Florida Supreme Court hears "dead peasant" insurance case

        On May 4, 2010, the Florida Supreme Court heard argument in the case Wayne Atkinson v. Wal-Mart Stores, Inc. (Click here to watch the argument). The case concerned Wal-Mart’s policies of “corporate-owned” life insurance, sometimes called “dead peasant” insurance, on the lives of its Florida employees.   Michael Myers of McClanahan Myers Espey argued on behalf of the families of the Wal-Mart employees. Wal-Mart was represented by Eileen Tilghman Moss of the firm Shook, Hardy & Bacon in Miami, Florida.

        In the case, Mr. Atkinson and others sued Wal-Mart, seeking to recover life insurance benefits Wal-Mart was paid after the deaths of their relatives, who had worked for Wal-Mart as rank-and-file employees.  The company received $66,048 after the death of Rita Atkinson and $72,820 after the death of Karen Armatrout.  A federal judge ruled the women's families did not have the right to sue under Florida law.  The United States Court of Appeals for the Eleventh Circuit then asked the Florida Supreme Court whether Florida law allows such a lawsuit.

ABC News Interviews Mike Myers on Dead Peasant Insurance

I was recently interviewed by ABC News on the topic Dead Peasant Insurance. That segment is embedded below:

If this is a topic of interest, be sure to visit our recently launched FAQ collection for more in-depth commentary.

Wal-Mart's "Dead Peasant" suit against insurers escapes the grave a third time

 

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.

Federal appeals court: ten-year limitations statute applies to Louisiana "dead peasant" case

 

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).

National Law Journal profiles COLI and BOLI suits

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.

Examples of Life Insurance Abuse: Man Shoves Boy From a 400 Foot Cliff to Claim Policy Benefits

 

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.

Havenstrite v. Hartford: Court Holds That Employees Insured by COLI Policies Have a Claim Against the Insurer

 

     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.

 

BOLI Increases May Reflect Institutions' 2008 Success or Failure

 

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.

 

Will Chase And Wells Fargo Benefit From The Deaths Of WaMu And Wachovia's Former Employees?

 

     Washington Mutual and Wachovia have two things in common. First, they were spectacular business failures. Second, they were two of the nation’s largest holders of “bank owned life insurance” or “BOLI” policies. The combination of these two facts creates interesting issues concerning the legality of the BOLI policies and who may benefit from the deaths of the banks’ former employees.

     Bank owned life insurance generally refers to policies that a bank purchases on the lives of its employees. But unlike traditional forms of life insurance, the bank designates itself as the policy beneficiary—meaning that the bank is entitled to the policy benefits when the insured employee dies. BOLI policies also remain in force even if the insured person no longer works for the bank. The policies are therefore similar to those often referred to as “dead peasant” or “janitor” insurance.

     Washington Mutual and Wachovia had enormous appetites for BOLI policies. As of June 30, 2008, Washington Mutual reported to the Office of Thrift Supervision that it maintained $5.072 billion in BOLI holdings. Wachovia likewise reported a staggering $14.575 billion of BOLI holdings.  Notably, those amounts are reported in cash surrender value, meaning that the policies’ benefit amounts are likely substantially higher.

     Washington Mutual’s assets were acquired by JP Morgan Chase in September and Wachovia was acquired by Wells Fargo earlier this month. These transactions create interesting questions concerning the validity of the policies on the lives of the former employees and who may profit from their deaths. 

     Assuming that the Washington Mutual and Wachovia employees consented to the BOLI policies on their lives (a big assumption indeed), Washington Mutual and Wachovia may have had the insurable interest necessary to support the BOLI policies. But what about JP Morgan Chase and Wells Fargo? WaMu and Wachovia employees, especially former employees who left long before the collapse, probably never imagined that Chase and Wells Fargo might one day benefit from their deaths. Thus, two issues surface. First, who will receive the BOLI policy benefits when WaMu and Wachovia’s former employees die? Second, if Chase and Wells Fargo are the expected beneficiaries of those policies, do they have the insurable interest necessary to ensure the policies’ validity? 

 For more information on this topic, please contact any of the firm's partners at mmellp.com.

