Arizona Life & Disability Ins. Guar. Fund v. Honeywell, Inc.

• Decision Date: 16 September 1997
• Docket Number: No. CV-96-0381-PR,CV-96-0381-PR
• Citation: 945 P.2d 805,190 Ariz. 84
• Parties: , 21 Employee Benefits Cas. 1699, 252 Ariz. Adv. Rep. 16 ARIZONA LIFE & DISABILITY INSURANCE GUARANTY FUND, an Arizona State Agency, Plaintiff/Counterdefendant/Appellant. v. HONEYWELL, INC., a Delaware corporation, and First Trust National Association, a corporation, Defendants/Counterclaimants/Appellees.
• Court: Arizona Supreme Court

Page 805

945 P.2d 805

190 Ariz. 84, 21 Employee Benefits Cas. 1699,

252 Ariz. Adv. Rep. 16

ARIZONA LIFE & DISABILITY INSURANCE GUARANTY FUND, an Arizona State Agency, Plaintiff/Counterdefendant/Appellant. v. HONEYWELL, INC., a Delaware corporation, and First Trust National Association, a corporation, Defendants/Counterclaimants/Appellees.

No. CV-96-0381-PR.

Supreme Court of Arizona En Banc.

Sept. 16, 1997.

Grant Woods, Attorney General by W. Mark Sendrow, Assistant Attorney General, Phoenix, and Guttilla & Murphy, P.A. by Nicholas C. Guttilla, Phoenix, for Plaintiff-Counterdefendant-Appellant.

Snell & Wilmer L.L.P. by John J. Bouma, Phoenix, Patrick G. Byrne and Popham, Haik, Schnobrich & Kaufman, Ltd. by David L. Hashmall, Karen R. Cole, Minneapolis, MN, for Defendants/Counterclaimants/Appellees.

OPINION

JONES, Vice Chief Justice.

The parties seek review of the court of appeals' ruling concerning guaranteed investment contracts (GICs) issued by the Executive Life Insurance Company (ELIC) to the trustee of certain employee retirement plans established by Honeywell, Inc. (Honeywell). See Arizona Life & Disability Ins. Guar. Fund v. Honeywell, Inc., 187 Ariz. 146, 927 P.2d 806 (1996). The trustee of Honeywell's retirement plan (Trustee) purchased GICs from ELIC, which was subsequently declared insolvent. Honeywell and the Trustee then submitted a claim to the Arizona Life and Disability Insurance Guaranty Fund (Fund) to cover the retirement plan's losses. The Fund sought a declaratory judgment that Arizona law excluded the GICs from coverage. The trial court entered summary judgment for Honeywell and the Trustee, but the court of appeals reversed. We granted review to decide whether the ELIC GICs are "annuities" as defined under A.R.S. § 20-254.01 and whether the GICs are "direct contracts" "issued to" Arizona residents as required by A.R.S. § 20-682(A). We have jurisdiction pursuant to Arizona Constitution article VI, section 5(3), and Arizona Rule of Civil Appellate Procedure 23.

Facts and Procedural History

A. Background

Honeywell is a Delaware corporation headquartered in Minnesota that operates a number of Arizona manufacturing plants and research facilities. Honeywell offered voluntary retirement plans to employees, including an investment option termed the Investment Plus Plan (Plan). ¹ The Plan provided investment funds from which an employee could allocate tax-deferred contributions. One such fund, the Protected Interest Fund (also known as a fixed income fund) was described in Honeywell's informational brochure as follows:

Protected Interest Fund--This fund provides safety of principal and a guaranteed rate of return. All the money in the fund is invested in insurance contracts. Honeywell negotiates the contracts twice a year to obtain the best possible rates under current market conditions. Assets in the fund earn a blended rate which is calculated by averaging the guaranteed rates of the previous and current individual contracts, weighted by the dollar balance in each contract. Rates are announced each time a contract is negotiated.

Approximately 7600 Arizona Honeywell employees participated in the Protected Interest Fund, which included, among its investments, GICs from a number of insurance companies. In January and April 1988, the Trustee, IDS Bank & Trust Company, ² purchased four GICs from ELIC. The net value of the ELIC GICs attributable to Arizona residents at the time of ELIC's insolvency was approximately $21 million. ELIC GICs accounted for sixteen percent of all GICs included in Honeywell's fixed income fund from which participants earned a weighted average rate of return.

ELIC ceased making required principal and interest payments in April 1991 and was declared insolvent in December 1991. As a result, Honeywell filed a claim with the Fund for losses of approximately $3.2 million, plus interest. Because it disputed that the ELIC GICs were covered, the Fund sought declaratory relief in Maricopa County Superior Court, asking the court to declare that the ELIC GICs were not covered under Arizona's insurance guaranty act. After the Fund moved for summary judgment, Honeywell and the Trustee filed a cross-motion for summary judgment. The court entered judgment for Honeywell and the Trustee, and the Fund appealed.

