LIFE & ACC. & HEALTH v. LIBERTY LIFE
| Decision Date | 11 May 1998 |
| Docket Number | No. 2842.,2842. |
| Citation | 500 S.E.2d 193,331 S.C. 268 |
| Parties | SOUTH CAROLINA LIFE AND ACCIDENT AND HEALTH INSURANCE GUARANTY ASSOCIATION, Respondent, v. LIBERTY LIFE INSURANCE COMPANY, Appellant. |
| Court | South Carolina Court of Appeals |
David W. Robinson, II, and Durham T. Boney, both of Robinson, McFadden & Moore, Columbia, for appellant.
John C. Bruton, Jr., of Sinkler & Boyd, Columbia, for respondent.
This case involves the interpretation of the South Carolina Life and Accident and Health Insurance Guaranty Association Act (Guaranty Act). The trial court issued a declaratory judgment absolving the South Carolina Life and Accident and Health Insurance Guaranty Association (the Association) of liability for coverage of certain investment contracts sold by Liberty Life Insurance Company (Liberty). Liberty appeals. We affirm.
In 1980, at the request of Hunt, Dupree and Rhine, a benefits consulting firm, Liberty designed an insurance product to be used by trustees and managers of employee retirement plans. This product consisted of two documents that Liberty intended to be sold together: (1) an annual renewable term (ART) life insurance policy for each participant in a firm's retirement plan and (2) a reserve deposit fund agreement (RDFA) between the trustee of each plan and Liberty. The ARTs provided for six annuity settlement options and set forth tables of rates and assumptions for each option. The ARTs are not at issue here, except to the extent that various provisions within them are referenced in the terms governing the RDFAs.
The RDFAs provided that retirement plan trustees would make contributions in actuarially determined amounts. In addition, the RDFAs guaranteed that funds deposited would earn at least four per cent interest annually. A retirement plan trustee could terminate the agreement at any time and require Liberty to return the entire investment, with accrued interest, to the retirement plan. Except for termination, however, a trustee could withdraw funds only upon written request "(1) to purchase annuities for retiring participants[;]... (2) to effect the payment, or cover the cost, of any other participant's benefits provided under the Trust; (3) or to provide a paid up Life Insurance Contract; [or] (4) to pay to the Trustee any terminated participant's nonvested interest." Liberty also guaranteed that for ten years after the effective date of the agreement, a trustee could purchase an annuity under the settlement option provisions in the ART life insurance policies.
Liberty submitted a prototype of the RDFA to the South Carolina Department of Insurance, which first approved the plan for sale on December 16, 1980. The Department approved modified versions of the plan on December 1, 1981, and January 6, 1987. During 1980 and 1981, both the ART and RDFA products were approved for sale by insurance departments in 27 other states. Beginning in 1981, Liberty sold RDFAs, coupled with ARTs, to retirement plan trustees in South Carolina and adjoining states.
On October 11, 1989, Investment Life and Trust Company (ILT), which was then a life insurance company licensed in South Carolina, assumed all of the RDFAs from Liberty. ILT later changed its name to Investment Life Insurance Company of America (ILA), redomesticated to North Carolina, and became licensed in South Carolina as a foreign insurer. In 1993, North Carolina declared ILA insolvent. The trustees of pension plans who had purchased RDFAs applied to the Association for protection. The Association denied the claims on the ground that the RDFAs were not covered policies under the Guaranty Act. Liberty agreed to provide the funds necessary for another insurer to assume the RDFAs while litigating the issue of coverage with the Association.
The focus of this controversy is whether the RDFAs were annuity contracts and, therefore, covered policies under the Act. The trial court determined that although an RDFA was a predecessor to a statutory annuity, it did not constitute one by itself.
Liberty argues the trial court erred in concluding the RDFAs were not covered policies under the Act. In support of this position, it contends the RDFAs were annuity contracts because of the ten-year guarantee of the periodic payment settlement options under which annuities could be purchased. Liberty further suggests the trial court improperly attached additional requirements to the statutory definition of an annuity, including (1) that the RDFAs had to specify when the annuities had to be exercisable, (2) that the RDFAs actually provide for periodic payments, and (3) that the insurer would have to make the annuity payments. We disagree.
