Opinion ID: 1849627
Heading Depth: 1
Heading Rank: 5

Heading: annuity contracts

Text: We are not the first court to consider the question of whether contracts similar to or identical to those before us here are annuity contracts within the meaning of a statute guarantying the obligations of an insolvent insurer. Other courts have reached different resolutions of this issue, due in large part to differing statutory definitions of the terms annuity and annuity contract. For example, in Ariz. Life & Disability v. Honeywell, 190 Ariz. 84, 945 P.2d 805 (1997), the Supreme Court of Arizona addressed whether contracts issued by Executive Life to the trustee of certain employee retirement plans established by Honeywell were annuities as defined by Arizona law so as to qualify for coverage under Arizona's guaranty act. The court employed a test drawn from the specialized meaning of the term `Annuities' set forth in Arizona's insurance code. Ariz. Life & Disability, 190 Ariz. at 88, 945 P.2d at 809. The code defined `Annuities' as `all agreements to make periodic payments, other than contracts defined ... as life insurance, where the making or continuance of all or of some of a series of such payments, or the amount of any such payment, is dependent upon the continuance of human life.' Id., quoting and citing Ariz.Rev.Stat. § 20-254.01 (1990). The court interpreted the contracts as incorporating the terms of the voluntary retirement plan which they funded. The plan expressly required payment in the event of a participating employee's death. The court therefore concluded that the contracts met the statutory definition of annuity because the continuation and amount of periodic payments by [Executive Life] of both principal and interest depended upon the lives of [the retirement plan] participants. Ariz. Life & Disability, 190 Ariz. at 91, 945 P.2d at 812. In Board v. Life & Health Ins., 335 Md. 176, 642 A.2d 856 (1994), the court addressed whether two contracts issued by Executive Life as funding mechanisms for a public employees' retirement plan were annuities covered by Maryland's guaranty act. That act did not define the term, but a Maryland insurance statute provided: `Annuities means all agreements to make periodical payments where the making or continuance of all or some of a series of such payments, or the amount of any such payment, is dependent upon the continuance of human life.... The business of annuities shall be deemed to include additional benefits operating to safeguard the contract from lapse, or to provide a special surrender value, or special benefit, or annuity, in the event of total or permanent disability of the holder. An annuity contract is a contract providing for an annuity as defined in this section.' Id. at 182, 642 A.2d at 859, quoting Md. Code. Ann., Insurance, art. 48A, § 65 (Michie 1994). The Maryland court first examined the Executive Life contracts and their relationship to the retirement plan. According to those terms, if a plan participant died, retired, or suffered severe financial hardship due to illness, the trustee could require Executive Life to pay the pro rata share of that participant's account in the plan. In addition, if the participant retired, became seriously ill, or died, and the participant elected an annuity, the trustee could direct Executive Life to issue the annuity upon payment of the appropriate premium. The court found that these provisions made the withdrawal provisions of the contracts `life-contingent,' reasoning: [Executive Life] could be called upon, whenever a participant died, to pay its pro rata share of that participant's account in the [employees' retirement plan]. This amount would be the initial value of the share together with interest at the guaranteed rate, compounded daily. The actual return which [Executive Life] might have realized on its investment of the premium deposits ( i.e., deferrals), as of the times of demands for payments generated by death or illness of participants, could have been below the amount which [Executive Life] had promised to pay to the [trustee]. Thus, [Executive Life's] assumption of the economic risk was life-contingent. Board, 335 Md. at 186, 642 A.2d at 861. After reaching this conclusion, the court determined that the only remaining issue was whether the contracts met the periodic payment element of the statutory definition of annuity. In this respect, the court reasoned that the contracts `provid[ed] for' an annuity because they provided options to obtain individual policies specifying life-contingent periodic payments. Id. at 187, 642 A.2d at 861. The court also found that this interpretation was in accord with