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Between December 1993 and July 1995, Wal-Mart bought life insurance policies on 350,000 employees and named itself the policies’ beneficiary. Dissatisfied with the return on its investment, Wal-Mart, in 2002, sued the insurers and brokers that sold the policies, including Hartford Life Insurance Company and AIG Life Insurance Company. Three times the Delaware trial court has dismissed Wal-Mart’s case. And three times—most recently on May 12, 2009—the Delaware Supreme Court has reinstated it.

Wal-Mart’s case was first dismissed on statute of limitations grounds by Delaware’s Court of Chancery. The Delaware Supreme Court reversed that dismissal, holding that whether Wal-Mart's suit was time-barred could not be decided on the pleadings.  On remand, the Court of Chancery granted the insurers’ renewed motion to dismiss for failure to state a claim. The Supreme Court affirmed the dismissal of Wal-Mart's claims, except for its claim of equitable fraud. Following the second remand, the case was transferred to the Superior Court, where Wal-Mart again amended its complaint to assert only a common-law fraud claim alleging that it was induced to acquire the policies (sometimes called “corporate-owned life insurance,” “COLI,” “dead peasant” or “janitor” insurance) by the insurers’ fraudulent misrepresentation and concealment of the full magnitude of the tax risks associated with certain policy features, which Wal-Mart calls “structural flaws.”

On October 28, 2008, the Superior Court dismissed Wal-Mart’s case a third time on the ground that Wal-Mart's fraud claim was time-barred under the applicable three-year limitations period.  It also held that Wal-Mart's claim accrued, at the latest, when Wal-Mart made its final COLI purchase in July 1995, and thus expired three years later. The Superior Court also held that the statute of limitations was not tolled by the "discovery rule" because the record showed that the factual basis of Wal-Mart's fraud claim was knowable and known to Wal-Mart long before September 3, 1999 (three years before the date that Wal-Mart filed this lawsuit).

On May 12, 2009, the Delaware Supreme Court reversed the Superior Court ruling and reinstated Wal-Mart’s case a third time when it held:

This 12th day of May 2009, upon consideration of the briefs of the parties and their contentions at oral argument, it appears to the Court that there are material issues of fact as to whether Appellants' alleged injuries were inherently unknowable and whether Appellants were blamelessly ignorant of Appellees' alleged fraud of understating the tax risks associated with Appellants' Corporate-Owned Life Insurance program. These material issues of fact preclude summary judgment on the Statute of Limitations, 10 Del. C. § 8106, in favor of Appellees.

Based on the Supreme Court’s ruling, the case will be returned to the Superior Court where the parties will continue litigation.

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     Litigation involving “stranger-owned life insurance” or “STOLI” is on the rise as insurance companies take aggressive legal action to rescind policies that they perceive to be involved in STOLI transactions.  These cases may be the beginning of a cottage industry of litigation concerning alleged STOLI arrangements.

     In January, a New Jersey federal court ruled that Lincoln National Life Insurance Company could seek rescission of a $3 million policy allegedly used for a STOLI transaction. In February, Hartford Life and Annuity Company announced that it was nearing a settlement of a case in a Texas federal court involving its rescission of a $5,900,000 policy. And on March 31, 2009, a Florida federal court ruled that Axa Equitable Life’s claim to rescind five policies—valued at approximately $73,000,000—would be decided partially in arbitration.

     The cases have two characteristics in common. First, the insurers base their claim for policy rescission on alleged misrepresentations in the policy application—usually that the insured person falsely stated that he or she did not intend to sell the policy in a secondary market transaction. Second, the policies involved carry a multi-million dollar death benefit. Based on the vast market for STOLI policy transactions, future cases involving these characteristics appear imminent. 

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On February 11, 2009, the United States Court of Appeals for the Fifth Circuit issued an opinion in the case Richard v. Wal-Mart Stores, Inc. The case was filed by the estate of a former Wal-Mart employee to recover life insurance benefits that Wal-Mart received from its “corporate-owned” policies; sometimes called “dead peasant” policies. The estate sued under a Louisiana statute that allows estates to recover policy benefits when the designated beneficiary (in this case Wal-Mart) did not have an “insurable interest” in the insured person’s life.     

