POWERS OF WASHINGTON LIFE AND DISABILITY INSURANCE GUARANTY ASSOCIATION WITH RESPECT TO FEDERAL OLD LINE POLICIES

OFFICES AND OFFICERS ‑- STATE ‑- INSURANCE COMMISSIONER ‑- INSURANCE ‑- POWERS OF WASHINGTON LIFE AND DISABILITY INSURANCE GUARANTY ASSOCIATION WITH RESPECT TO FEDERAL OLD LINE POLICIES

The Washington Life and Disability Insurance Guaranty Association, with the approval of the state insurance commissioner, may continue to impose the lien on life insurance policies previously imposed by the Federal Old Line Insurance Company; and it may impose a similar lien on policies issued by Federal Old Line on or after April 1, 1949; the Guaranty Association may also discontinue a past practice of Federal Old Line of waiving certain liens upon death claims and maturities; and it may limit the payment of interest declared by Federal Old Line to October 7, 1968.

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                                                                     July 1, 1974

Honorable Karl Herrmann
Insurance Commissioner
Insurance Building
Olympia, Washington 98504                                                                                                               Cite as:  AGLO 1974 No. 64

Dear Sir:
 
            This is written in response to your recent request for our opinion as to whether the Washington Life and Disability Insurance Guaranty Association has the following powers with respect to insurance policies issued by the Federal Old Line Insurance Company (hereinafter referred to as Federal Old Line):
 
            (1) To continue to impose a lien equal to one annual premium which was previously imposed by directors of Federal Old Line on all policies issued by it prior to April 1, 1949;
 
            (2) To impose a similar lien on all policies issued by Federal Old Line on or after April 1, 1949;
 
            (3) To discontinue the past practice of those directors of waiving the liens described in (1) above on death claims and maturities; and
 
            (4) To limit the payment of interest declared by the directors of Federal Old Line but not provided for in the policies issued by it, to October 7, 1968 (the date your office became the rehabilitator of the company by court order) and to provide that such interest shall not accrue thereafter.
 
            We respond to the foregoing in the manner set forth in our analysis.
 
                                                                     ANALYSIS
 
            The Washington Life and Disability Insurance Guaranty Association was created by chapter 259, Laws of 1971, 1st Ex. Sess., now codified as chapter 48.32A RCW, the purpose of which, as stated in RCW 48.32A.010,  [[Orig. Op. Page 2]] is
 
            ". . . the creation of funds . . . to be used to assure to the extent prescribed herein the performance of the insurance contractual obligations of insurers becoming insolvent . . . and to promote thereby the stability of domestic insurers.  . . ."  (Emphasis supplied.)
 
            This act, the constitutionality of which was recently upheld in Aetna Life v. Washington Life, 83 Wn.2d 523 (1974), applies to ". . . policies and contracts . . . of insolvent insurers with respect to which an order of liquidation is entered after May 21, 1971."  RCW 48.32A.020(3).  It is, therefore, applicable to policies of Federal Old Line because the court order of liquidation relating to that company was entered by the King County Superior Court on November 10, 1971 ‑ following the court's earlier entry on October 7, 1968, of an order to rehabilitate the company.  With this in mind we turn, first, to RCW 48.32A.060(1), under which the Guaranty Association has approached you in the instant case, and then to your questions.  This statute, codifying § 6(1) of the act, states that:
 
            "(1) The association shall, subject to such terms and conditions as it may impose with the approval of the commissioner, assume, reinsure, or guarantee the performance of the policies and contracts of any domestic life or disability insurer with respect to which an order of liquidation has been entered by any court of general jurisdiction in the state of Washington, and shall have power to receive, own, and administer any assets acquired in connection with such assumption, reinsurance, or guaranty.  The association, as to any such policy or contract under which there is no default in payment of premiums subsequent to such assumption, reinsurance, or guaranty, shall make or cause to be made prompt payment of the benefits due under the terms of the policy or contract."  (Emphasis supplied.)
 
             [[Orig. Op. Page 3]] Questions (1) and (2):
 
            As called for in RCW 48.09.220-48.09.250, the policies with which we are here concerned contain the following provision with respect to the contingent premium liabilities of the policyholders:
 
            "Contingent Premium and Liability Limit: Each member of this Company shall have a contingent liability, pro rata and not one for another, for the discharge of its obligations.  The maximum amount of each such member's contingent liability shall not be more than one additional premium for the member's Policy at the annual premium rate and for a term of one (1) year.  The By-laws of the Company state:
 
            "'1. It is expressly provided that the contingent liability of the Policyholder shall not exceed one additional annual premium as noted in the Policy.
 
