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

• Decision Date: 21 May 1996
• Docket Number: No. 1,CA-CV,1
• Citation: 187 Ariz. 146,927 P.2d 806
• Parties: 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. 95-0125.
• Court: Arizona Court of Appeals

Page 806

927 P.2d 806

187 Ariz. 146

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. 1 CA-CV 95-0125.

Court of Appeals of Arizona Division 1, Department C.

May 21, 1996.

Review and Cross-Petition forReview Granted Nov. 19, 1996.

[187 Ariz. 147] Grant Woods, Attorney General by Sydney K. Davis, Chief Counsel Consumer Protection & Antitrust Section and W. Mark Sendrow, Assistant Attorney General and Guttilla & Murphy, P.C. by Nicholas C. Guttilla, Phoenix, for Appellant.

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

Donna M. Killoughey, P.C. by Donna M. Killoughey, Tempe and Ballard, Spahr, Andrews & Ingersoll by David H. Pittinsky and Lawrence D. Berger, Philadelphia, PA, for Unisys Corp., Amicus Curiae.

OPINION

LANKFORD, Judge.

The Arizona Life and Disability Insurance Guaranty Fund ("the Fund") filed an action for declaratory relief in superior court seeking a declaration that it was not obligated to cover losses suffered by an employee retirement plan operated by Honeywell, Inc. The Fund moved for summary judgment. Honeywell and the plan trustee, First Trust National Association ("the trustee"), filed a cross-motion for summary judgment. The trial court entered judgment for Honeywell and the trustee. The Fund timely appealed, and we have jurisdiction pursuant to Ariz.Rev.Stat. Ann. ("A.R.S.") section 12-2101(B) (1994).

The issue presented is whether the Fund must assure payments by an insurer which had entered into Guaranteed Investment Contracts ("GIC's") ¹ with the plan trustee. We hold that the trial court erred in holding that GIC's are annuities covered under Arizona's life and disability insurance guaranty statutes, and accordingly we reverse the judgment.

I.

We review the summary judgment de novo. United Bank of Ariz. v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (App.1990). Issues of statutory interpretation are also reviewed de novo. Hawkins v. Department of Econ. Sec., 183 Ariz. 100, 103, 900 P.2d 1236, 1239 (App.1995).

Honeywell is a Delaware corporation with its principal place of business in Minnesota. It operates manufacturing and research facilities in various locations in Arizona. Honeywell sponsors employee retirement plans for its employees. The assets of Honeywell's employee retirement plan are held in trust and are managed by the trustee.

Honeywell's employees voluntarily participated in the retirement plan. Employees elected to deduct a designated percentage from their pay to be invested on their behalf. Employees could select from among several different investment programs.

More than 7,000 of Honeywell's Arizona employees selected what was designated the "fixed income" or "protected interest" option. For those employees who selected this option, the trustee invested approximately 21 million dollars with the Executive Life Insurance Company ("ELIC"). ELIC was a California insurance corporation authorized to do business in Arizona.

The trustee purchased four GIC's from ELIC in January and April of 1988. The four contracts were substantially similar. ² Each named the trustee as the owner of the contract. As owner, the trustee was entitled to "exercise every contract right and enjoy every contract provision without the consent of any [Honeywell employee retirement plan] participant." ³

The trustee deposited a specified amount, either in a lump sum or in installments, with ELIC. Each GIC issued by ELIC provided a guaranteed interest rate on the deposit. Each GIC had a set maturity date at which time ELIC was obligated to pay the full "fund value." "Fund value" was defined in the contracts as "the sum of all deposits, less any withdrawals and scheduled payments, plus interest earned at the guaranteed rate...." Each GIC provided for annual payments of accrued interest to the trustee. Each GIC also provided that the full fund value was to be paid not in one installment but in a specified number of yearly installments.

Deductions from the fund value of the GIC's were allowed without penalty under specified conditions. ⁴ Each GIC contained what we will refer to as "payout provisions":

The Owner may direct [ELIC] to purchase an individual annuity contract for a participant before the retirement date. [ELIC] will withdraw the cost of annuity benefits for the participant on the date it withdraws the amount. The owner may also withdraw all or part of the fund value to provide for plan benefits, in accordance with the [Honeywell employee retirement plan's] provisions. ⁵

If funds were withdrawn before the contract maturity date, interest payments on the amounts withdrawn ceased. Although the trustee could have withdrawn funds from the ELIC GIC's to purchase annuities on behalf of Honeywell's employees, it is undisputed that it made no such withdrawals.