The district court held that the suit was subject to a one-year statute of limitations and dismissed it for being filed too late. But the court of appeals reversed, holding that the suit was timely under Louisiana’s ten-year statute of limitations. (Read the court’s opinion).

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STOLI is an acronym for “stranger-owned life insurance” or “speculator-owned life insurance.” It is a shorthand reference for transactions in which someone buys insurance on his own life for the purpose of selling it to a third party, often an unrelated investor, once the policy’s contestability period has expired. A recent ruling by a federal court in New Jersey, however, may undermine the security of such investments.

In a STOLI transaction, the insured person typically gets cash for the policy and the investor receives the right to the policy benefits when the insured person dies. Life insurers loathe the transactions because investors are unlikely to let STOLI policies lapse, meaning that insurers will have to pay death benefits on a greater percentage of insurance contracts than they have become accustomed. 

On January 27, 2009, the United States District Court for New Jersey became one of the first courts to weigh-in on what may become a recurring topic of litigation—an insurer’s effort to rescind one of its life insurance policies because of the possibility that it would be sold in a secondary market in a STOLI transaction. 

In Lincoln National Life Insurance Company v. Calhoun, Lincoln National sued to rescind a $3 million policy on the life of Walter Calhoun. First, the insurer argued that the policy is void because Calhoun intended—at the time he applied for the policy—to sell it to “stranger investors” in the secondary life insurance market, thereby removing the necessary insurable interest.  Second, Lincoln National argued that Calhoun made a material misrepresentation in his application by falsely stating that he had not discussed the possible sale or assignment of the policy in a secondary market.  

The court held that Lincoln National properly stated a case, noting that a material misrepresentation on the policy application may be reason to void the policy. But more importantly, the court added that Lincoln National’s allegation of no insurable interest could also serve to void the policy. The court held, “Insureds begin to run afoul of the insurable interest requirement, however, when they intend at the time of the policy's issuance, to profit by transferring the policy to a stranger with no insurable interest at the expiration of the contestability period.” 

The impact of the court’s insurable interest holding could be enormous. The market for STOLI policies is now estimated to be in the tens of billions of dollars. The court’s ruling that a policy may be void if the insured person intended, at the time of purchase, to transfer the policy to one without an insurable interest may undermine the security of those STOLI investments.     

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On January 30, 2009, the National Law Journal published an article by Tresa Baldas that profiles current and potential litigation involving corporate owned life insurance and bank owned life insurance policies (read the article).  The article describes how a recent ruling from the United States District Court for the Northern District of Oklahoma in the case Havenstrite v. Hartford may expose insurance carriers to liability for administering life insurance policies on people without their consent.  The article also addresses the magnitude of the policy benefits from policies of bank owned life insurance and how litigation concerning those policies may be forthcoming.

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I have previously used this forum to describe instances of life insurance abuse and stress the role that human nature plays in those abusive acts. With the regulation of life insurance practices remaining a noteworthy topic, especially in the context of stranger-owned, bank-owned, and corporate-owned life insurance, these abusive acts should be a constant reminder of the potential harm that may result when a person has an incentive to profit from another’s early death. 

One especially horrific example of such abuse involves a scheme devised by Francis Marion Black, Jr., who was convicted of murdering twelve-year-old Marvin Noblitt to claim life insurance benefits. Black was sentenced to death. The appeals court that affirmed Black’s conviction held that there was no doubt that he formed, planned, and committed the crime. His acts were inhuman and the evidence from his trial supported the conviction.

Black and his wife Guinevere were married in 1934 and promptly lost their savings through poor stock investments.  Black schemed to recapture the losses by adopting a boy, purchasing an insurance policy on the child’s life, and then killing him in a way that appeared accidental. He contacted two insurance companies about policies on the life of a boy he “intended to adopt.”  He requested $50,000 in coverage, but was told that he could insure a child for only $5,000. 

Black and his wife then moved to San Benito, Texas and began asking about a twelve or thirteen year old boy they could adopt. Black met Marvin Noblitt’s mother, told her that he intended to open an ice cream parlor in San Antonio, and wanted to adopt a boy who would work at the store before and after school. Marvin’s mother refused the adoption. But she allowed Black to take him for six months and said she would reconsider the adoption if Marvin liked the arrangement. 

