Attorney General's Opinion
Attorney General, Richard Blumenthal
June 14, 1995
Morton L. Weinstein
Connecticut Board of Examiners of Embalmers and Funeral Directors
150 Washington Street
Hartford, CT 06106
Dear Chairman Weinstein:
This is a response to your request for formal advice regarding whether it is lawful, under Conn. Gen. Stat. § 42-202, for licensed funeral establishments to invest escrow monies received pursuant to funeral service contracts in life insurance policies. Our answer is that such monies may be invested in certain types of life insurance policies to the extent such life insurance policies are fundamentally comparable to the other investment vehicles set forth in section 42-202(c)(1) to (4).
We understand that it has long been the understanding of the funeral service industry that such investments were unlawful under section 42-202. This understanding, however, was called into question by a letter of the Commissioner of Insurance, Robert R. Googins, dated July 22, 1993, in which the Insurance Commissioner stated:
Under § 42-202, Conn. Gen. Stat., the assets of an escrow account established to hold funds received pursuant to a funeral service contract may be invested in insurance contracts. As discussed in an Opinion of Connecticut's Attorney General dated September 11, 1987, life insurance policies used as investments for escrow account assets must be such that they can properly be termed insurance.
Apparently, widespread uncertainty among members of the State's funeral service industry resulted from this letter due to its apparent adoption of the view that certain life insurance policies are acceptable investments under section 42-202. The practical effect of this letter has been that certain insurance companies have begun soliciting funeral service establishments in the State claiming that the investment in life insurance policies of escrow assets held by them pursuant to funeral service contracts is appropriate.1
At the outset, it must be noted that the Opinion of the Attorney General relied upon by the Insurance Commissioner did not address the question of whether a life insurance policy is an acceptable investment for escrow account assets under section 42-202. Rather, the Opinion concluded that several life insurance company filings were not "insurance contracts" at all and, thus, were not acceptable investments under section 42-202. Therefore, the issue of whether any "true" insurance contract, including a life insurance contract, is an acceptable investment did not have to be addressed. See 87 Conn. Op. Atty. Gen. 048 (9/11/87). The Insurance Commissioner's reliance on this Opinion is thus misplaced.
As to the issue currently at hand, i.e., whether a life insurance policy is an acceptable investment under section 42-202, subsection (c) of that section provides:
Assets held in escrow accounts established pursuant to this section shall be invested in one or more of the following: (1) Deposit accounts insured by the Federal Deposit Insurance Corporation; (2) accounts insured against loss of principal by an agency or instrumentality of the United States government; (3) bonds in which savings banks in this state may, by law, invest; (4) bonds of the United States or any agency thereof or of this state or any municipality of this state; or (5) any other deposit account, insurance contract, or security of a quality, safety and expense comparable to those set forth in this subsection. (Emphasis added).
Assuming a life insurance contract contains the elements of a "true" contract of insurance, as discussed previously in 87 Conn. Op. Atty. Gen. 048 (9/11/87), the issue is whether it is an acceptable investment under section 42-202.
Statutory itemization indicates a legislative intent that the list enumerated be exclusive. State v. Kish, 186 Conn. 757, 765-66, 443 A.2d 1274 (1982). Further, where a particular enumeration is followed by general descriptive words, the latter will be understood as limited in their scope to things of the same general kind or character as those specified in the particular enumeration. Eastern Connecticut Cable Television, Inc. v. Montville, 180 Conn. 409, 413, 429 A.2d 905 (1980). Thus, in order for a particular insurance contract to be an acceptable investment it must be of a "quality, safety and expense comparable to those set forth" in subdivisions (1) through (4) of subsection 42-202(c). As discussed below, the touchstone of the four enumerated investments is their low level of risk, their income orientation, their guaranteed principle and their low cost.
Subsection (c)(1) refers to deposit accounts insured by the Federal Deposit Insurance Corporation. An "insured deposit"2 for purposes of the Federal Deposit Insurance Corp., 12 U.S.C. § 1811, et seq., means "the net amount due any depositor ... for deposits in an insured depository institution (after deduction offsets) less any part thereof which is in excess of $100,000." 12 U.S.C. § 1813(m). Thus, such insured deposits are insured up to a maximum of $100,000. 12 U.S.C. § 1821(a)(1).
Likewise, subsection (c)(2) refers to accounts insured against loss of principal by a United States government agency or instrumentality.
