South Carolina Ins. v. Liberty Ins.
| Decision Date | 02 April 2001 |
| Docket Number | No. 25274.,25274. |
| Parties | SOUTH CAROLINA LIFE AND ACCIDENT AND HEALTH INSURANCE GUARANTY ASSOCIATION, Respondent, v. LIBERTY LIFE INSURANCE COMPANY, Petitioner. |
| Court | South Carolina Supreme Court |
David W. Robinson, II, and Kevin K. Bell, both of Robinson, McFadden & Moore, of Columbia, for petitioner.
John C. Bruton, Jr., and Frank W. Cureton, both of Haynsworth Sinkler Boyd, PA, of Columbia, for respondent.
We granted certiorari to review the Court of Appeals' affirmation of the trial court's ruling that certain investment contracts were not covered by the South Carolina Life and Accident and Health Insurance Guaranty Association ("the Association"). South Carolina Life & Accident & Health Ins. Guar. Ass'n v. Liberty Life Ins. Co., 331 S.C. 268, 500 S.E.2d 193 (Ct.App.1998). Liberty Life Insurance Company ("Liberty") contends the contracts are annuities entitled to coverage. We disagree and affirm.
The Association was created in 1972 when the legislature passed the South Carolina Life and Accident and Health Insurance Guaranty Act ("the Act"), codified at S.C.Code Ann. §§ 38-29-10, et seq. (Supp.1999). The Association guarantees, assumes or reinsures contractual obligations of insurers who become financially unable to meet their obligations. See S.C.Code Ann. § 38-29-70. To provide this protection, the Association assesses member insurers at rates based on the value of policies or contracts held by the respective insurer.1 See S.C.Code Ann. § 38-29-80. Only certain policies come within the protection afforded by the Act. See S.C.Code Ann. § 38-29-40. The Act defines those policies as "direct life insurance policies, accident and health policies, annuity contracts, and contracts supplemental to life and accident and health insurance policies and annuity contracts issued by persons authorized to transact business in this State...." Id.
The Act's purpose is "to maintain public confidence in the promises of insurers by providing a mechanism for protecting policy owners, insureds, beneficiaries, annuitants, payees, and assignees of [covered policies] against failure in the performance of contractual obligations due to impairment of the insurer issuing these policies or contracts." S.C.Code Ann. § 38-29-30. The Act is to be liberally construed. See S.C.Code Ann. § 38-29-200. The Association may "[t]ake legal action to avoid payment of improper claims." S.C.Code Ann. § 38-29-70(11)(f).
While the Act does not define "annuity contracts," "annuity" is defined elsewhere in the insurance code 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.1999). The interpretation of this definition and the intent of the legislature in promulgating the Act are at the heart of the instant dispute. "All rules of statutory construction are subservient to the one that the legislative intent must prevail if it can be reasonably discovered in the language used, and that language must be construed in the light of the intended purpose of the statute." Broadhurst v. City of Myrtle Beach Election Comm'n, Op. No. 25191, 342 S.C. 373, 380, 537 S.E.2d 543, 546 (2000).
Early in the 1980s, Liberty entered into a number of contracts, called Reserve Deposit Fund Agreements ("RDFA"),2 with trustees of various privately funded employee retirement plans whereby the trustees periodically deposited money with Liberty, the money ultimately to be used to fund retirement benefits to participating employees. For the first ten years of the contracts, Liberty guaranteed a minimum four percent interest rate, or such greater rate as determined by Liberty.
The terms of the RDFA allowed the plan trustee to terminate the contract at any time and require Liberty to return the entire amount deposited, with accrued interest, to the retirement plan. Additionally, partial withdrawals were permitted for any of four purposes: (1) to purchase an annuity, from Liberty or any third party, for a retiring employee; (2) to purchase a paid-up life insurance policy for an employee; (3) to pay any benefit due a retiring employee under the retirement plan, e.g., a lump sum payment, an installment payment, or an annuity, at the option of the retiring employee; or, (4) if an employee terminated her employment prior to retiring, the trustee could recover the departing employee's non-vested interest in the retirement plan. These withdrawal options were guaranteed during the first ten years of the contract.
