All in the Details

When the Columbian Bank and Trust Co. of Topkea, Kansas failed in 2008, it was just one of a number of small banks that had collapsed in the wake of a severe economic downturn that threw the entire global financial system into a tailspin.

Columbian’s failure did not garner lasting nationwide attention, but perhaps it should have. For among its account holders was none other than leading annuity writer Aviva USA, which at the time of the bank’s failure had cash accounts worth some $11.3 million.

But what is telling about the accounts is the way they were classified meant that when the bank failed, the money was largely uninsured by the Federal Insurance Deposit Corporation.

This elementary error on Aviva’s part ultimately cost the company nearly $9.5 million, a loss verified when an appeals court recently upheld a ruling in Aviva Life & Annuity Company and American Investors Life Insurance Company v. FDIC, No. 10-3163.

The decision ends an embarrassing debacle for Aviva, which contends the lost funds were being held for annuity customers. But more importantly, Aviva’s loss underscores the need for insurance companies to make every effort to identify funds as being held in insurance company separate accounts.

The Appeal

The case stemmed from the failure of Columbian Bank and Trust Co. in Topeka, which closed and sold its deposits to a Chillicothe, Missouri bank on Aug. 22, 2008.

According to a press release issued by the FDIC, Columbian had $622 million in total deposits, plus $268 million in so-called brokered deposits. Outside of the brokered deposits, there was only $46 million in 610 accounts that exceeded the insurance limits. Of this, $11.3 million belonged to Aviva, in two uninsured corporate accounts–$4,242,854.60 held in an account for Aviva Life & Annuity operating account, and $7,098,344.56 held in account for American Investors Life Insurance Co. account.

Because the FDIC considered these accounts to be acorporate accounts, rather than pass through accounts being held for the benefit of annuity customers, when Columbian failed, Aviva received only the $100,000 insured deposit limit for each account. It received another $300,000 after the accounts received total deposit insurance of $250,000 each retroactively under a provision of the Dodd-Frank financial services reform law of 2010.

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

Therefore, its aggregate loss, based on the additional $300,000 paid retroactively, was $9,436,143.

Aviva filed suit against the FDIC in a bid to retrieve its lost millions, but the lower court ruled in the FDIC’s favor. Aviva appealed the lower court decision.

Aviva lawyers told the appellate court that, “Because the deposit accounts were actually used to fund annuity contracts and benefits, the funds were entitled to pass-through insurance treatment pursuant to Section 330.8 and the FDIC’s determination to the contrary was arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law. “

On August 13, a panel of the 10th U.S. Circuit Court of Appeals upheld the lower court’s decision, rejecting Aviva’s claims that the funds were held for the benefit of Aviva’s annuity customers.

According to the appellate court case, FDIC field officials originally accepted the arguments of Aviva officials that the two accounts involved were pass through accounts held for the benefit of Aviva’s annuity customers.

But the panel noted that a number of smaller accounts containing from $1,000 to $10,000 were deemed by the FDIC to be held for the benefit of annuity customers, and were accorded pass through treatment, that is, each account was insured up to the $100,000 deposit insurance limit in effect at that time.