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4000 - Advisory Opinions


Insurance Coverage Provided for Funds Held Pursuant to a Doctors' Malpractice Insurance Trust

FDIC-92-24

April 17, 1992

Valerie J. Best, Counsel

This is in response to your letter requesting an opinion concerning deposits comprised of contributions to a physicians' liability protection trust account. Please accept our apologies for the delay in responding to your inquiry. Due to the novel policy decisions our response has required, we have been unable to respond as quickly as we would like.

I.  PHYSICIAN INTERINDEMNITY TRUST

In your letter, you indicate that the deposits will be maintained with your client, [Bank], an insured depository institution, in the name of the [Doctors Malpractice Insurance] Trust ("Trust"). The trust is sponsored and controlled by the board of trustees ("Trustees") of [Doctors Malpractice Insurance] Corporation, an "interinsurance cooperative corporation" organized under sections 12200 et. seq. of the California Corporations Code for the purpose of sponsoring a cooperative indemnity arrangement under section 1280.7 of the California Insurance Code. The Trust was established to provide professional liability protection to eligible California residents who are physicians or surgeons licensed to practice and currently practicing medicine in the state of California. Although the Trust provides indemnification to its members for claims of medical malpractice, it is ineligible to be licensed as an insurance company (pursuant to section 1642 of the California Insurance Code) and is regulated instead by the California Department of Corporations.

According to the California Insurance Code, in order to join the Trust, each participating physician or surgeon must make an initial deposit of not less than $20,000 ("Initial Contribution") to the Trust, establishing a trust corpus of not less than $10,000,000. Cal. Ins. Code § 1280.7(a)(1) (West 1972 & Supp. 1991). All funds must be deposited in such banks or savings and loan associations located in California as the Trustees may designate. Id. § 1280.7(a)(3). Funds in excess of current needs are to be invested in, inter alia, certificates of deposit or time deposits issued by federally insured banks and savings and loan associations located in California. Id. § 1280.7(a)(4). The income earned on the trust corpus is to be used for the payment of claims, costs, judgments, settlements and costs of administration of the Trust. Should the income prove insufficient to meet these costs, however, the Trustees may assess members as necessary to meet the obligations of the Trust. Id. § 1280.7(a)(5).

Pursuant to the terms of the Trust Agreement, the Initial Contributions of members generally may not be used to pay for the cost of liability protection, except that an amount not to exceed 10% in the aggregate of the Initial Contributions may be used to cover Trust expenses and payment of claims from time to time, provided that any such amounts are "promptly repaid" (repaid within one year). Section 20(d).

In the event membership is terminated through a member's death or retirement and the member is in full compliance with the Trust Agreement, California law provides that each member is entitled to have his or her Initial Contribution returned (1) immediately upon the death of the member to the member's estate or to a designated beneficiary, or (2) in the case of retirement, 10 years from the date the notice of retirement is received by the Trust or an earlier date specified in the Trust Agreement. Id. § 1280.7(a)(9)(A)-(B). Should a member elect to voluntarily terminate his or her membership while in full compliance with the Trust Agreement, the member may either choose to cease being responsible for future assessments (in which case coverage will cease) or continue to pay such assessments until such time as his or her Initial Contribution is repaid (in which case coverage will continue for occurrences prior to the date of the member's voluntary termination). In either event, repayment of the Initial Contribution may occur no earlier than 10 years from the date the Initial Contribution was made. Id. § 1280.7(a)(9)(F).

The Initial Contribution will be forfeited only in cases of involuntary termination, where the member fails to pay assessments within 30 days from the date the assessment was due, or where the member fails to comply with any other provision of the Trust Agreement and such failure to comply is not cured within 60 days. Id. § 1280.7(a)(9)(D)-(E).

The Trustees may also, at their discretion, terminate a physician's membership by a two-thirds vote where it is deemed to be in the best interests of the interindemnity arrangement, even though the member is in full compliance with all provisions of the Trust Agreement. Should a member be so terminated, he or she may (1) request return of the Initial Contribution, following which indemnity coverage will cease as to all pending claims and all occurrences prior to the date of termination, or (2) forfeit return of the Initial Contribution and receive coverage for any claims that might arise in the future for acts committed prior to the member's termination date (known as "tail coverage"). Id. § 1280.7(a)(9)(G).

II.  DEPOSIT INSURANCE COVERAGE

As you know, the FDIC insures deposits according to the "right and capacity" in which they are held. As a threshold matter, we must decide the right and capacity in which the Interindemnity Agreement funds are held.

The Agreement fails to meet the requirements of the FDIC's regulations for joint accounts or for accounts held by a custodian on behalf of principals. Since the Interindemnity Agreement speaks of itself as a trust and operates like a trust, we will treat it as a trust for insurance purposes.

