Minnesota Life and Health Ins. Guar. Ass'n v. Department of Commerce, C5-86-1464

• Decision Date: 17 February 1987
• Docket Number: No. C5-86-1464,C5-86-1464
• Citation: 400 N.W.2d 769
• Parties: MINNESOTA LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION, Relator, v. DEPARTMENT OF COMMERCE, Respondent.
• Court: Minnesota Court of Appeals

Page 769

400 N.W.2d 769

MINNESOTA LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION Relator, v. DEPARTMENT OF COMMERCE, Respondent.

No. C5-86-1464.

Court of Appeals of Minnesota.

Feb. 17, 1987.

Syllabus by the Court

1. The Commissioner of Commerce did not err in interpreting the definition of annuity contract under Minn.Stat. Sec. 61B.03, subd. 3 (1984) to include certain unallocated annuities.

2. The Commissioner properly ordered recalculation of the assessments of all Association member insurers.

Frank J. Walz, Best & Flanagan, Minneapolis, for relator.

Hubert H. Humphrey III, Atty. Gen., Jerome L. Getz, Allen I. Gilbert, Sp. Asst. Attys. Gen., St. Paul, for respondent.

Christopher J. Dietzen, John E. Diehl, Larkin, Hoffman, Daly & Lindgren, Ltd., Bloomington, for John Alden Life Ins. Co. and Sun Life Ins. Co. of America.

Timothy R. Thornton, Thomas J. Vollbrecht, Hart, Bruner, O'Brien & Thornton, Minneapolis, for IDS Life Ins. Co. and Midwest Life Ins. Co.

Department of Commerce, St. Paul, pro se.

Carl W. Cummins, Jr., Dorsey & Whitney, St. Paul, for Manufacturers Life Ins. Co. Heard, considered, and decided by RANDALL, P.J., and FOLEY and WOZNIAK, JJ.

OPINION

WOZNIAK, Judge.

The Minnesota Life and Health Insurance Guaranty Association appeals from a decision of the Commissioner of Commerce determining the assessment base for Association member insurers. The Association contends that the Commissioner erred in: (1) broadly defining annuity contract under Minn.Stat. Sec. 61B.03, subd. 3 (1984); (2) determining unallocated annuities are contracts "supplemental to" annuity contracts under Minn.Stat. Sec. 61B.02, subd. 1; and (3) ordering recalculation of the assessments of all Association member insurers. We affirm.

FACTS

Appellant Minnesota Life and Health Insurance Guaranty Association (Association) is a nonprofit organization created under the Insurance Guaranty Association Act, Chapter 61B. All insurers in Minnesota dealing in life, health, and annuity contracts are Association members. The Act is designed to protect policyholders, insureds, beneficiaries, and others against insurance company failures. The Association was created to guarantee benefit payments and coverage continuation for Minnesota residents. Association members are assessed to make the payments to insureds. Assessments are limited to 2% yearly of an insurer's premiums covered by a particular account, such as an annuity account.

The Department of Commerce found that Minnesota's Insurance Guaranty Association Act, adopted in 1977, was patterned after a national Model Act. However, the Minnesota Act contains a definition of "annuity contracts," the major issue of this appeal, which is not contained in the Model Act.

This action stems from a recent assessment of Association insurers due to the bankruptcy of Baldwin-United and its subsidiaries, University Life Insurance Company of Indiana and National Investors Insurance Company of Arkansas. Cincinnati-based Baldwin-United filed for bankruptcy in 1983, shortly after its subsidiaries were placed into rehabilitation in their home states. Before Baldwin-United's failure, over 2,700 single premium deferred annuities (SPDAs) were purchased by Minnesota residents. Under an SPDA policy, the policyholder pays a lump sum to the company, which establishes an interest-earning account. At a fixed time, the policyholder may withdraw the accumulated funds or elect one of the contract's annuity payout options.

In November 1983, the Commissioner found that the companies were unable to meet their obligations to policyholders and were "impaired insurers" under the Act. In January 1984 the Commissioner sued the Association to force it to assess member insurers to cover payments due Minnesota policyholders. The parties entered into a stipulation in May 1985 to assume or guarantee the obligation of the two insurance subsidiaries under the SPDAs issued to Minnesota residents. The stipulation provides that on November 1, 1987, the Association will reimburse Minnesota residents the difference between whatever an insured had received with respect to the SPDA from whatever source, and the policy value of the SPDA on May 1, 1984.

