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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 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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   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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