A few days after arriving in San Antonio, Black applied for a $5,000 policy on Marvin from the Acacia Insurance Company, which refused the application. Undeterred, he applied to the Great American Insurance Company for a $5,000 policy. Black lied in the application and stated that he had cared for Marvin since taking him from an orphanage in Oklahoma. Great American issued the policy on May 29, 1938 and named Black as the policy beneficiary. 

Within a week, Black and Guinevere packed all of their possessions and began driving to San Antonio with Marvin. They stopped in Alpine, Texas on June 8th. Black went to a local drug store the next morning and asked about post cards of the Grand Canyon, the local mountain scenery and places of interest within a hundred miles of Alpine.  The pharmacist did not have the post cards, but suggested that Black visit Alpine’s Chamber of Commerce.  He did so and asked about the Limpia, Grand, and Santa Helena Canyons.  The Chamber of Commerce gave him information about the scenic beauty of the country and Agua Frio Springs, located at the foot of a 400 foot cliff.  Later that day, Black went to Agua Frio Springs.

The Agua Frio Springs were on a private ranch and the ranch’s owner appeared at Black’s trial. He testified that the springs were located at the foot of a cliff, approximately 400 feet high.  He also testified that Black, accompanied by his wife and a child, arrived at the ranch on June 9th at about 5 p.m. and asked for permission to look at the springs, the bluff, and the scenery.  He granted Black’s request and, in a very short time, saw two people on top of the cliff rolling stones into the canyon.  About thirty minutes later, Black went to the ranch house and reported that his little boy had fallen off the cliff and was injured.  The rancher drove his truck to the foot of the cliff and brought Marvin’s mangled body back to the ranch house. Marvin’s body was then taken to an undertaker in Alpine. 

Black told the undertaker that he had adopted the boy but had not yet gone through all of the legal formalities. He added that he had taken the boy from Oklahoma about a year earlier and that there was no reason to delay the burial because he did not think he could ever find the boy’s mother.  Black also said that he did not have much money and asked if the undertaker would help him collect a $5,000 insurance policy on the boy’s life.

After the funeral, Black and Guinevere were arrested and charged with homicide. Black made a written confession in which he admitted the killing. The confession stated that Black went to the top of the cliff with the boy, threw a few rocks, and then shoved the boy off the cliff.

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     On December 31, 2008, the United States District Court for the Northern District of Oklahoma held that employees whose lives were insured by an employer’s secret policies of corporate-owned life insurance possess a claim against the insurer that administered the policies for misusing the employees’ identities and personal information. (Read the Court’s opinion).

     Corporate-owned life insurance or “COLI” is insurance held by a company on the lives of its employees, or former employees, with the company named as the policy beneficiary. Because the company designates itself as the policy beneficiary, the insurer pays the policy benefits to the company when a covered employee dies.

     The plaintiffs in the case Havenstrite v. Hartford Life Insurance Company alleged that Hartford used their names, Social Security numbers, and other personal information without their consent or knowledge to administer and maintain the secret COLI policies on their lives. They claimed that Hartford violated an Oklahoma statute that provides a recovery against any person who, without consent, uses another’s name in products, merchandise, or goods. They also claimed that Hartford committed a common law invasion of privacy by misappropriating their names and identities when Hartford used that information in its insurance policies and administrative reports.

    Hartford asked the Court in the Havenstrite case to dismiss the claims against it by arguing that the plaintiffs’ names did not have any special value. The Court refused Hartford’s request and applied Oklahoma’s law that “one who appropriates to his own use or benefit the name or likeness of another is subject to liability to the other for invasion of his privacy.” The Court concluded that the plaintiffs adequately alleged that Hartford “appropriated to Hartford’s own use and benefit the commercial value of their names and private personal identifiers by receiving premiums, commissions and service and administration fees.”

     Between five and six million Americans are covered by a COLI policy, according to an attorney for Hartford.  COLI policies are sometimes referred to as"Janitor" or “Dead Peasant” policies.  "Dead Peasant insurance" is a phrase used within the insurance industry to describe the deceased employees whose lives were insured by one of the policies.