To meet this obligation, the Association agreed to assess its members based on a percentage of the dollar amount of annuity contracts they write. The Association excluded certain types of annuity contracts from the assessment base, specifically those not issued to or owned by a named individual. The unallocated annuity contracts excluded by the Association include guaranteed investment contracts (GICs) and deposit administration contracts (DACs). GICs and DACs, issued primarily under pension fund and profit sharing plans, provide for payment of funds to the insurer by an employer or other policyholder at a specific interest rate for a fixed term. The policyholder cannot withdraw the funds before the end of the term except to adjust for a prevailing interest rate change or to begin annuity payments for plan participants.

The Association determined that the definition of annuity in Minn.Stat. Sec. 61B.03 put GICs and DACs outside the Act's coverage, thus removing them from the assessment base. Minnesota Statute Section 61B.03, subdivision 3 states:

"Annuity contracts" means contracts subject to Chapter 61A wherein the policyowner agrees to make payments to the insurer at the beginning of the contract period and the insurer agrees to make payments thereafter to the insured for a specified period of time or until the insured's death.

The stipulation between the State and the Association requires a $6 million assessment from member insurers. The Association's board of directors' resolution sets the assessment base as:

All premiums or considerations received by such members from the sale in Minnesota during the calendar year 1982 of annuity contract or annuity certificates, except premiums or considerations arising from any annuity contract or any annuity certificate issued under a group annuity contract which was not issued to or owned by an individual, except to the extent of any annuity benefits guaranteed to any such individual by the insurer under any such annuity contract or certificate.

(Emphasis added.)

After excluding GICs and DACs, the assessment was based on $389 million in premiums. If GICs and DACs were included in the base, an additional $252 million in annuity premiums would have been included, bringing the assessment base to $641 million. This dispute involves the question of whether the GICs and DACs should be included in the assessment base.

Respondent insurers appealed the assessment base to the Commissioner of Commerce, objecting to the exclusion of GICs and DACs. A contested case hearing was held before an administrative law judge (ALJ) whose proposed findings recommended that the Association reassess all member insurers and include unallocated annuities in the assessment base. The ALJ determined that exclusion of the unallocated annuities would deprive many Minnesota insureds of the Act's protection, while improperly reducing the assessment base. He noted that a major insolvency would substantially increase the time it would take to protect Minnesota consumers.

Both oral testimony and documentary evidence were presented at the administrative hearing. John Ingassia, supervisor of the life and health section of the Department of Commerce, testifying for informational purposes, said the department was taking a neutral position with respect to inclusion of DACs and GICs into the Act's coverage. He explained that unallocated annuities are regulated by the Commerce Department in the same manner as all other annuities and noted that GICs and DACs are not specifically excluded from the Act's coverage. He also pointed out that GIC contracts include an annuity option. Richard O'Brien, vice president and assistant general counsel for IDS Financial Services, testified that the board's narrow assessment base means that IDS bears a disproportionate share of the assessments. He claims that the Baldwin-United annuities sold to Minnesotans were basically GIC contracts and that GICs are considered annuities by the Internal Revenue Service and for general insurance law purposes.

Royce Sanner, Vice President and General Counsel for Northwestern National Life Insurance and a member of the Association's board of directors, explained that the distinction between covered and noncovered annuity contracts is the absence of the provision identifying the persons who would become annuitants in the noncovered contracts. He explained the board interpreted the statute to require narrow coverage in the belief that, "It's better to protect individual John Does than to protect large, sophisticated pension plan buyers." Sanner admitted that his company sells DACs and GICs and that $32 million in premiums were excluded under the board's interpretation. He said nearly all other board members also benefit from this interpretation.

Sanner agrees that GICs and DACs are considered annuities under Minn.Stat. Sec. 61A, but disputes whether they are annuities under Chapter 61B due to the definition of annuity contract contained in the Minnesota Act. Respondents claim there is no difference.

The Association disagreed with the ALJ's findings. In July 1986, the Commissioner's findings, conclusions and order determined that GICs and DACs and other unallocated annuity contracts are covered under the Act as contracts "supplemental to" annuity contracts or, alternatively, "annuity contracts." The order invalidated the Association's assessment and required a new assessment of all insurers. The Association then appealed by writ of certiorari.

ISSUES

1. Did the Commissioner of Commerce err in determining GICs, DACs, and other unallocated annuities are covered policies under the Minnesota Insurance Guaranty Association Act?

2. Did the Commissioner err in determining GICs and DACs were "supplemental...