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March 31, 1980

INSURANCE DEPARTMENT OF the STATE OF NEW YORK, and Albert B. Lewis, as Superintendent of Insurance of the State of New York, Defendants

The opinion of the court was delivered by: CANNELLA


Motion for a preliminary injunction, enjoining the defendant during the pendency of this action from enforcing Section 219.4(h) of Regulation 34A of the Insurance Department of the State of New York, 11 N.Y.C.R.R. § 219.4(h), against the plaintiff, is granted. Fed.R.Civ.P. 65(a).

By Order to Show Cause issued on February 22, 1980, (Haight, D. J.), plaintiff brought on the instant application for preliminary relief. Judge Haight entered a temporary restraining order enjoining enforcement of the disputed regulation pending a hearing on the preliminary injunction before Judge Stewart. Thereafter, the parties agreed to extend the restraining order and adjourn the hearing so that it could be heard by this Court, to which the case has been assigned for all purposes.

 A hearing was held on March 18, 1980, and both sides were heard. The only evidence presented was introduced in their respective papers by way of affidavit. At the conclusion of the hearing, the Court reserved decision and extended the temporary restraining order pending its decision.


 The facts are largely undisputed. On January 11, 1980, the defendant Insurance Department of the State of New York ("the Department") promulgated the following proposed regulation:

The use of the phrase "low cost" or a similar term shall not be used (sic ) to categorize a company's operations or policy portfolio. A particular policy form may be referred to as being "low cost" only when this is capable of being demonstrated to the satisfaction of the Superintendent. Companies using the phrase "low cost" in their advertisements must be prepared to demonstrate such "low cost" to any consumer requesting substantiation.

 11 N.Y.C.R.R. § 219.4(h) (hereinafter referred to as "section 4(h)").

 Phoenix Mutual Life Insurance Company ("Phoenix"), the plaintiff herein, appeared at a hearing before the Department on February 1, 1980, to testify in opposition to the proposed regulation. The President of Phoenix stated that the company supported prohibiting the phrase "low cost" where its truth could not be proven, but argued that a blanket ban is unnecessary to accomplish that. He invited the Department to establish "benchmarks" to which the cost of a company's policies and operations could be compared. Despite the opposition of Phoenix and other insurers, *fn1" however, the Department adopted section 4(h). Phoenix thereafter commenced the instant action seeking preliminary and permanent injunctive relief against enforcement of the regulation.

 Phoenix contends that section 4(h) strikes at the heart of its advertising campaign. For at least five years, it has stressed "its reputation for low cost whole life insurance." *fn2" One of its printed advertisements published in 1975, contains a table listing allegedly comparable ordinary life insurance policies offered by fifteen different companies, and ranking them by cost as calculated by the "Interest-Adjusted Cost Index" method, which is described infra. After a rather lengthy explanation of the table, the ad concludes: "Low cost is no longer our goal . . . it is our achievement. If low cost is important to you, call Phoenix Mutual today." *fn3"

 All of Phoenix's subsequent advertisements contain a similar message, as well as the following phrase, which appears to have become the company's motto: "We're saving a lot of people a lot of money." A typical example is one published in 1978, which contains a photograph of Virginia Knauer, former Special Assistant to the President for Consumer Affairs, and a statement attributed to her extolling the low cost of the whole life policies offered by Phoenix. The full text of this ad is reprinted in the margin. *fn4"

 Phoenix believes that its advertising campaign stressing low cost has been and will continue to be crucial to its success. It cites a 1978 survey of consumer attitudes showing cost to be the second-most important factor to the buying public, topped only by the readability of the policy. *fn5" In addition, Phoenix contends that between 1971 and 1977, it nearly tripled its share of the New York market, a result it attributes to its advertising emphasis on cost. *fn6" The defendant does not dispute this.

 From the evidence submitted to the Court, it appears that "Interest-Adjusted Indexes" are a generally accepted method of comparing life insurance costs. A 94-page booklet published by the defendant in 1977, entitled Consumers Shopping Guide For Life Insurance, states: "[Although] there is no single cost comparison system that will answer all the questions for a consumer shopping for life insurance, the most widely accepted method is comparing interest-adjusted indexes." *fn7" As the Guide explains, comparing the premiums of different policies would be misleading, since "participating" policies *fn8" generally pay dividends, which represent a share of the excess of the company's income over expenses and reserves. Thus, a more accurate estimate of cost would be the premiums minus any expected dividends. Even this would be misleading, however, since premiums and dividends are paid out over time, and therefore their value depends upon an interest rate. *fn9"

 An "Interest-Adjusted Payment Index," which can be calculated for any policy, and which is usually expressed as a rate per $ 1,000 of insurance, takes into account the value of money over time, and is therefore a better basis for comparison. It is the fixed amount that would have to be paid annually over a particular period and at a particular interest rate, in order for the series of such payments to have a present value equal to the present value of the series of premium payments minus expected dividends for a particular policy over the same period and at the same interest rate. Even this index ...

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