WASHINGTON BUREAU — An unusual 10th U.S. Circuit Court of Appeals ruling has reminded life insurers about just how careful they have to be when they are trying to get Federal Deposit Insurance Corp. (FDIC) protection.

A 3-judge panel at the 10th Circuit ruled earlier this month that the FDIC need not treat $11.3 million in separate account assets deposited in two corporate accounts at a failed Topeka, Kan., bank as separate account assets.

The FDIC can treat the two corporate accounts as ordinary accounts, each with a $100,000 FDIC insurance limit, because the insurers that set up the accounts – subsidiaries of Aviva USA, Des Moines, Iowa – labeled each account, “operating account,” the panel held.

The ruling apparently could reduce the FDIC payout to the Aviva USA subsidiaries by more than 80%.

Sam Caligiuri, a partner at Day Pitney L.L.P., Hartford, and head of the firm’s insurance regulation and transaction practice group, says the case points up the need for insurers to make every effort to identify funds held in insurance company separate accounts as separate account funds.

“Where Aviva went wrong was classifying these funds in an operating account instead of stating explicitly that these were for an insurance company separate account,” Caligiuri says.

Caligiuri’s primary job is working on separate accounts and related issues, and he says the 10th Circuit case is the first he can recall in which this type of loss has occurred.

“Insurance company separate accounts are very important because they allow insurance companies to protect the assets of separate accounts contract holders, which support various annuities products from the insolvency of the insurance company,” Caligiuri says.

The accounts “very well could have been separate accounts, and [the insurers] tried to demonstrate they were separate account assets, but, by not clearly identifying it as a separate account, they put themselves at a disadvantage of having to prove that it was, which they were ultimately unsuccessful in doing,” Caligiuri says. “There is something important to learn, to be exceedingly careful in how you identify insurance company separate accounts.”

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.”

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