Wal-Mart's "Dead Peasant" Insurance Policies Are Focus of Proposed Class Action
Last month I wrote about litigation initiated by Wal-Mart against several insurance companies regarding “dead peasant,” or corporate-owned, life insurance policies purchased by Wal-Mart on 350,000 of its employees.
But a story in Tuesday’s Insurance Law 360 (subscription required) alerted me to a recent decision from the Eleventh Circuit Court of Appeals that could affect similar litigation pending against Wal-Mart in Florida. (Incidentally, although a subscription is required for the full text of stories from Insurance Law 360, if you don't want to subscribe, I highly recommend the free daily digest of top stories, which is emailed every morning, and is available for several practice areas. You can sign up at Law 360,)
In Atkinson v. Wal-Mart Stores, Inc., 2009 WL 3320322 (October 16, 2009), the court certified to the Florida Supreme Court the following question:
Whether the amendments to Fla. Stat. § 627.404 apply retroactively and enable the representative of an insured to sue for COLI benefits received by a party lacking an insurable interest or whether the amendments create a new cause of action such that a family would lack standing to sue for benefits obtained prior to the enactment of the amendments.
The background is that in 2008, the Florida legislature amended the statute as described in the proposed certified question. Under the prior version of the statute, a cause of action did not exist for an insured’s representative to sue for COLI benefits received by a party lacking an insurable interest, which typically would be the insured’s employer.
Based on the following facts provided by the Eleventh Circuit, the amount of money at stake is significant, perhaps even to Wal-Mart:
In 1993, Wal-Mart adopted a corporate owned life insurance (“COLI”) program through which the company would purchase life insurance policies for its employees. Wal-Mart funded the policies, at no cost to the employees. The policies provided benefits of $5,000 to $10,000 to the decedents’ beneficiaries, with the remainder of the policy amount paid to Wal-Mart. By 2000, as the result of new regulations, Wal-Mart had discontinued the COLI program.
Rita Atkinson and Karen Armatrout worked as a rank-and-file Wal-Mart employees paid hourly wages. Neither opted out of the COLI program and Wal-Mart obtained life insurance policies upon both. Atkinson died in 1996. After payment under her policy to her estate, Wal-Mart received the remainder of the benefits totaling $66,048.70. Armatrout died in 1997 and Wal-Mart received $72,820.30 in benefits under her policy.
A footnote indicated that employees were notified that they could opt out of the program, but the court does not indicate how large the putative class is or the amount at issue. But the opinion notes that Wal-Mart made over $135,000 from the policies on Atkinson and Armatrout, two “rank-and-file” employees, while each employee’s beneficiaries received, at most, $10,000. So there’s a lot of money at stake in COLI policies.
The plaintiffs filed a putative class action in Florida state court against Wal-Mart last year, and Wal-Mart removed the action. The United States District Court for the Middle District of Florida denied certification and dismissed the complaint on the grounds that, based on the law in effect in 2000, the plaintiffs' cause of action did not exist and the legislature gave no indication when it amended the statute that the amendment was to be applied retroactively.
The plaintiffs have appealed the dismissal of their action, and although the Eleventh Circuit's opinion doesn't say one way or the other, it appears that it is certifying the question to the Florida Supreme Court on its own motion.
Jeff Kuntz at The Florida Legal Blog, which focuses on appellate litigation in Florida state and federal courts, wrote about the Eleventh Circuit's opinion in this post. And from Tales of a Fictional Pirate Captain,here's an extensive list of companies that may have purchased COLI policies. I don't know how accurate or up to date the list is, but the sheer number of companies listed gives you an idea of how extensive the practice has been.
So what exactly is wrong with the practice? The employees were never promised more, and they never paid a dime for the coverage. This is just a story of people seeing business as "evil" because they make large sums of money. Well guess what, if you provided a service as valuable and widespread as Wal-Mart, you would also make Millions (Billions?) of dollars as well. This case should be thrown out since the employees were not actually wronged, they were told that they would get $5000 - $10000, and they did.
Programs like Wal-Mart's were experience-rated, which means that any mortality gain on Employee A were offset by future premiums on Employee B. Thus, there is no "enrichment," unjust or otherwise, on an employee's death.
The entire benefit of these plans was tax-driven and depended on the continued life of the employees. A death caused an economic loss by ending the tax play, not a gain. The "new regulations" that caused the plan to be terminated were tax rules, not insurance rules.
