Contingent Fee Business Litigation Blog

     The appropriate use, or misuse, of certain life insurance products remains a hot topic of conversation. Earlier this year, Florida passed legislation about who may benefit from life insurance policies. The State of Washington recently banned “dead peasant” insurance. And more than twenty-five states are now analyzing regulations concerning life settlements and “stranger owned” life insurance.

     Policy makers addressing these issues should, first and foremost, consider the impact of human nature on transactions in which one may profit from the death of another. Human nature is a dangerous thing, writes George Will. There are few statements so consistently true. 

     Insurance products have been abused by speculators since the beginning of insurance itself. Life insurance is no different. And that vehicle, fueled by human nature, will always present a profit opportunity for the unscrupulous.

     One fascinating example of such unscrupulous speculation is a policy purchased by National Convenience Stores, Inc., the former operator of the Stop-N-Go chain of convenience stores. During the summer of 1991, NCS bought insurance on the lives of all its Texas employees. It also designated itself as the policy beneficiary and was entitled to $250,000 every time an employee died on the job. 
 

     At the time it bought the policy, NCS’ business was failing. It filed for bankruptcy protection just a few months later. In December of 1991, the company, according to one executive, “had no money in the bank.” 

     But while its core business was failing, NCS experienced a remarkable number of employee deaths. Six employees died during the policy term, mostly from robbery-related murders. NCS was paid $1.5 million in policy benefits. And because the policy premium was approximately $620,000, the bankrupt company profited by almost $900,000 because of employee deaths. The insurance broker who placed the policy and had to process the claims, suggested prayer a way to control the mounting losses.

     Notably, NCS decided not to invest in many safety devices because it stated that it could not afford them. It decided against bullet-proof glass and drop safes for stores in high-crime areas. It also decided against having multiple employees on duty during late-night hours when crime was highest. Once it emerged from bankruptcy, and after the policy term expired, NCS was acquired by a competitor that installed new safety devices. On-the-job deaths then decreased dramatically.
 

     The NCS example is worthy of consideration. Defenders of practices such as broad-based, leveraged, corporate owned life insurance often argue that the coverage poses no moral hazard because the corporate beneficiary would never murder its insured employees. But as the NCS policy demonstrates, murder is not the relevant inquiry. The relevant inquiry, the moral hazard, is whether one wagers on the early death of another. NCS made a substantial profit, not from murder, but by depriving its employees of a safe work environment.