The General Assembly enacted the Guaranty Act to protect insureds, beneficiaries, and others against failure in the performance of contractual obligations due to the impairment of insurers. S.C.Code Ann. § 38-29-30 (1989 and Supp.1997). Under the Act, when a foreign insurer becomes impaired, the Association may "[g]uarantee, assume, or reinsure, or cause to be guaranteed, assumed, or reinsured, the covered policies of residents." S.C.Code Ann. § 38-29-70(4)(a) (1989 and Supp. 1997). Covered policies are "direct life insurance policies, accident and health insurance policies, annuity contracts, and contracts supplemental to life and accident and health insurance policies and annuity contracts issued by persons authorized to transact insurance in this State...." S.C.Code Ann. § 38-29-40 (1989 and Supp.1997).
The elementary and cardinal rule of statutory construction is that the court must determine the intent of the legislature. Horn v. Davis Elec. Constructors, Inc., 307 S.C. 559, 416 S.E.2d 634 (1992). The words of the statute must be given their plain and ordinary meaning without resorting to subtle or forced construction to limit or expand its operation. First Baptist Church of Mauldin v. City of Mauldin, 308 S.C. 226, 417 S.E.2d 592 (1992). Statutes, as a whole, must receive practical, reasonable, and fair interpretation consonant with the purpose, design, and policy of lawmakers. Whiteside v. Cherokee County Sch. Dist. No. 1, 311 S.C. 335, 428 S.E.2d 886 (1993). The Guaranty Act is to be liberally construed. S.C.Code Ann. § 38-29-200 (1989 and Supp.1997). The legislature, however, in authorizing the Association "to take legal action necessary to avoid payment of improper claims," did not intend for every product insurance carriers sell to be covered by the Guaranty Act. S.C.Code Ann. § 38-29-70(11)(f) (1989 and Supp.1997).
Although the Guaranty Act does not define the term "annuity contract," the Insurance Code defines "annuity" as "every contract or agreement to make periodic payments, whether in fixed or variable dollar amounts, or both, at specified intervals." S.C.Code Ann. § 38-1-20(6) (Supp.1997). The trial court determined that, for the purpose of this litigation, the terms "annuity" and "annuity contract" were essentially the same. Although Liberty maintained at trial that the two terms were distinct concepts, it has not argued this point in its appeal.1
A typical RDFA provides for distribution of the entire fund upon termination of the agreement by the trustee. It also provides for distribution of part of the assets of the fund in lump sum for the trustee either to fund benefits as part of the retirement plan or to return a terminated employee's nonvested interest in the fund. It does not, however, provide for "periodic payments" at "specified intervals." In a case factually analogous to this one, the Virginia Supreme Court held guaranteed interest contracts (GICs) similar to the RDFAs here were not annuities because they did not specifically provide for periodic payments to individuals as required by statute. Bennet v. Virginia Life, Accident & Sickness, Ins., 251 Va. 382, 468 S.E.2d 910 (1996). The Virginia Guaranty Act defines an annuity as an agreement "to make periodic payments in fixed dollar amounts pursuant to the terms of a contract for a stated period of time or for the life of the person or persons specified in the contract." Id.468 S.E.2d at 913(quoting Va.Code Ann. § 38.2-106 (1993)). Like the RDFAs here, the GICs provided only for the accumulation of funds at a guaranteed interest rate and for withdrawal of the funds on specific conditions. Although the withdrawn funds could be used to purchase an annuity, the Bennet court explained, "An undertaking to purchase an annuity in the future is not a present guarantee of annuity benefits." Id. at 914.2
Similarly, the Arizona Court of Appeals held GICs were not annuities under applicable statutory law. Arizona Life & Disability Ins. Guar. Fund v. Honeywell, Inc., 187 Ariz. 146, 927 P.2d 806 (Ct.App.1996). In so holding, the court declared, Id.927 P.2d at 814.3See also Krahling v. First Trust Nat'l Ass'n, 123 N.M. 685, 944 P.2d 914, 918 (Ct.App.1997) (), cert. denied, 123 N.M. 446, 942 P.2d 189 (1997).
We have reviewed the cases from other jurisdictions that have found contracts similar to the RDFAs are annuities covered by their states' guaranty acts and find them unpersuasive.4
We therefore find the option to purchase an annuity does not make the RDFAs annuities. If an RDFA itself were an annuity, an additional contract for periodic payments would not be necessary.
In addition, the RDFAs are not, as Liberty argues, eligible for coverage as "contracts supplemental to ... annuity contracts." S.C.Code Ann. §...
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