4000 - Advisory Opinions
Insurance Coverage of Escrow Accounts Maintained for Benefit of Residents of a Continuing Care Facility
January 19, 1988
Claude A. Rollin, Attorney
This is in response to your letter, dated November 28, 1988, inquiring about the rules governing the deposit insurance that would be afforded by the FDIC to certain escrow accounts maintained for the benefit of residents or prospective residents of a continuing care facility located in Florida.
I have reviewed the copies of the Escrow Agreement for *** ("Escrow Agreement"), the Minimum Liquid Reserve for *** Escrow Agreement ("Reserve Agreement"), which you forwarded with your letter. I have also reviewed the statutory provisions of Florida law which govern continuing care contracts (Chapter 651 of the Florida Statutes). Based upon my review, and for the reasons stated below, it is my opinion that each resident or prospective resident of *** would be separately insured, up to $100,000, for his or her beneficial interest in the commingled deposit account established pursuant to the Escrow Agreement provided that the FDIC's recordkeeping requirements (outlined below) are satisfied. Such separate insurance would not, however, be provided for any deposit accounts established pursuant to the Reserve Agreement.
It appears that *** serves as escrow agent under the Escrow Agreement entered into between *** and ***, a Florida general partnership. *** Properties (hereinafter the "Provider") is engaged in the business of providing "continuing care" as that term is defined in section 651.011(2), Florida Statutes. In compliance with sections 651.025, 651.033, and 651.055, Florida Statutes, and pursuant to the terms of the Escrow Agreement, all funds received from or on behalf of a resident or prospective resident of the Provider's continuing care facility (located in *** and known as *** are held in a deposit account at ***. Pursuant to the Escrow Agreement, the deposit account is styled as *** as Escrow Agent for the benefit of the residents of the ***-Phase I." In accordance with statutory requirements, paragraph three of the Escrow Agreement directs that:
The Escrow Agent shall retain all escrowed funds in an account separate and apart from the operational accounts of Provider. If within seven (7) days of a deposit into escrow the Escrow Agent receives notification from either the Provider or the resident or prospective Resident, that the Resident has elected to rescind his or her continuing care agreement with the Provider, then in that event, the Escrow Agent shall immediately remit to the Resident or prospective Resident all funds of the Resident or prospective Resident held in escrow by the Escrow Agent. If Escrow Agent does not receive any such notification of rescission within said seven (7) day period, the Escrow Agent shall retain said deposit until the Florida Department of Insurance (the "Department") has approved the release of escrowed funds pursuant to Section 651.023(4), F.S.
In addition, paragraph seven of the Escrow Agreement provides that:
It is understood by the Provider that all funds deposited in the Escrow Account shall remain the property of the Resident or prospective Resident until released to the Provider in accordance with this agreement and Florida statutory and regulatory law. The Escrow Account shall not be subject to any liens or charges by Escrow Agent or judgments, garnishments or other creditors' claims against the Provider.
In light of the foregoing language in the Escrow Agreement, and the statutory provisions underlying those sections, it is my opinion that each resident or prospective resident of *** has an ownership interest in the funds deposited pursuant to the Escrow Agreement and thus would be deemed a "principal" for the purpose of applying § 330.2 of the FDIC rules and regulations, 12 C.F.R. § 330.2, which is the section governing the deposit insurance for accounts held by agents. Section 330.2(b) of the FDIC rules and regulations provides that funds owned by a principal and deposited in the name of the agent at an FDIC-insured bank, shall be insured as the individually-owned funds of the principal. 12 C.F.R. § 330.2(b). When an agent holds funds owned by more than one principal in a single deposit account, the ownership interest of each principal in the commingled deposit account would be recognized and insured as the individually-owned funds of the principal. 12 C.F.R. § 330.101.
Therefore, the ownership interest of each principal in the commingled account would be added to any other funds held in an individual capacity by that person at the same bank and the total would be insured up to $100,000. These fundamental principals of insurance coverage apply, however, only when certain recordkeeping requirements are satisfied.
One recordkeeping requirement is that the bank's deposit account records must indicate the fiduciary nature of the deposit account (i.e., that the agent is holding the funds in a custodial or agency capacity for numerous principals). The other requirement is that the records of either the bank or the depositor, maintained in good faith and in the regular course of business, must indicate the name and ascertainable ownership interest of each principal in the commingled deposit account. 12 C.F.R. § 330.1(b).
In this case, it appears that both of these recordkeeping requirements will be satisfied. First, as noted above, the Escrow Agreement requires that the escrowed funds be held in an account entitled *** as Escrow Agent for the benefit of the residents of the *** Phase I." Assuming that *** deposit account records are styled in this manner (in compliance with the Escrow Agreement), the first recordkeeping requirement would be satisfied since the fiduciary nature of the deposit account would be expressly disclosed on *** deposit account records. Second, the proposed Escrow Agreement Amendment requires that separate records be maintained "identifying each Resident's or prospective Resident's separate interest in the funds held hereunder so that at any time the beneficial interest of each Resident or prospective Resident in such funds can be determined." Assuming that *** maintains such records, the second recordkeeping requirement would be satisfied. Therefore, each resident or prospective resident of *** would be separately insured, up to $100,000, for his or her beneficial interest in the commingled deposit account established pursuant to the Escrow Agreement. Of course, any interest that a resident or prospective resident may have in the commingled deposit account would be added to any other individually owned accounts maintained by that same person with *** for deposit insurance purposes.
With respect to any deposit accounts established pursuant to the Reserve Agreement, it is my opinion that the FDIC would treat those accounts as being owned by the Provider, rather than by the residents or prospective residents, for deposit insurance purposes. My opinion is based on the fact that the residents and prospective residents do not appear to have an ownership interest in the funds deposited in such an account. The funds required, by statute and the Reserve Agreement, to be deposited by the Provider in an escrow account represent the Provider's future principal, interest, tax and insurance payments for the continuing care facility. The funds are being held in the account to assure payment by the Provider of the Provider's contractual obligations with respect to the facility. Moreover, the purchasers or prospective purchasers have no right, under either the Reserve Agreement or the relevant statutory provisions, to obtain the funds in the account. Under the Reserve Agreement, only the Provider or the Florida Department of Insurance may ultimately be entitled to the deposited funds. Although the funds deposited pursuant to the Reserve Agreement are being held for the protection of the residents and prospective residents, it appears that the Provider is the true owner of those funds and thus would be deemed the "principal" for the purpose of applying § 330.2 of the FDIC rules and regulations. 12 C.F.R. § 330.2. Therefore, since the Provider is a partnership, any account established pursuant to the Reserve Agreement would be aggregated with any other partnership accounts maintained by the Provider at *** and the total would be insured, up to $100,000, pursuant to 12 C.F.R. § 330.5.
Please be advised that the opinions expressed herein represent the current thinking of the FDIC Legal Division staff but they are not, in any way, binding on the FDIC or its Board of Directors.