Life Settlements, STOLI Pose Potential Insurable Interest Problems

     Virtually every jurisdiction in the United States recognizes a person’s right to insure his or her own life and name another as the policy beneficiary, either through an assignment or express designation. The designated beneficiary or assignee is thereafter deemed to have an insurable interest in the insured person’s life by virtue of that designation or assignment. 

     In the context of life or viatical settlements, the requirement of an insurable interest is typically satisfied when the insured person assigns the policy to the purchaser. The insured person in a “stranger owned life insurance” or “STOLI” transaction may likewise satisfy the insurable interest requirement through designation or assignment. Thus, it is arguable that the beneficiary in both life settlement and STOLI transactions have an insurable interest in the insured person’s life because of the assignment—an act taken by the insured person himself.

     One matter absent from the current debate over life settlement and STOLI transactions, however, involves the maintenance of an insurable interest after a secondary transfer of the policy. Most contracts may be transferred time and time again. But life insurance policies are not like most contracts because the requirement of an insurable interest is a fundamental. It is therefore likely that the second (or third, or fourth) assignee of the life insurance contract will not have an insurable interest in the insured person’s life—the insured person did not assign the policy to the subsequent owner or name it as the policy beneficiary. And in many jurisdictions, the absence of an insurable interest renders the policy void as a wagering contract that violates public policy.

 

     To learn more about this topic, please contact any of the firm's partners at mmellp.com.

How "Dead Peasant" Insurance Got Its Name

   Corporate owned life insurance (policies that pay death benefits to an employer when its employees die) has been a frequent subject of debate for several years. These debates include the morality of employers insuring their employees’ lives without consent, to legality under state law, to the policies’ use as a federal income tax sham. And in virtually every debate, the phrases “dead peasant” or “janitor” insurance are used to describe the coverage.

    Defenders of corporate owned life insurance claim that “dead peasant insurance” is an inflammatory description created by the media. A law firm that represents large corporations that bought the insurance argues, for example, that COLI plans have been “christened by the media” as dead peasant policies. Others have argued that the media has “sensationalized” stories with phrases like “janitor” and “dead peasant” insurance.

    These criticisms fairly raise the question “How, in fact, did dead peasant insurance get its name?”

    In 1993, Winn Dixie Stores bought COLI policies on approximately 36,000 of its employees, without their knowledge or consent. The Coventry Group, a large insurance brokerage firm well-versed in COLI transactions, helped place the policies, which were underwritten by AIG Life Insurance Company. On October 30, 1996, Lawrence J. Kramer, the Coventry Group’s vice president and general counsel, distributed a memo stating “Here is a very rough beginning of the booklet we are preparing for Winn-Dixie.  A section on Dead Peasants remains to be written, and Peggy is preparing sample journal entries for various scenarios.” The “dead peasants” referenced in the memo were deceased Winn-Dixie employees whose deaths resulted in policy benefits to the company. A similar memo states “I want a summary sheet that has Surrender in one column, the Exit Strategy 1A in the second column and the Dead Peasants in the third column.”

    These memos were part of the court’s record in a lawsuit in which the United States Court of Appeals for the Eleventh Circuit held that Winn-Dixie’s COLI policies were a sham transaction for federal income tax purposes. The memos were later used by reporters such as Ellen Schultz and Theo Francis of the Wall Street Journal and L.M. Sixel of the Houston Chronicle and incorporated into articles about corporate owned life insurance. Thus, the phrase “dead peasant insurance” is not a creation of the media. It is a term used within the insurance industry to describe employees whose lives are insured by policies of corporate owned life insurance for an employer’s benefit.

     For more information on this topic, contact any of the firm's parters at mmellp.com.

Origin Of The Insurable Interest Doctrine

     It is well-understood in modern society that a person may not use an insurance policy to profit from another's loss of life or property. One cannot, for example, insure the life of a NASCAR driver with the hope that he will be killed in the next race. Likewise, one cannot insure his neighbor’s house and then burn it down to receive the policy benefits. Modern laws exist to remove the incentive for wrongdoing through insurance policies. But using life and property insurance contracts to benefit from another person's misfortune has not always been prohibited. And that which we now accept as forbidden was, at one time, commonplace.

