Case Title: Bennet v. Virginia Life

Citation: 

Docket Number: 950808

State: virginia

Court: Virginia Supreme Court

Date: 1996-04-19T00:00:00Z

Document:
Present:  Carrico, C.J., Compton, Stephenson, Lacy, Keenan, and 
Koontz, JJ., and Cochran, Retired Justice 
 
DAVID H. BENNET, ET AL.  
                                            OPINION BY 
v.  Record No. 950808 
CHIEF JUSTICE HARRY L. CARRICO 
                                           April 19, 1996 
VIRGINIA LIFE, ACCIDENT AND SICKNESS 
INSURANCE GUARANTY ASSOCIATION, ET AL.
*
 
 
FROM THE STATE CORPORATION COMMISSION 
 
 
This appeal involves application of the provisions of Chapter 
17 of Title 38.2 of the Code of Virginia, Code §§ 38.2-1700 
through -1721.  The purpose of Chapter 17 is "to protect, subject 
to certain limitations, policyowners, insureds, beneficiaries, 
annuitants, payees, and assignees of life insurance policies, 
accident and sickness insurance policies, annuity contracts, and 
supplemental contracts against failure to fulfill contractual 
obligations due to the impairment or insolvency of the insurers 
issuing those policies or contracts."  Code § 38.2-1700(A). 
 
To provide this protection, the General Assembly designated 
the Virginia Life, Accident and Sickness Insurance Guaranty 
Association (the Association), composed of all insurers licensed 
to transact the business of insurance in this Commonwealth, "to 
enable the guaranty of payment of benefits and of continuation of 
coverages."  Code §§ 38.2-1700(A), -1702(A).  Members of the 
Association are "subject to assessments to provide funds to carry 
out the purpose of [Chapter 17]."  Code § 38.2-1700(A).  In the 
case of an insolvent insurer, the Association shall "[g]uarantee, 
assume, or reinsure or cause to be guaranteed, assumed, or 
                     
     
*The State Corporation Commission is also an appellee 
pursuant to Rule 5:21(f). 
reinsured the covered policies of the insolvent insurer," Code 
§ 38.2-1704(B)(1), and shall "[a]ssure payment of the contractual 
obligations of the insolvent insurer," Code § 38.2-1704(B)(2). 
 
However, not all such policies or contracts are entitled to 
protection.  As pertinent here, Code § 38.2-1700(C)(5) provides 
that Chapter 17 shall not apply to "[a]ny contract or certificate 
which is not issued to and owned by an individual, except to the 
extent of . . . any annuity benefits guaranteed to an individual 
by an insurer under such contract or certificate."  This provision 
is at the core of the controversy in the present case, and it was 
brought into focus when, on December 22, 1994, David H. Bennet and 
L. John Fleischmann, Trustees for the Dynamic Systems, Inc. 
Savings Enhancement Plan (the Plan), and Roger Nicholas, a 
participant in the Plan (collectively, the Plan Trustees), filed a 
petition for declaratory relief with the State Corporation 
Commission (the Commission). 
 
The petition alleged that Dynamic Systems, Inc. (Dynamic) is 
a firm engaged in the business of providing engineering and 
management services; that Dynamic maintains the Plan for the 
benefit of its employees, who number "94 or more"; and that the 
Plan and the trust implementing it qualify under § 401(a) of the 
Internal Revenue Code and include a qualified cash or deferment 
arrangement under § 401(k).  The petition alleged further that the 
Plan had purchased certain Guaranteed Interest Contracts (GICs) 
from InterAmerican Insurance Company of Illinois (InterAmerican); 
that InterAmerican was licensed to transact insurance business in 
Virginia and, consequently, was a member of the Association; and 
that InterAmerican had become insolvent as that term is defined in 
Code § 38.2-1701.  Finally, the petition alleged that demand had 
been made upon the Association to extend coverage to the GICs but 
that the Association had refused the demand and the Commissioner 
of Insurance for Virginia had ruled that the GICs were not covered 
by Chapter 17 of Title 38.2. 
 
The petition prayed for a declaration that the GICs were 
"annuity contracts" entitled to coverage under Code § 38.2-1700(A) 
and that the Association was required to guarantee the contracts. 
 The petition also prayed for an order requiring the Association 
to pay the Plan Trustees approximately $1.6 million, representing 
the "Contract Value [of the GICs] as of 12/23/91," the date 
InterAmerican became insolvent.  
 
The Association moved to dismiss the petition on the ground 
that the GICs were excluded from coverage by the terms of Code 
§ 38.2-1700(C)(5).  The Commission sustained the Association's 
motion and dismissed the petition, stating: 
 
 
From the documents filed by the parties, including 
the actual text of the GICs themselves, it is obvious 
that these products are not owned by and issued to 
individuals, nor do they provide any annuity benefits to 
individuals.  Thus, there is no basis under which these 
investments can be guaranteed by [the Association]. 
 
 
The Plan Trustees are here upon an appeal of right.  Va. 
Const. art. IX, § 4; Code § 12.1-39.  They argue that the statute 
in question is remedial in nature and, hence, should be construed 
liberally to promote the underlying policy of providing protection 
to innocent victims of insurer insolvency.  The Plan Trustees 
maintain that the Commission's interpretation of Code § 38.2-
1700(C)(5) is both unduly restrictive and inconsistent with the 
spirit and fundamental purposes of the statute in question. 
 
The Plan Trustees argue further that, although the Plan and 
the trustees hold legal title to the GICs, the Plan participants 
"are in every sense the equitable and beneficial owners of the 
. . . GICs."  These investments, the Plan Trustees say, "were 
purchased by the Plan at the express direction of individual Plan 
participants 
using 
individually 
identifiable 
participant 
contributions to pay the premiums," the interest of each 
participant "was separately accounted for, and individual Plan 
participants 
received 
periodic 
statements 
identifying 
their 
specific interests in the . . . GICs."  Furthermore, the Plan 
Trustees point out, each participant "directed the application of 
funds" and had "individual rights to withdraw money under the GICs 
in accordance with the terms of the Plan."   
 
