Opinion ID: 1232987
Heading Depth: 1
Heading Rank: 6

Heading: Annuity Purchase Option

Text: 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. [5] Id. 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 [e]ven though the GIC allows the Trustee to purchase an annuity contract upon the participant's retirement, we find this alone cannot qualify the GIC contract as an annuity.... Instead, we conclude that the [GIC] are annuities ... only because required payments under the contracts are life contingent. 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 position. The New Mexico Court of Appeals agreed that an option to purchase an annuity was not an annuity, stating: [u]nder the [GIC], a plan participant held an option to purchase an annuity after retirement. This option is perhaps the clearest demonstration that the [GIC] were not themselves annuities. An option to purchase an annuity does not create an annuity contract, only the possibility of a separate contract for an annuity in the future .... Since only an exercise of the option to purchase an annuity contract could create an annuity, it follows that the Executive Life [GIC] were not themselves annuity contracts. Krahling v. First Trust Nat'l Ass'n, 123 N.M. 685, 944 P.2d 914, 918 (1997). The statutory definition of annuity in Krahling was synonymous with that in Honeywell, supra, and is distinguishable from our current definition. However, we are persuaded by the court's opinion that an option to purchase an annuity in the future does not constitute a present annuity. In Oklahoma Life & Health Ins. Guar. Ass'n v. Hilti Retirement Sav. Plan, 939 P.2d 1110 (Okla.1997), the Oklahoma Supreme Court noted that twenty-two states statutorily provide guaranty coverage for unallocated annuity contracts [8] similar to those involved in the instant dispute. See id. at 1112. All of the states cited limit the maximum coverage by the guaranty associations to amounts ranging from $1,000,000 to $7,500,000 per contract. Georgia and North Carolina have limits of $5,000,000. [9] See id. The absence of a limitation of coverage for unallocated annuities in our statute supports our conclusion that the legislature did not contemplate coverage for this type of funding mechanism when it passed the Act. We are cognizant of those decisions which have found similar contracts to be within the protection afforded by the particular state's guaranty act and do not find them compelling. See, e.g., Board of Trustees of the Md. Teachers & State Employees Supplemental Retirement Plans v. Life & Health Ins. Guar. Corp., 335 Md. 176, 642 A.2d 856 (1994); Minnesota Life & Health Ins. Guar. Ass'n v. Department of Commerce, 400 N.W.2d 769 (Minn.Ct.App.1987); and Unisys Corp. v. Pennsylvania Life & Health Ins. Guar. Ass'n, 667 A.2d 1199 (1995), aff'd 546 Pa. 256, 684 A.2d 546 (1996). Our review of these cases indicates that they were decided under statutory or judicial definitions of annuity or annuity contract distinguishable from our own. It is also noteworthy that subsequent to these decisions, the state legislatures of Minnesota [10] and Pennsylvania [11] amended their guaranty acts to limit the coverage afforded unallocated annuities akin to RDFA, while the Maryland legislature excluded them from coverage. [12] Liberty advances the additional argument that the Insurance Commissioner's approval of the RDFA indicates they were approved for sale as annuity contracts. It arrives at this conclusion employing a process of elimination, reasoning that since the contracts were not life insurance contracts and not health insurance contracts, they must have been approved as annuity contracts. However, Liberty presented no evidence that the RDFA were approved as annuity contracts and its conclusion is purely speculative. In any event, this Court is not bound by the Insurance Commissioner's determination. Cf. Wilkes v. Freeman, 334 S.C. 206, 512 S.E.2d 530 (Ct.App.1999), cert. denied (insurer's form offering underinsured motorist coverage did not comply with statute despite the fact the form had been approved by the Insurance Commissioner). The Insurance Commissioner's approval is entitled to some deference, but it is not dispositive. See Richland County Sch. Dist. Two v. S.C. Dep't Educ., 335 S.C. 491, 517 S.E.2d 444 (Ct.App.1999).