     The insurable interest doctrine, as recognized today, originated in English statutes designed to remove insurance contracts from the environment of gambling and the misconduct commonly associated with one having the ability to profit from another’s loss. As described in the Appleman insurance treatise, English underwriters of the eighteenth century insured marine risks without requiring the policy beneficiary to have an interest in the vessel or its cargo. The practice created an incentive to destroy the insured property by those expecting to receive insurance benefits from the loss. The English Parliament reacted to the situation in 1749 by enacting the Statute of George II (19 Geo. 2, ch. 37 (1746)), which recognized that “a mischievous kind of gaming or wagering” had caused “great numbers of ships, with their cargoes, [to] have . . . been fraudulently lost and destroyed . . . .” The statute sought to remedy the situation by declaring that assurances for shipping risks not supported by an interest, or by way of gaming or wagering, would be “null and void to all intents and purposes.”

     According to Appleman, enterprising Englishmen insured the lives of famous persons reported to be seriously ill and the “unfortunate gentlemen” accused of crimes punishable by death. The amount wagered was the policy premium and the gamble, obviously, was whether the insured person lived or died. 

     The wagers had a substantial, negative impact on the persons whose lives were insured. In his 1761 publication “The Mystery and Inquiry of Stock Jobbing,” Thomas Mortimer wrote:

The inhuman sport affected the minds of men depressed by long sickness; for when such persons, casting an eye over a newspaper for amusement saw that their lives had been insured in the Alley at 90 per cent, they despaired of all hopes; and thus their dissolution was hastened.

In 1774, Parliament enacted a statute (14 Geo. 3, ch. 48 (1774)) to discourage the “mischievous kind of gaming” on human life:

no insurance shall be made . . . on the life or lives of any person or persons, or on any other event or events whatsoever, wherein the person or persons for whose use, benefit, or on whose account such policy or policies shall be made, shall have no interest . . .. 

            The English Statutes of George II and George III form the fundamental principles of the insurable interest doctrine by requiring owners of property and life insurance to have an “interest” the subject matter of those contracts. The insurable interest requirements were promptly announced in the United States, even though American courts did not embrace the English statutes and, in some instances, rejected them. In the 1806 case Russel v. Union Ins. Co., the United States Supreme Court addressed the necessity of an insurable interest in property insurance.  Similar opinions soon followed in the context of life insurance.

How Much Are Citigroup's Former Employees Worth Dead?

     Since the beginning of 2008, Citigroup has made thousands of employee layoffs and is poised to discharge thousands more by year’s end. The layoffs may ultimately total between 17,000 to 24,000 employees due to subprime and credit-related losses, according to CNBC.

     The layoffs raise the interesting question, “how much are Citigroup’s former employees worth dead?”

     Citibank, N.A., like many national banks, invests heavily in policies of bank owned life insurance or “BOLI.” BOLI policies insure the lives of the bank’s employees, but unlike traditional life insurance name the bank as the policy beneficiary. When the bank employee dies, the insurance benefits are paid to the bank. 

     Banks, like Citibank, are required to report their life insurance holdings through reports filed with the Federal Financial Institutions Examination Council and report those holdings on line five of a schedule called “RC-F—Other Assets.” Those reports demonstrate that Citibank has acquired billions of dollars of BOLI coverage on the lives of its employees since 2006. Citibank possessed $2.215 billion in BOLI coverage as of March 31, 2006, $3.325 billion as of March 31, 2007, and $3.99 billion as of December 31, 2007. Notably, banks report their life insurance assets in terms of cash surrender value, meaning that the policy benefits due from employee deaths are likely far greater than the amount reported on the schedules. 

     BOLI policies remain in force even if the insured person’s employment with the bank ends. Thus, Citibank will receive insurance benefits upon the deaths of its former employees who were insured by a BOLI policy. As the employees who were laid off in 2008 die, policy benefits will flow to Citibank. And from a pool of 17,000 to 24,000 former employees, those benefits may be significant, even by Citibank’s standards.