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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
{{6-30-92 p.4626}}[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).
{{6-30-92 p.4627}}
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
{{6-30-92 p.4628}}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
{{6-30-92 p.4629}}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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