The court of appeals held that the ELIC GICs were not annuity contracts under Arizona statutes, and thus not covered by the Fund. Honeywell and the Trustee have petitioned on this issue. Additionally, the court of appeals ruled in favor of Honeywell and the Trustee on two issues, holding that the GICs were issued to Arizona residents, and that the GICs are direct annuity contracts. The Fund has cross-petitioned on these two issues. Our review addresses all three issues.

B. ELIC GIC provisions

Under the terms of the ELIC GICs, the Trustee was the legal owner of the contracts and was able to "exercise every contract right and enjoy every contract provision without the consent of any participant." The Trustee deposited with ELIC the participants' investments on a specified date. In return, ELIC agreed to pay interest annually at a set rate throughout the entire contract period. ELIC contracted to repay the fund value of three of the four GICs in periodic installments; that is, ELIC would repay specified percentages of the principal in annual payments over a set number of consecutive years. ELIC agreed to repay the entire principal for the fourth GIC on a single maturity date. The GICs defined fund value as "the sum of all deposits, less any withdrawals and scheduled payments, plus interest earned at the guaranteed rate...."

The GICs, and the Plan as incorporated by the GICs, provided options for participants to withdraw their investments prior to the contract maturity date. For example, the GICs allowed the Trustee to withdraw the annuity value needed to purchase an individual annuity contract for a participant upon retirement. Under the GICs, at established intervals participants could also require the Trustee to reallocate funds from the GICs to other investment options offered by the Plan. Moreover, the contract allowed the Trustee to fulfill Plan benefit requirements such as the distribution of benefits upon the participant's termination of employment, death, disability, or retirement. Upon retirement of a participant, the Plan required payment in a lump sum. Upon the death of the participant, the Plan provisions required a lump sum distribution to the participant's beneficiary. If the Trustee withdrew funds before the contract maturity date, ELIC made no more interest payments on those funds.

C. Arizona statutory authority

In 1977 the Arizona Legislature adopted, with modification, the 1975 Life and Health Guaranty Association Model Act of the National Association of Insurance Commissioners. See Life and Disability Insurance Guaranty Fund Act, 1977 Ariz. Sess. Laws ch. 136, § 4 (codified as amended at Article 7 chapter 3 of Title 20, A.R.S. §§ 20-681 to -695). Article 7 applies to insurance guaranty fund protection and encompasses "direct life insurance policies, disability insurance policies, annuity contracts and contracts supplemental to life and disability insurance policies and annuity contracts issued to residents of this state by persons authorized to transact insurance in this state...." A.R.S. § 20-682(A). ARTICLE 7³ mandates that "[a]ll member insurers shall be members of the fund as a condition of their authority to transact insurance in this state." A.R.S. § 20-683(A). A member insurer is a "person authorized to transact any kind of insurance to which this article applies." A.R.S. § 20-681(4). The Fund is expressly obligated to guarantee losses of residents' covered policies arising from the insolvency of non-Arizona insurers. A.R.S. § 20-685(D).

Although the Arizona Legislature did not include within Article 7 a statement of purpose, the 1975 Model Act explained that

[t]he purpose of this Act is to protect policy owners, insureds, beneficiaries, annuitants, payees, and assignees of life insurance policies, health insurance policies, annuity contracts, and supplemental contracts, subject to certain limitations, against failure in the performance of contractual obligations due to the impairment or insolvency of the insurer issuing such policies or contracts.

1975 Life and Health Guaranty Association Model Act of the National Association of Insurance Commissioners § 2.

In 1995, the Legislature amended A.R.S. § 20-682 to expressly exclude GICs from coverage under the Fund:

4. Any guaranteed investment contract or any part of a guaranteed investment contract that is issued by a life insurance company, unless the contract holder exercises an annuity option for individual persons provided by the guaranteed investment contract on or before the date the life insurance company becomes subject to a delinquency proceeding as defined in § 20-611.

A.R.S. § 20-682(B)(4) (Supp.1995). The Legislature made this amendment prospective only; it is not applicable to litigation, including the instant case, that was pending as of March 29, 1995.

When, as in the present case, neither explicit text nor statement of legislative intent resolving the precise issue is provided to the court, we must resolve any ambiguity by considering the legislature's overall purposes and goals in enacting the body of legislation in question. If possible, we attempt to interpret the questioned statutory provision in a manner that will carry out and fulfill those goals. See Lowing v. Allstate Ins. Co., 176 Ariz. 101, 103-04, 859 P.2d 724, 726-27 (1993). As the Model Act indicates, the statute in question was adopted to protect individual purchasers of life insurance and annuity contracts from losses resulting from failure of the insurer. The obvious aim of the statutes establishing the fund in question and similar funds was to spread the risk of loss resulting from an insurer's insolvency...