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           Patent infringement suit filings have remained relatively steady for the past eight years, according to Stanford Law School’s Intellectual Property Clearinghouse. New patent suits range between 2,300 and 2,800 filings per year. But Marshall, Texas is the venue of choice for a disproportionally high number of those filings. Since January 1, 2008, for example, there have been 295 patent suits filed in the United States District Court for the Eastern District of Texas.  And sixty percent of the district’s patent suits are traditionally filed in the district’s Marshall Division. 

            There are several reasons why plaintiffs’ lawyers prefer Marshall. The sitting judges and their magistrates are considered fair and experienced. Jurors in the division have also demonstrated a deep respect for individual property rights. And there is a perception, although no longer substantiated, that cases reach trial quickly through Marshall’s “rocket docket.”

But another reason why plaintiffs prefer Marshall is the district’s “Rules of Practice for Patent Cases.” Those rules require prompt disclosure of discoverable information and prevent gamesmanship in the discovery process. More importantly, the rules are strictly enforced by the judges and magistrates. Plaintiffs’ lawyers know that they will be able to get the information necessary to support their case; and get it quickly or have an available remedy.

The crush of patent cases filed in Marshall over several years has caused its “rocket docket” to slow. And plaintiffs may search for other venues. One possibility is the United States District Court for the Southern District of Texas (located primarily in Houston, Texas). The venue may become attractive because, effective January 1, 2008, the district adopted its own “Rules of Practice for Patent Cases” that mirror those used in Marshall. Adoption of those rules, however, has not yet lead to a dramatic increase in patent suit filings. Only thirty-two patent cases have been filed in the district during 2008 (compared to twenty-eight last year). Time will tell whether the new rules attract suit filings. Because new suits filed under those rules are just now becoming ripe for the adjudication of discovery disputes, we will soon learn whether judges and magistrates in the Southern District of Texas apply the rules as strictly as the jurists in Marshall. If so, plaintiffs’ lawyers may find Houston a more attractive venue for their patent cases.

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2008 was a dismal year for some of the country’s largest financial institutions. But it was a relatively good year for others. By coincidence or otherwise, the successes and failures of these institutions appear to be reflected by increases in their reported holdings of bank owned life insurance or BOLI.

An increase in BOLI holdings will generally result from one of three events, or some combination of them. Reported BOLI holdings may increase because the bank bought new policies on its employees. They may also increase when the reporting bank acquires a competitor and, during the process, the competitor’s BOLI policies. Increases may also occur when investment returns raise the cash surrender value of existing policies.

            Over the preceding four quarters, BOLI holdings of Bank of America, Citibank, Wachovia, Washington Mutual, and Wells Fargo have been:

                        Dec. 07            Mar. 08            June 08            Sept. 08           % increase

BOA                14.3B               14.5B               16.5B               17.1B                  19.5

Citi                   3.9B                 4.03B               4.05B               4.1B                       5

Wachovia       14.6B               14.4B               14.5B               14.6B                     0

WaMu             4.9B                 5.028B             5.072B             no report               3.4

Wells Fargo    4.9B                 5.15B               5.19B               5.36B                   9.38

While the relationship between BOLI increases and institutional success may be coincidence, a correlation exists nevertheless. Bank of America, with its 19.5% increase in BOLI holdings, recently reported third quarter 2008 net income of $1.18 billion, or $0.15 per share, a figure far lower than a year ago but significant in relation to other 2008 returns in the industry. Bank of America also received approval for the $50 billion acquisition of Merrill Lynch. Wells Fargo likewise achieved solid growth in loans and deposits during 2008 and is on track to complete its acquisition of Wachovia by year’s end. This success correlates to Wells Fargo’s 9.38% increase in BOLI holdings over the last year.

Wachovia, Citibank and Washington Mutual did not fare as well in 2008. Citibank required bailout money from the federal government and has cut tens of thousands of jobs during the year. Wachovia and Washington Mutual were acquired by competitors while on the brink of collapse. These failures correlate to the relatively pedestrian increases in their BOLI holdings. But perhaps the most interesting question is why their BOLI holdings increased at all (Wachovia’s did not). It seems unlikely that these institutions invested their cash in additional policies. The reported increases may therefore be attributable to investment gains which, at these percentages, are similar to the returns available from treasury bills or similar investments.

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