Next, we must decide whether the Trust is revocable or irrevocable. This depends upon the terms of the Trust Agreement. Because the Trust can be dissolved by the vote of three-quarters of the members, the Trust as a whole is revocable. See Section 20(e); see also Cal. Ins. Code § 1280.7(a)(13).

However, the Trust as a whole is comprised of two types of funds or sub-trusts: (1) the initial contributions (that is, the principal of such initial contributions), and (2) the assessments, quarterly fees and income from the initial contributions. For ease of reference, we will call the first fund the "Initial Contributions Sub-Trust" and the second fund the "Assessments Sub-Trust." For deposit insurance purposes, we must examine each of these trusts separately under the FDIC's regulations.

A.  Initial Contributions Sub-Trust

The Initial Contributions Sub-Trust may be viewed as either revocable or irrevocable.

1.  Irrevocable Trust Analysis

One might regard the Initial Contributions Sub-Trust as irrevocable. After all, while any one physician can withdraw from the Initial Contributions Sub-Trust, it would take three-quarters of the members to dissolve the Trust completely. Further, once a physician makes his or her initial contribution to the Trust, the Trust terms operate as written and the physician can do nothing to change them. Thus, as to each physician, the Initial Contributions Sub-trust is irrevocable.

Section 330.11(a) of the FDIC's regulations, which governs irrevocable trust accounts, provides (in relevant part) as follows:

Funds representing the non-contingent trust interest(s) of a beneficiary deposited into one or more deposit accounts established pursuant to one or more irrevocable trust agreements created by the same settlor(s) grantor(s) shall be added together and insured up to $100,000 in the aggregate. Such insurance coverage shall be separate from the coverage provided for other accounts maintained by the settlor(s), trustee(s) or beneficiary(ies) of the irrevocable trust(s) at the same insured depository institution.

12 C.F.R. § 330.11(a) (1991).

The term "trust interest" is defined in section 330.11(c)(1) as "the interest of a beneficiary in an irrevocable express trust (other than an employee benefit plan) created either by written trust instrument or by statute, but does not include any interest retained by the settlor." Id. § 330.11(c)(1) (emphasis added).

In this case, each physician has a retained interest in his or her Initial Contribution on the condition that it not be forfeited as described above. According to our regulation on irrevocable trusts, when a settlor retains an interest in the settlor's irrevocable trust, that interest does not qualify as a "trust interest" but is insured as if it were the individually-owned funds of the settlor. 12 C.F.R. § 330.11(c)(1). This is true even when the retained interest is contingent, as in this case.1 As a result, we would treat the Initial Contributions as the individually owned funds of each settlor (member). However, they would be added together with any other individually owned funds the physician may hold at the same insured depository institution,

2.  Revocable Trust Analysis

The Initial Contributions Sub-Trust can also be viewed as revocable because the physicians, either individually or together, can revoke the Trust, and in some cases, each physician who revokes the Trust as to himself or herself can retrieve his or her Initial Contribution. The FDIC's rule governing revocable trust accounts, which includes simple payable-on-death accounts as well as written trust agreements, provides as follows:

Funds owned by an individual and deposited into any account commonly referred to as a tentative or "Totten" trust account, "payable-on-death" account, revocable trust account, or similar account evidencing an intention that upon the death of the owner, the funds shall belong to such owner's spouse, or to one or more children or grandchildren of the owner, shall be insured in the amount of up to $100,000 in the aggregate as to each such named beneficiary, separately from any other accounts of the owner or the beneficiaries. Such intention must be manifested in the title of the account using commonly accepted terms such as, but not limited to, "in trust for," "as trustee for," "payable-on-death to," or any acronym therefor, and the beneficiaries of the account must be specifically named in the deposit account records of the insured depository institution. The settlor of a revocable trust account shall be presumed to own the funds deposited into the account.

12 C.F.R. § 330.8(a) (emphasis added).

The term "belong to" referred to above means that the beneficiary must have a vested or non-contingent interest in the trust in order for the FDIC to grant insurance coverage to the beneficiary's interest. Here, however, the interest the physician holds in his or her Initial Contribution contains contingencies which may defeat the physician's beneficial interest in the Trust. For instance, a physician may forfeit his or her Initial Contribution if the physician fails to pay fees/assessments when due or if the physician has violated any other terms of the Trust Agreement. Where a revocable trust has defeating contingencies, the beneficiaries' interests so affected are added together for insurance purposes and insured as if they were the individually owned funds of the settlors. In this case, the FDIC would insure the interest of each physician in his or her Initial Contribution as if it were his or her individually owned funds. This means that the interest of each physician in the Initial Contributions Sub-Trust at the time of the bank's default would be added together with any other individually-owned funds which that physician holds at the same bank, and that entire amount would be insured for a maximum of $100,000. (Please note that a particular physician's interest in the Trust when the bank defaults may be less that his or her original contribution because the Initial Contributions Sub-Trust can be invaded up to a maximum of 10% at any given time.)