Upon retirement, a plan participant could select three types of annuities: a life annuity, an annuity covering the participant for life with the remainder to a beneficiary, or a joint and survivor annuity. ⁶ When the trustee purchased annuities for retiring employees, it purchased the annuities from other insurance companies. ⁷ However, if a retiring employee did not wish to select an annuity, Honeywell's retirement plan allowed several other options, including a lump-sum distribution, a deferred lump-sum distribution, and payment over a term of years.

When an employee died, Honeywell's retirement plan provided three options for the surviving beneficiary. The survivor could request full payment of the dollar value of the deceased employee's accrued benefits in a lump sum, payment over a term of years, or payment in the form of an annuity to provide retirement income for the life of the beneficiary.

ELIC was declared insolvent, ordered liquidated and placed in receivership by a California court in December of 1991. Honeywell submitted a claim to the Fund for coverage of losses sustained by the plan, on behalf of plan participants who reside in Arizona. The Fund responded with the declaratory judgment action that is the subject of this appeal.

II.

Because the issue in this case depends on whether Arizona's guaranty fund statute covers guaranteed investment contracts, we begin with an analysis of the relevant statutory provisions.

In 1977, the Arizona Legislature established the Life and Disability Guaranty Fund. See 1977 Ariz. Sess. Laws ch. 136, § 4 (implementing A.R.S. § 20-681 et seq ). The legislation was patterned after a model act developed by the National Association of Insurance Commissioners.

Although no statement of intent was adopted by the Arizona Legislature, the drafters of the model act wrote that the purpose of such a guaranty fund is "to protect policy-owners, insureds, beneficiaries, annuitants, payees and assignees against losses ... which might otherwise occur due to an impairment or insolvency of an insurer."

Under the Arizona statutes, all member insurers ⁸ are required to be members of the Fund as a condition of their authority to transact insurance in Arizona. A.R.S. § 20-683(A) (1990). All costs, expenses and liabilities of the Fund are paid from assessments levied against the member insurers. A.R.S. § 20-683(C) (1990).

When a non-Arizona insurer becomes impaired, ⁹ the Fund is obligated to 1. Guarantee, assume or reinsure ... the covered policies of residents.

2. Assure payment of the contractual obligations of the impaired insurer to residents [and]

3. Provide such monies, pledges, notes, guarantees or other means as are reasonably necessary to discharge such duties....

A.R.S. § 20-685(D) (Supp.1995).

However, the Fund's obligations are limited to certain kinds of insurance, namely:

to 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) (Supp.1995). The question of the Fund's obligation to cover the losses suffered by Honeywell's employee retirement plan after ELIC's liquidation depends on whether the GIC's are included in section 20-682 as "annuity contracts ... issued to residents of this state...."

A.

The first question is whether the GIC's were "issued to residents of this state." The Fund argues that they were issued to the non-resident trustee. While the trustee was legal owner of the GIC's, the equitable owners were the beneficiaries of the retirement plan trust. Many of the beneficiaries were Arizona employees of Honeywell. The contracts were "issued to" Arizona residents even though the trustee held legal title. See Unisys Corp. v. Pennsylvania Life and Health Ins. Guar. Ass'n, 667 A.2d 1199, 1204 (Pa.Commw.Ct.1995) (resident employees protected under Pennsylvania's Guaranty Fund even if owner of GIC's was the trustee of the employee benefit plan); cf. Estate of Pilafas v. Arizona Zoological Soc'y, 172 Ariz. 207, 210, 836 P.2d 420, 423 (App.1992) ("[T]he creation of a trust involves the present transfer of property interests in the trust corpus to the beneficiaries."); Dunlap Investors, Ltd. v. Hogan, 133 Ariz. 130, 132, 650 P.2d 432, 434 (1982) ("[E]quitable title ... constitutes a vested interest in the property itself...."). But see Bennet v. Virginia Life, Accident and Sickness Ins. Guar. Ass'n, 251 Va. 382, 468 S.E.2d 910, 913 (1996) (GIC's were issued to plan trustee, not plan participants, and were owned by trustee).

We agree with Honeywell that the Fund's interpretation of the phrase "issued to residents" leads to anomalous results. It would be possible under the Fund's construction for employees...