            "'2. Whenever the Board of Trustees shall determine that there exists a situation where the Company is notified that it is required to provide additional assets so its admitted assets will equal or exceed reserves and liabilities, then a resolution is to be adopted by the Board authorizing the reduction of the contingent liability of Policy owners to possession . . .'"
 
            Thus, those policies are subject to the imposition of a lien under the following terms of RCW 48.09.260:
 
            "As to life insurance, any portion of an assessment of contingent liability upon a policyholder which remains unpaid following notice of such assessment, demand for payment, and lapse of a reasonable waiting period as specified in such notice, may, if approved by the commissioner, be secured by placing a lien on the reserves held by the insurer to the credit of such policyholder."
 
            In fact, such a lien was imposed some years ago by the directors of Federal Old Line on all policies issued by it prior to April 1, 1949.  The Guaranty Association  [[Orig. Op. Page 4]] now proposes to continue that lien and to impose a similar one on all policies issued by the company since that date.  It is our opinion that with your approval as provided for in RCW 48.32A.060(1), supra, both of these things may be done.
 
            Subsection (6) of this same statute, which is obviously to be read in conjunction with subsection (1), provides that:
 
            "(6) For the purpose of carrying out its obligations under this chapter, the association shall be deemed to be a creditor of the liquidating insurer to the extent of assets attributable to covered policies and contracts reduced by any amounts to which the association is entitled as a subrogee.  All assets of the liquidating insurer attributable to covered policies and contracts shall be used to continue all covered policies and contracts and pay all contractual obligations of the liquidating insurer as required by this chapter.  Assets attributable to covered policies and contracts, as used in this subsection, are those in that proportion of the assets which the reserves that should have been established for such policies and contracts bear to the reserves that should have been established for all insurances written by the liquidating insurer."
 
            And, without question, the lien imposed by the directors of Federal Old Line with respect to policies issued prior to April 1, 1949, represents an asset of that now liquidating insurer.  Thus, subject to your approval as contemplated by RCW 48.32A.060(1), this facet of the association's instant proposal may be implemented as provided for in its resolution that accompanied your request.
 
            As for the imposition of a similar lien on policies issued by Federal Old Line on or after April 1, 1949, our affirmative answer here is simply based upon RCW 48.32A.060(1), supra.  We read this subsection as permitting the Guaranty Association to impose whatever "terms and conditions" the liquidating insurer could, itself, have imposed upon its policyholders ‑ but only  [[Orig. Op. Page 5]] with your approval as therein provided.  Since the insurer could have imposed the lien now proposed by the association with your approval under RCW 48.09.260, supra, the association may now do so as well.
 
            Question (3):
 
            By the same token we also believe that with your approval, the association may, as well, establish as one of the terms of its assumption of Federal Old Line's policy obligations a discontinuance of the past practice of the company's directors of "waiving" the liens imposed by it on death claims and policy maturities.
 
            Question (4):
 
            Finally, it is our opinion for the same reason that the Guaranty Association, acting through its board of directors, will also have the power by virtue of your approval of its proposed resolution under RCW 48.32A.060(1), supra, to limit the payment of interest declared by the directors of Federal Old Line, but not provided for in the policies issued by it, to October 7, 1968 (the date your office became the rehabilitator of the company by court order) and to provide that such interest shall not accrue thereafter.  Obviously, this is also something which the board of directors of the liquidating insurer itself could have done at any time while it was still actively managing the company.  Thus, the association by imposing this condition will not be breaking any contractual agreement with the policy owners of Federal Old Line ‑ but only discounting a "declaration" (as opposed to a contractual agreement) adopted by the board of directors of Federal Old Line in an attempt to ease its financial difficulties.
 
            In so concluding on the basis of the above explained reasoning we should also point out that as the statutory receiver of Federal Old Line, you have already given notice to the policyholders that no interest will be paid on their policies after the above date.  Therefore, the Guaranty Association's proposal here amounts to nothing more than a perpetuation of the status quo which you have, in the exercise of your powers as receiver, already established.
 
             [[Orig. Op. Page 6]]
            We trust the foregoing will be of some assistance to you.
 
Very truly yours,
 
SLADE GORTON
Attorney General
 
PHILIP H. AUSTIN
Deputy Attorney General