It is a good thing for the heirs of insureds to have a claim on gains realized where a policyholder has no insurable interest. But I doubt Wal-Mart realized any such gains.
I think the basis for the objections to "dead peasant" or COLI policies is that the insureds (employees) were not told about the policies (which federal legislation has since changed), and that companies benefited from the deaths of their employees, which goes back to the lack of notice that the companies provided.
Even if the insurance program is "experience-rated," I think it's fair to assume that the practice would not have been so pervasive if it had not been successful, i.e., generated income for the employers who purchased the policies.
Jeffrey -
Of course the programs were successful because the companies made profits on them. But all the gains were from tax arbitrage on cash value finagling. The actual insurance element was a non-event.
Lawrence,
Thank you for the explanation of how Wal-Mart actually benefited from its purchase of the policies.
Jeffrey -
I don't understand your first paragraph. Are the two bases for objection independent? Or is the objection that both elements (no notice and corporate profit) are true?
If you assume so much of this was bought because the buyers profited from it, how do you explain the insurance companies selling so much of it? Don't they care about profits, too? The answer - explicitly found by the Tax Court in Winn-Dixie - is that all of the gain to the employer was tax-driven. The insurance company made a spread on policy loans, the insurance element was neutralized by experience rating, and the tax arbitrage (deductible interest vs. tax-free recovery of the interest at death, the LATER the better), created money for the buyer. That's how it worked. Ask any broker who sold the stuff or any CFO who bought it. For the big boys, mortality gains were never on the radar.
In watching Michael Moore, you have to understand his polemical phiilosophy, a corrupt blend of Abraham Lincoln and Meatloaf: You can fool all of the people some of the time and some of the people all of the time. And two out of three ain't bad.
BTW, if you're interested in the back story of "Dead Peasant" insurance, here's, what someone present at the creation (me) says happened.
Jeffrey - I did not see my comment of 1:21 a.m. or yours of 12:02 when I posted a few moments ago. (One can never be sure that a comment has "stuck," so I assumed that for some reason mine of 1:21 a.m. didn't make it to the blog. Sorry.)
Let me add that I have no interest in defending janitor COLI against any tax-based complaint. It's the "profit on death" thing that I find interesting, not only because Mike Myers, whom I have never met, felt obliged to link my name to it, but because the whole process by which a lie becomes a political truth fascinates me.
Lawrence,
Thank you for your insightful comments about these insurance policies. I particularly enjoyed your blog post (linked in your 12:41 comment) about your own involvement and role in giving the policies their unique nickname.
I don't care what the political term of this is, and how you word it. I believe, personal, this is completely and utterly wrong! Making a profit (as much as Wal-Mart has made) on someone's death! And did any of you think if these people's families? They are probably swimming in debt after this happened. They have to not only pay for the hospital bill and the funeral bill, but also if they have children, the spouse now has to support the whole family by themselves. I don't care what you say 5,000 to 10,000 is not going to cover the funeral, yet alone the funeral and hospital bills.
On another note does Wal-Mart really need to make more money? You are still shopping at Wal-Mart after knowing that this company STOLE money from middle-class citizens? This has just given more another reason to NEVER shop at Wal-Mart again.
If my neighbor takes out a fire insurance policy on my home, he has vested an interest in something he does not own and could only profit from it. This is illegal. Likewise, if Walmart takes out life insurance policies on its workers, they have vested an interest in their death. AKA making it profitable for them if their workers die. This so far is legal. I don't know about you, but I wouldn't want to work for or shop at a company that made money off the deaths of its employees.
IMO, if a company can make money off of a dead employee then it creates a huge moral risk as it disincentives safe work place practices.
On it's face, the issue has multiple "red flags."
The first being that an Insurance Policy for the Life of Another is contrary to public policy (i.e., basic concept of right and wrong) regardless of current state law.
The second is non-disclosure. Even now, the companies confusingly word the contracts in a form of procedural unconscionability that questions the validity of the policies.
The third is that the companies have no rational insurable interest. The key word being "rational." Using the companies' description of an insurable interest, I could take out a life insurance policy on the President of Brazil since I own stock in companies that benefit from the Brazilian President's current economic policies. See my point? It's a huge stretch for a company to claim they have an insurable interest. It has to be rational and reasonable.