Contingent Fee Business Litigation Blog : Houston Patent & Contingent Fee Business Litigation Lawyer & Attorney : McClanahan Myers Espey Law Firm : Intellectual Property, Commercial Litigation

        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.

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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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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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     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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     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.

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     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. 

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     Last October, television personality Larry King filed suit against insurance brokers Alan Meltzer and the Meltzer Group, Inc.  The suit concerned policies that are sometimes called “Stranger Owned Life Insurance,” "STOLI," or “Speculator Owned Life Insurance.”  (see the complaint).  The essence of a “STOLI” transaction is that the insured person buys the policy on his life while intending to immediately sell the policy to a third party.

    King alleged that, on the advice of the brokers, he bought a $10 million policy on himself and promptly sold it for $550,000. He also sold an existing $5 million policy for $850,000 in cash. King’s suit alleged that the brokers were liable to him because he did not receive enough money for the policies, the brokers did not adequately advise him about his continuing life insurance needs, he had unexpected tax consequences from the transactions, and the brokers improperly benefitted themselves at his expense.

     King’s suit also alleged that the brokers sold the policies on his life to an entity named Coventry First, LLC, a member of The Coventry Group. As I have previously written, The Coventry Group is the brokerage firm that drafted memos concerning Winn-Dixie’s policies of “Corporate Owned Life Insurance” that spawned the name “dead peasant” insurance for COLI products.  (see the entry). 

     King agreed to a settlement during July 2008.  The presiding court entered an order dismissing the case on August 4, 2008 because of the settlement.  The parties did not disclose the settlement terms. 

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   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.

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