3.  Summary of Insurance Coverage for Initial Contributions Sub-Trust

Regardless of whether the Initial Contributions Sub-Trust is analyzed under either the FDIC's regulations for revocable or irrevocable trusts, the outcome for deposit insurance purposes is the same: the FDIC would insure each physician's interest in his or her Initial Contribution as if it were the physician's individually owned funds. As discussed below, certain recordkeeping requirements must be met before such insurance coverage is available.

B.  Assessments Sub-Trust

The Assessments Sub-Trust is irrevocable. Once a physician's check for assessments or quarterly fees is deposited with the Trust, the physician loses control over how it will be used. It may be used to pay for a future malpractice claim against him or her, or it may be used to pay for a malpractice claim against another physician. For this reason, each physician's interest in the Assessments Trust is contingent. Applying the FDIC's rule for irrevocable trusts set forth above, all contingent interests in an irrevocable trust (and here, all of the member's interests are contingent) are added together and the entire amount is insured for up to $100,000. See 12 C.F.R. § 330.11(b).

The insurance of such Trust funds would, however, be separate from the insurance afforded to other deposits maintained individually by any of the physicians at the same insured depository institution.

III.  ALLOCATION OF FUNDS BETWEEN INITIAL CONTRIBUTIONS SUB-TRUST AND THE ASSESSMENTS SUB-TRUST

The next question we must ask is, would the FDIC permit an allocation of funds between the Initial Contributions Sub-Trust and the Assessments Sub-Trust at any one bank? For example, let us assume that 2% of the total Trust funds belong to the Initial Contributions Sub-Trust and 98% of the funds belong to the Assessments Sub-Trust. Would it be possible, at any one bank, for the Trustees to allocate, say, 50% of the Trust funds in that bank to the Initial Contributions Sub-Trust and the other 50% of the Trust funds to the Assessments Sub-Trust? The answer to this question is yes, provided that the Trustees can prove through their recordkeeping that their identification of each part of the Trust as an Initial Contribution or Assessment (or some other part of the Trust) is correct.

Even though the Trustees can hold a large portion of Initial Contribution funds at the same insured depository institution (due to the pass-through insurance coverage afforded them), still only $100,000 in Assessment funds can be held at each such institution. Thus, to prevent some funds from being uninsured, the Trustees must monitor each Assessments Sub-Trust account at any one insured depository institution to ensure that it does not exceed $100,000.

IV.  RECORDKEEPING REQUIREMENTS

As a final note, you should be aware of the FDIC's regulations concerning recordkeeping requirements. First, the FDIC's regulations require that the deposit account records of an insured depository institution must disclose the nature of any relationship that may provide a basis for additional insurance coverage. Id. § 330.4(b)(1). In the case of the Trust, this entails clearly identifying the deposit as a trust. Each trust account must indicate, by its title, that it involves a trust--for instance, a permissible title for the funds in the Initial Contribution Sub-Trust would be "[Doctors Malpractice Insurance] Trust--Initial Contributions Sub-Trust Account." As to the Assessment Sub-Trust, the title must also indicate that the account involves a trust, as in "[Doctors Malpractice Insurance] Trust--Assessments Sub-Trust Account." Second, records of either the insured depository institution or the depositor, maintained in good faith and in the regular course of business, must reveal the allocable ownership interest in the account of each member (i.e., each member's initial contribution). Such records may also be maintained for the depositor by a third party, such as a trust administrator or actuary. Id. § 330.4(b)(2). (It would not be necessary to comply with this second recordkeeping requirement for the Assessments Sub-Trust because the members have no ascertainable interest in the funds.)

I trust that this has been responsive to your inquiry. Again, please accept my apologies for the delay in responding to your inquiry. You may call me at (202) 898-3812 if you have any questions.

1Section 330.11(c)(2) defines the term "non-contingent trust interest" as
  a trust interest capable of determination without evaluation of contingencies except for those covered by the present worth tables and rules of calculation for their use set forth in § 20.2031-7 of the Federal Estate Tax Regulations (26 C.F.R. 20.2031-7) or any similar present worth or life expectancy tables which may be adopted by the Internal Revenue Service.
  Id. § 330.11(c)(2).
  In the event a trust contains certain trust interests which do not qualify as non-contingent trust interests, the funds representing those interests--that is, contingent interests--are added together and insured up to $100,000 in the aggregate. Id. § 330.11(b). In this instance, the possibilities of forfeiture are contingencies which render the whole retained interest contingent. Go back to Text


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