Subsection (c)(3) refers to bonds in which savings banks in this state may invest. Such investments are set forth in Conn. Gen. Stat. § 36-96, and include United States, state, municipal and specified foreign and international obligations, housing authority obligations, specified corporate bonds, and revenue bonds. A review of section 36-96 indicates that said bond investments are secured or guaranteed such that payment of both principal and interest is made, or otherwise restricted per rating categories.
Life insurance is a contract by which an insurance company, for a certain sum of money or premium proportioned to the age, health, and other circumstances of the person whose life is insured, engages that if such person shall die within the period limited in the policy, the insurance company shall pay the sum specified in the policy, according to the terms thereof, to the person in whose favor such policy is granted. Day v. Walsh, 132 Conn. 5, 12, 42 A.2d 366 (1945); 44 C.J.S. Insurance § 10(a). "Life insurance is not a means of raising wealth, but in its most usual form is simply a mode of savings, although there is authority to the effect that the purpose of life insurance is not an investment. Id; see also Ellison v. Straw, 119 Wis. 502, 508, 92 N.W. 168 (1903). Further, the concept of insurance has been said to involve some investment risk-taking on the part of the insurer and to involve a guaranty that at least some fraction of the benefits will be payable in fixed amounts. Securities and Exchange Commission v. Variable Annuity Life Insurance Company, 359 U.S. 65, 79 S. Ct. 618, 622 (1959); See Spellacy v. American Life Ins. Ass'n, 144 Conn. 346, 354-55, 11 A.2d 834 (1957). It is not an essential element of insurance, however, that a definite fund be set aside to meet the insurance company's obligations. Haynes v. United States, 353 U.S. 81, 77 S. Ct. 649, 651 (1957). Nevertheless, the Connecticut Life and Health Insurance Guaranty Association Act, Conn. Gen. Stat. §§ 38a-858 to 38a-875, inclusive, is intended to provide protection for policyholders, insurers, beneficiaries, annuitants, payees and assignees of life insurance policies, inter alia, when the insurance company issuing a policy becomes impaired and cannot honor its obligations. See Conn. Gen. Stat. § 38a-859.3 Thus, life insurance contracts may be of comparable quality and safety as those investments enumerated in section 42-202(c).
The primary concern with insurance polices in regard to §42-202 is the marketing expenses of such policies. It is conceivable that a person might pay a single premium and yet receive a cash surrender value of only a fraction of the premium if the policy were to be liquidated immediately. For example, in your letter you indicate that, using figures provided by one company currently doing business in Connecticut, a female, sixty-six years of age, who pays a single premium of $4,800 receives a cash surrender value of only $3,548 at the inception of the policy. This represents an expense of $1,252 for administering the policy or 26% of her initial deposit were she to liquidate the policy immediately. It is our understanding that investments in deposit accounts or government-backed securities, even with brokerage fees, would not result in so large an expense to an investor.
Moreover, an administrative expense of this magnitude would appear to conflict with the overall intent of section 42-202. Conn. Gen. Stat. § 42-202(d) provides, in pertinent part, as follows:
All interest, dividends and other income earned on the amounts deposited in an escrow account pursuant to this section shall be returned in such escrow account and credited less any administration expenses, to the respective interests of those persons for whose benefit the escrow account is maintained ... (Emphasis added).
Under Conn. Gen. Stat. § 42-202(e).
[i]f a purchaser of funeral services, property or merchandise defaults in making payments required under the terms of such contract, or if the purchaser or the person responsible for making funeral arrangements for a deceased beneficiary fails to have the funeral service establishment provide services, the funeral service establishment may retain any origination fee and any costs actually and reasonably incurred by such establishment in the performance of the contract as liquidated damages, provided the sum of the amount retained as an originated fee and the amount retained to pay for costs incurred by the funeral establishment in the performance of the contact shall not exceed an amount equal to five per cent of the amount in the escrow account at the time the purchaser of the funeral services defaults in making such payments. The balance of any amount remaining in the escrow account shall be paid to such purchaser upon request. (Emphasis added).
Finally, Conn. Gen. Stat. § 42-204 provides:
The legal representative of the decedent or a person who has entered into a funeral service contract with a funeral service establishment, upon written notice to such establishment and to the escrow agent and subject to the provisions of section 17-83a, may cancel any funeral service contract prior to the performance by such establishment. In the event of such a cancellation all money in the escrow account paid by such persons, together with all accrued income, less costs actually and reasonably incurred by the funeral service establishment in the performance of such contact, shall be returned to such person. (Emphasis added).
