstanding political vendetta against those he calls “Second Amendment types,” the NRA said, particularly the NRA. During 2018, Cuomo “conspired with DFS to “bankrupt the NRA by threatening its financial service providers,” the NRA said in its lawsuit.
The state dissolution action, the NRA says, nowhere alleges that the NRA does not conduct activities consistent with its stated corporate purposes, nor that it fails to honor requests by donors regarding the specific application of their gifts. The complaint is also silent with regard to the NRA’s finances and whether any alleged looting or waste by the individual defendants rendered the NRA insolvent or incapable of continuing to carry out its stated purpose.
The NRA sees the James lawsuit as nothing but an abuse of the non-profit laws to silence a political enemy. Indeed, the action has drawn condemnation, the NRA says, as a blatant abuse of power and a threat to democratic principles from voices not traditionally aligned with the NRA, including the ACLU and the New Republic.
The NRA speaks
In a statement issued through her attorneys in August, NRA president Carolyn Meadows told news sources the NYAG’s lawsuit was an attempt to score political points.
“This was a baseless, premeditated attack on our organization and the Second Amendment freedoms it fights to defend,” Meadows said. “You could have set your watch by it. The investigation was going to reach its crescendo as we move into the 2020 election cycle. It’s a transparent attempt to score political points and attack the leading voice in opposition to the leftist agenda. This has been a power grab by a political opportunist—a desperate move that is part of a rank political vendetta. Our members won’t be intimidated or bullied in their defense of political and constitutional freedom.”
Most recently, the NRA is pushing to move James’s lawsuit out of New York City and consolidate other cases, according to a news story in law.com published Nov. 13.
In a memorandum filed Oct. 20 with the United States Judicial Panel on Multidistrict Litigation, the NRA requests oral argument in its effort to transfer four federal cases for consolidated pretrial proceedings to the Northern District of Texas, contending the various actions involve common questions of fact. The cases are pending in different district courts and all involve the finances and governance of the NRA. In addition to the first amendment lawsuit the NRA filed against James in New York, the subject litigations include an NRA lawsuit against Ackerman McQueen, a litigation brought by a donor and a defamation litigation brought by Ackerman McQueen against a former employee who was the former host of NRATV and testified in support of the NRA in the Ackerman McQueen litigation. Two of the four actions are already pending in the Northern District of Texas.
The NRA also proposes moving the NYAG’s lawsuit against the NRA, which is pending in Manhattan Supreme Court, to the U.S. Judicial Panel on Multidistrict Litigation, noting that the NYAG’s case should have been filed in federal court because it overlaps the NRA’s case against her and its case against Cuomo, which are both in federal court in the Northern District of New York. In any case, the NRA has petitioned to move the NYAG’s lawsuit.
For her part, James told law.com that her case is not going to be moved, and an assistant attorney general for New York filed a response opposing an MDL, opining that the cases have nothing in common. In addition, the NYAG plans to file a motion to dismiss the NRA lawsuit against her on government immunity grounds, law.com reported, and the NRA has moved to dismiss the NYAG’s case on venue grounds.
Also, attorneys for the donor class action opposed moving that lawsuit, alleging the NRA is forum shopping.