significant Maryland legislative history on the issue. Applying different statutory definitional tests, other courts have held that contracts similar to those at issue here are not annuity contracts within the meaning of a guaranty statute. For example, in Bennet v. Va. Life, Acc. & Sickness Ins., 251 Va. 382, 385, 468 S.E.2d 910, 912 (1996), the Supreme Court of Virginia addressed whether certain Guaranteed Interest Contracts purchased by a retirement plan from InterAmerican Insurance Company of Illinois were `annuity contracts' entitled to coverage under Virginia's guaranty act. The Virginia statutory scheme specifically defined annuity, see Va.Code Ann. § 38.2-106 (Michie 1999), and then specifically excluded contracts which would otherwise be considered annuity contracts if such contracts were 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. Va.Code Ann. § 38.2-1700(C)(5) (Michie 1999). Based upon this statutory language, the court concluded that because the contracts were issued to a trustee, and not to the individual plan participants, they could not be both `issued to' and `owned by' an individual under § 38.2-1700(C)(5). Bennet, 251 Va. at 386, 468 S.E.2d at 913. In addition, the court concluded that the exception to § 38.2-1700(C)(5) could not be met because an annuity was 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.' Bennet, 251 Va. at 387-88, 468 S.E.2d at 913, quoting § 38.2-106. Similarly, in South Carolina Ins. v. Liberty Ins., 344 S.C. 436, 545 S.E.2d 270 (2001), the court addressed whether certain agreements entered into between an insurance company and various trustees of privately funded employee retirement plans were annuity contracts under South Carolina's guaranty act. The act itself did not define the term, but the South Carolina insurance code defined annuity 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) (West Cum.Supp.2000). Applying this definition, the court concluded that the agreements were not annuities because they did not make periodic payments at specified intervals and only provided the trustees with an option to purchase an annuity. See, also, Krahling v. First Trust Nat. Ass'n, 123 N.M. 685, 944 P.2d 914 (N.M.App.1997) (holding guaranteed investment contracts issued by Executive Life to pension plan not annuities under New Mexico's statutory definition of that term because they did not provide periodic payments dependent on continuation of human life). These cases have no direct application to the issue before us here because neither the applicable version of the Act nor Nebraska's insurance code define the terms annuity or annuity contract. We are instead guided by the following well-established principles. In the absence of anything to the contrary, statutory language is to be given its plain and ordinary meaning. An appellate court will not resort to interpretation to ascertain the meaning of statutory words which are plain, direct, and unambiguous. Salazar v. Scotts Bluff Cty., 266 Neb. 444, 665 N.W.2d 659 (2003); Hauser v. Nebraska Police Stds. Adv. Council, 264 Neb. 605, 650 N.W.2d 760 (2002). In addition, a statute is open for construction to determine its meaning only when the language used requires interpretation or may reasonably be considered ambiguous. City of Omaha v. Kum & Go, 263 Neb. 724, 642 N.W.2d 154 (2002); Philpot v. Aguglia, 259 Neb. 573, 611 N.W.2d 93 (2000). A statute is ambiguous when the language used cannot be adequately understood either from the plain meaning of the statute or when considered in pari materia with any related statutes. Johnson v. Kenney, 265 Neb. 47, 654 N.W.2d 191 (2002); Premium Farms v. County of Holt, 263 Neb. 415, 640 N.W.2d 633 (2002). The Commonwealth Court of Pennsylvania, considering the precise issue before us in this case, noted common-law authority which defined `annuity' as a `term somewhat loosely used in financial and legal nomenclature and is perhaps incapable of exact definition. Generally speaking, it designates a right-bequeathed, donated or purchased-to receive fixed periodical payments, either for life or a number of years. Its determining characteristic is that the annuitant has an interest only in the payments themselves and not in any principal fund or source from which they may be derived.' Unisys Corp. v. Pa. Life & Health Ins. Guar., 667 A.2d 1199, 1202 (Pa. Commw.1995), quoting Dwight Estate, 389 Pa. 520, 134 A.2d 45 (1957), quoting Commonwealth, Appellant, v. Beisel, 338 Pa. 519, 13 A.2d 419 (1940). Black's Law Dictionary defines the term annuity alternatively as follows: 1. An obligation to pay a stated sum, usu[ally] monthly or annually, to a stated recipient. · These payments terminate upon the death of the designated beneficiary. 