We will assume, without deciding, that the Plan Trustees are 
correct in saying the statute in question should be liberally 
construed.  Even so, we do not think the statute can be stretched 
to provide coverage for the claims advanced by the Plan Trustees. 
 Accordingly, we find that the Commission's interpretation of Code 
§ 38.2-1700(C)(5) is neither unduly restrictive nor inconsistent 
with the spirit and fundamental purposes of the statute in 
question. 
 
Code § 38.2-1700(C)(5) excludes from coverage any contract or 
certificate which is not both issued to and owned by an 
individual, and nothing in the statutory language permits an 
interpretation that a mere beneficial or equitable owner can 
satisfy the "issued to" and the "owned by" requirements.  Indeed, 
such an interpretation is impermissible even under the GICs 
themselves.  The GICs were issued to the Plan, not the individual 
participants, and 
§ 4.10 of the Plan provides as follows: 
 
   4.10   Trust as Single Fund:  The creation of 
separate 
Accounts 
for 
accounting 
and 
bookkeeping 
purposes shall not restrict the Trustee in operating the 
Trust as a single Fund.  Allocations to the Accounts of 
Participants in accordance with this Article IV shall 
not vest any right or title to any part of the assets of 
the Fund in such Participants . . . . 
 
In 
addition, 
the 
GICs 
are 
issued 
to 
the 
Plan 
as 
the 
"Contractholder," and § 6.7 of the GICs provides as follows: 
 
6.7  Ownership 
 
 
The 
Contractholder 
(and 
not 
the 
Participant, 
beneficiary or contingent annuitant) is the sole owner 
of all payments, rights, options and privileges granted 
or made to any Participant, beneficiary or contingent 
annuitant under the provisions of this Contract and is 
entitled, without the consent or participation of any 
Participant, beneficiary or contingent annuitant, to 
exercise such rights, options and privileges and to 
receive all such payments at the time payable under the 
Plan to the Participant, beneficiary or contingent 
annuitant. 
 
 
Hence, the conclusion is inescapable that the GICs involved 
in this case are neither issued to nor owned by individuals.  The 
petitioners can succeed, therefore, only if the GICs guarantee 
"annuity benefits . . . to an individual," within the meaning of 
the exception to Code § 38.2-1700(C)(5).  In a footnote to their 
brief, the Plan Trustees state as follows: 
 
 
The . . . GICs are themselves annuity contracts 
because they are agreements to make periodic or lump-sum 
payments 
and 
fixed-dollar 
amounts 
to 
the 
Plan 
participants through the Plan.  See Va. Code Ann.       
 § 38.2-106(1993).  As annuity contracts, the . . . GICs 
clearly 
guaranteed 
annuity 
benefits 
to 
the 
Plan 
participants. 
 
 
As the Association points out, however, Code § 38.2-106 
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," and the GICs involved in this case 
simply do not satisfy that definition; they neither provide for 
periodic payments nor fix a dollar amount to be paid.  Rather, the 
GICs provide only for the accumulation of value at a specified 
rate of interest and for the withdrawal of the accumulated value 
upon certain conditions.   
 
Moreover, while one of the options provided by the GICs 
permits withdrawal of accumulated value for the purchase of an 
annuity, the withdrawal must be made by the Contractholder, i.e., 
the Plan, not an individual participant.  Section 4.1 of the GICs 
states: 
 
4.1  Notice of Benefits 
 
 
Written notice shall be given to the Insurance 
Company by the Contractholder whenever any withdrawal is 
to be made from the Accumulated Value for the purpose of 
providing benefits under the Plan. 
 
 
Furthermore, the undertaking assumed by the Contractholder 
according to the terms of the GICs is to purchase annuities for 
participants, upon request.  Section 4.2 of the GICs provides: 
 
4.2  Withdrawal to Purchase an Income Annuity 
 
 
Upon receipt of a notice from the Contractholder to 
purchase an annuity under this Contract for a person in 
accordance with the Plan, the Insurance Company will 
effect the purchase of such annuity by withdrawing from 
the Accumulated Value the full consideration therefor, 
plus the amount of state premium tax, if any . . . . 
 
An undertaking to purchase an annuity in the future is not a 
present guarantee of annuity benefits.  Hence, the conclusion is 
inescapable that the GICs involved in this case do not guarantee 
"any annuity benefits . . . to an individual," within the 
contemplation of the exception to Code § 38.2-1700(C)(5). 
 
Board of Trustees v. Life & Health Insurance Guaranty Corp., 
642 A.2d 856 (Md. 1994), cited by the Plan Trustees, is 
inapposite.  At the time of that decision, the Maryland guaranty 
statute had no exclusion similar to Virginia's Code § 38.2-
1700(C)(5).  And we are not persuaded by the opinions of the 
insurance commissioners of three sister states, cited by the Plan 
Trustees in support of their position. 
 
Two subsidiary questions remain, (1) whether the Commission 
erred in refusing to consider "certain binding representations 
[InterAmerican made] to the Plan participants regarding the GICs 
in promotional materials," and (2) whether the Commission erred in 
dismissing the petition for declaratory relief filed by the Plan 
Trustees without leave to amend.  We refuse to consider these 
questions.  No objection was preserved before the Commission with 
respect to either point and no assignment of error touches either 
point. Rule 5:21(i).  
 
Finding no error in the proceedings below, we will affirm the 
judgment of the Commission. 
 
Affirmed.