Liberty subsequently sold the contracts to Investment Life Insurance Company of America ("Investment"). Investment, initially a South Carolina insurer, later redomesticated in North Carolina, while maintaining a license to sell insurance in South Carolina.
In 1993 Investment was declared insolvent by the State of North Carolina. When Investment's assets were not sufficient to meet its obligations under the RDFA, a number of plan trustees applied to the Association for reimbursement. The Association denied coverage. This litigation ensued after Liberty paid the shortfall and accepted an assignment of the trustees' claims against the Association.
Are the RDFA covered under the Act?
The crux of Liberty's argument is that because the RDFA contractually obligated Liberty either to sell annuities to plan trustees for the benefit of retiring employees, or to return funds to the trustee for use in purchasing an annuity from some third party, the RDFA meet the statutory definition of annuity.
The trial court and Court of Appeals determined that, since the RDFA contemplate an additional requirement, i.e. that the trustee enter into a contract separate and apart from the RDFA in order to initiate a stream of payments to a retiring employee, the RDFA themselves are neither covered contracts nor contracts supplemental to covered contracts. We agree.
Liberally construing the Act, the RDFA are not, in our opinion, annuities. As pointed out by the Court of Appeals, the RDFA do not "make periodic payments at specified intervals." Instead, they provide the trustees with an option to purchase annuities.
The Supreme Court of Virginia found that "an undertaking to purchase an annuity in the future is not a present guarantee of annuity benefits." Bennet v. Virginia Life, Accident & Sickness Ins. Guar. Ass'n, 251 Va. 382, 468 S.E.2d 910, 914 (1996). The court in Bennet held that Guaranteed Interest Contracts (GIC), contracts similar to the RDFA in the instant case, were not annuities covered by the State's guaranty association. Our Court of Appeals cited Bennet as support for its conclusion that the RDFA were not entitled to coverage as annuities.3 While Bennet's reasoning is sound, the Virginia statutory definition of annuity is significantly different from our own. The Virginia guaranty act excluded from coverage annuities "not issued to or owned by an individual...." Id. at 912. The Bennet court based its holding that the GIC were not covered by the guaranty act upon the fact that the plan trustee, and not the individual employees, owned the GIC.
The Court of Appeals also relied on Arizona Life & Disability Ins. Guar. Fund v. Honeywell, Inc., 187 Ariz. 146, 927 P.2d 806 (1996),4 wherein the Arizona Court of Appeals held that GIC were not annuities covered by that State's guaranty act. There the controlling statute defined annuities as "all agreements to make periodic payments ... where the making or continuance of all or some of a series of such payments, or the amount of such payment, is dependent upon the continuation of human life." 5Id. at 811. The Arizona court determined that the GIC were not annuity contracts because the payments under the GIC were not contingent on the continuation of human life. The court further held that the GIC were not annuities because the existence vel non of an annuity was entirely speculative and dependent on the trustee's decision to exercise one of a number of options under the contract, i.e. the option to purchase an individual annuity.6 Much of the court's reasoning applies to the RDFA here:
Whether an annuity would be purchased was entirely speculative. First, an employee who invested in the fixed income fund must have retired. Second, the employee would had to have selected the annuity option from the number of options available under Honeywell's retirement plan. Third, the trustee must have elected to direct [the insurer] to purchase the annuity by withdrawing money from the fund value of the [GIC], as opposed to purchasing an annuity from other funding sources.
Id. at 814. Similar procedures were required to initiate a stream of payments to a plan participant in the case sub judice.
As pointed out by Liberty, the decision of the Arizona Court of Appeals was subsequently overruled by the Arizona Supreme Court. Arizona Life & Disability Ins. Guar. Fund v. Honeywell, Inc., 190 Ariz. 84, 945 P.2d 805 (1997). However, the Arizona Supreme Court based its reversal on the lower court's finding that the GIC's payment provisions were not life contingent. The supreme court agreed with the lower court that Id. at 813 (emphasis added).7 Liberty does not argue that the RDFA are annuities because they make payments which are dependent upon the continuation of human life, but because the RDFA obligated Liberty to make periodic payments should the trustee and plan beneficiary so elect. With that in mind, it is not clear how Honeywell, supra, provides support for its...
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