2. A fixed sum of money payable periodically. 3. A right, often acquired under a life-insurance contract, to receive fixed payments periodically for a specified duration. Cf. pension. 4. A savings account with an insurance company or investment company, usu[ally] established for retirement income. · Payments into the account accumulate tax-free, and the account is taxed only when the annuitant withdraws money in retirement. Black's Law Dictionary 88-89 (7th ed.1999). While not directly applicable to this case, another Nebraska statute defines [a]nnuity contract as a contract or contracts issued by one or more life insurance companies or designated trusts and purchased by the retirement system in order to provide any of the benefits specified in a public employee retirement system. Neb.Rev.Stat. § 16-1021(2) (Reissue 1997). Given the breadth of the term annuity and the absence of an applicable statutory narrowing definition, we conclude that the term annuity contract as used in the Act is ambiguous and thus open for construction. We are obligated by the Act itself to give it a liberal construction so as to effect the purposes enumerated in section 44-2701, as set forth above. § 44-2704. The Executive Life contracts have certain characteristics of annuities. Two of the contracts expressly incorporate application forms identifying the contracts as Group Annuity Contract[s]. The application forms for the remaining two contracts do not appear in the record, but the substantive provisions of those contracts are similar to those which are designated by their accompanying application forms as group annuity contracts. All four contracts define [a]nnuitant as [t]he individual upon whose life the amount and duration of benefits depends. All of the contracts also provide that the trustee may withdraw the annuity value and purchase an individual annuity for a plan participant. In addition, all four contracts provide a participant with the option to choose from three types of annuity benefit payments. The Commonwealth Court of Pennsylvania relied on these characteristics in concluding that the same Executive Life contracts at issue here were annuity contracts within the meaning of Pennsylvania's guaranty statute which, like ours, did not specifically define the term annuity. See Pa. Life & Health Ins. Guar., supra . The district court relied upon this Pennsylvania case in reaching its conclusion that the contracts at issue are annuity contracts within the meaning of the Act. The Association argues that the district court's construction is erroneous because the presence of an unexercised future annuity option does not make the contracts `annuity contracts' within the meaning of the Act. Brief for appellant at 16. It argues that the contracts are at best ... ` unallocated annuity contracts,' defined as `any annuity contract or group annuity certificate which is not issued to and owned by an individual, except to the extent any annuity benefits are guaranteed to an individual by an insurer under such contract or certificate.' Brief for appellant at 17-18, quoting Georgia Life & Health v. Gilman Paper Co., 249 Ga.App. 767, 549 S.E.2d 751 (2001). Although the phrase unallocated annuity contract does not appear in the version of the Act applicable to this case, the Act was amended in 2001 to specifically provide that it shall not apply to an unallocated annuity contract, defined as an annuity contract or group annuity certificate that 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 the contract or certificate. 2001 Neb. Laws, L.B. 360, codified at §§ 44-2702(16) and 44-2703(2)(b)(xi) (Cum.Supp.2002). In order to ascertain the proper meaning of a statute, reference may be had to later as well as earlier legislation upon the same subject. Nicholson v. General Cas. Co. of Wis., 262 Neb. 879, 636 N.W.2d 372 (2001); Big John's Billiards v. Balka, 260 Neb. 702, 619 N.W.2d 444 (2000). By its 2001 amendments to the Act, the Legislature has affirmed that from a definitional standpoint, an unallocated annuity contract is a species of the broader phrase annuity contract. Because the Legislature did not specifically exclude unallocated annuity contracts from the scope of the Act until the 2001 amendment, it is reasonable and logical to conclude that prior thereto, the statutory phrase annuity contract included an unallocated annuity contract. While this is likely an issue of last impression, we conclude that the Executive Life contracts at issue in this case were annuity contracts falling within the scope of the Act as it was written at the time that Executive Life became insolvent.