Bennet v. Virginia Life, Accident & Sickness Insurance Guaranty Ass'n

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.