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Life Health > Life Insurance

10th Circuit Rules on FDIC Protection of Annuity Accounts

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Two life insurance company subsidiaries of Aviva USA should recover only 16% of the $11.3 million they deposited in a Topeka, Kan., bank that failed in 2008, according to a 3-judge panel of the 10th U.S. Circuit Court of Appeals.

The life companies – Aviva Life & Annuity Company and American Investors Life Insurance Company – had deposited most of the funds in the bank, Columbian Bank & Trust Company, Topeka — in two large accounts.

Aviva USA, Des Moines, Iowa, has argued in the case, Aviva vs. FDIC, No. 10-3163, that the life companies created the accounts for a large number of annuity holders, and that each annuity contract holder should get the FDIC protection accorded an annuity contract holder.

The FDIC determined that the deposits were held in two corporate accounts and had only $200,000 in FDIC insurance protection. A judge at the U.S. District Court for the District of Kansas upheld found that the FDIC had not acted arbitrarily or capriciously in determining that, “because the two challenged accounts were each entitled ‘operating account,’ they were to be aggregated as corporate accounts, up to the deposit limit of $100,000,” Judge Michael Murphy writes in an opinion for the 10th Circuit panel.

The 10th Circuit panel sustained the lower-court ruling.

If the court had upheld Aviva USA’s claim, the life companies would have received $8.6 million in FDIC insurance payments up front and 12.287% of the proceeds from the sale of the bank’s assets.

Columbian, a bank that held $622 million in total deposits, including $268 million in brokered deposits, was closed and its deposits sold to a Chillicothe, Mo., bank Aug. 22, 2008.

According to the FDIC, outside of the brokered deposits, Columbian held only $46 million in 610 accounts that exceeded the insurance limits, apparently $11.3 million in Aviva uninsured accounts, according to the court ruling.

Aviva USA is a unit of Aviva P.L.C., London (NYSE:AV).

Kevin Waetke, a spokesman for Aviva USA, says Aviva does not intend to pursue the matter further.

“The court’s decision was limited to a narrow issue of administrative law regarding the FDIC’s authority,” Waetke says. “It is important to note that this issue occurred three years ago and the decision has no impact on our current operations. Aviva does not intend to pursue the matter any further.”

Section 330.8

The two corporate accounts involved in the suit included an account for Aviva Life & Annuity that held $4,242,854.60 and an account for American Investors Life that held $7,098,344.56.

The appeals court decision notes that several smaller accounts containing from $1,000 to $10,000 were deemed by the FDIC to be held for the benefit of annuity customers. Those accounts were accorded pass-through treatment, meaning that each account was insured up to the $100,000 deposit insurance limit in effect at that time.

In exercising its prerogative under FDIC regulations, “the FDIC determined these deposit accounts records clearly and unambiguously indicated that the challenged accounts were corporate accounts, and refused to consider plaintiff’s evidence to the contrary,” Judge Michael Murphy writes in an opinion for the 10th Circuit panel.

As a result, the Aviva life subsidiaries received only the $100,000 insured deposit limit for each deposit account. It received another $300,000 after the deposit accounts received total deposit insurance of $250,000 each retroactively under a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The Aviva life subsidiaries also received $1,363,857 in two steps in 2009 as a bank creditor based on sale of Columbian’s assets.

The company’s aggregate loss, after taking into account the additional $300,000 paid retroactively under the Dodd-Frank Act, was $9,436,143.

“Because the bank’s records unambiguously show that plaintiffs’ operating accounts were owned as general corporate accounts (and do not disclose that the operating accounts were owned as annuity contract accounts), the district court correctly decided that the Bank’s records were conclusive and that “FDIC was mandated, by regulation, to ‘consider no other records on the manner in which the funds are owned,” the FDIC says in a brief filed with the appellate court.

In its brief, the FDIC acknowledges that Section 330.8 of its regulations “exempts accounts of a life insurance or annuity corporation from aggregation with other accounts of that corporation (providing instead separate, ‘pass-through’ coverage up to $100,000 per annuitant) if five specific requirements are met: The account is a ‘separate account’; the account is for the ‘sole purpose’ of funding life insurance and annuity contracts and incidental benefits; and three criteria under state law are met, including that the separate account is not chargeable with liabilities arising from other business of the corporation and is protected from the corporation’s creditors. The Section 330.8 exception is unavailable here because Plaintiffs do not satisfy either the threshold evidentiary requirement imposed by Section 330.5 nor the additional substantive requirements imposed by Section 330.8.”

Aviva says in its brief that, the “FDIC initially determined, and conveyed to Appellants, that the deposit accounts would be afforded pass-through treatment because the accounts were maintained for and on behalf of Appellants’ annuity customers to fund annuity contracts and the benefits incidental to such contracts.”

Subsequently, however, the brief continued, “the FDIC reversed course and erroneously denied Appellants’ claims for pass-through coverage, and classified as uninsured certain of appellants’ deposit accounts, based solely on how the accounts were labeled, despite the fact that the FDIC’s own review showed that the funds in those accounts were annuity monies.

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