It is axiomatic that a legislative act is to be considered as a whole with a view toward reconciling and harmonizing its separate parts in order to render a reasonable overall interpretation. Orticelli v. Powers, 197 Conn. 9, 14, 495 A.2d 1023 1985). Further, common sense must be used and it must be assumed that the legislature intended to accomplish a reasonable and rational result. Gentry v. City of Norwalk, 196 Conn. 596, 603, 494 A.2d 1206 (1985). While there is no cap on costs in section 42-204 for cancellation of a contract as in section 42-202(e) for default by the purchaser, and while the amount returned under section 42-204 resembles a cash surrender value, in reading the provisions of sections 42-202 and 42-204 together it does not seem reasonable that the Legislature contemplated funds being deposited in investments where administrative expenses total a large percentage of the initial investment, such as that apparently found in connection with the marketing of some life insurance policies.
In short, while some life insurance contracts are better than others (i.e., lower premiums, higher cash surrender value, guaranteed), in order for a life insurance contract to constitute an investment vehicle of comparable "quality, safety and expense" as those enumerated in Conn. Gen. Stat. § 42-202(c) it must have the characteristics of being income-oriented, of limited risk, with a guaranteed principal and of limited cost to the consumer. This is a question that can be determined only on a case-by-case basis.
Very truly yours,
Jane D. Comerford
Assistant Attorney General
1 We note that the Insurance Commissioner does not possess the authority to decide whether funeral service contract escrow funds may be invested in life insurance policies. While the Insurance Commissioner is charged with the regulation of insurance policies and practices under the State's insurance laws, Conn. Gen. Stat. § 38a-1 et seq., the Insurance Commissioner may not pass upon the propriety of certain types of investments for purposes of the laws regulating funeral service contracts. Pursuant to Conn. Gen. Stat. § 20-209a, the Board of Examiners of Embalmers and Funeral Directors has jurisdiction to adjudicate complaints regarding compliance with the general statutes and administrative regulations governing funeral directing and embalming and to impose sanctions where appropriate. Conn. Gen. Stat. § 20-209a (regarding embalmers and funeral directors). The Department of Public Health and Addiction Services is also charged with adopting, with the advice and assistance of the Board, any regulations necessary to implement the purposes of Chapter 385. It is conceivable that the Board could be called on to adjudicate a complaint that a violation of section 42-202 constitutes a violation of Conn. Gen. Stat. § 20-227(4) concerning disciplinary action for "incompetency, negligence or misconduct in the carrying on of such business or profession" of embalming or funeral directing.
At the same time, the Commissioner of Consumer Protection is responsible for adopting regulations directed at the business practices of persons licensed or regulated under Chapter 385 and to adjudicate all complaints concerning such business practices. Indeed, a violation of section 42-202 would be deemed an unfair or deceptive trade practice in accordance with the provisions of Chapter 735a, which provisions come within the jurisdiction of the Commissioner of Consumer Protection.
2 As used in the Deposit Account Act, Conn. Gen. Stat. § 36-27a et seq., "deposit account" means any account at a financial institution (1) which is in the name of one or more natural persons; (2) in which, with regard to a trust account the entire beneficial interest is held by one or more natural persons, and (3) into which deposits maybe made ...." Conn. Gen. Stat. § 36-27b(d).
3 The Act provides coverage to persons for direct, nongroup life, health, annuity and supplemental policies or contracts, for certificates under group annuity contracts, and for unallocated annuity contracts. Conn. Gen. Stat. § 38a-860(b)(1). The Act does not provide coverage for, inter alia, any portion of a policy or contract not guaranteed by the insurer or under which the risk is borne by the policy or contract holder, much like those investment vehicles enumerated in sections 42-202(c)(1), (2), and (3). See Conn. Gen. Stat. § 38a-860(b)(2). Nor does it provide coverage for any plan or program of an association or similar entity to provide life or annuity benefits to its members to the extent such plan or program is self-funded or uninsured or for any portion of a policy or contract to the extent that it provides that any fees or allowances be paid to any person in connection with the service to or administration of such policy or contract. The benefits for which the association may become liable are limited to the lesser of (1) the contractual obligations for which the insurer is liable or would have been liable if it were not an impaired insurer, or (2) with respect to any one life, three hundred thousand dollars in life insurance death benefits, but no more than one hundred thousand dollars in net cash surrender and net cash withdrawal values for life insurance, or one hundred thousand dollars in the present value of annuity benefits including net cash surrender and net cash withdrawal values.