WSJ Law Blog post on "Dead Peasant" Litigation Surge
As if there weren't enough tough publicity about insurance companies and financial services these days, the Wall Street Journal's law blog yesterday had a post titled: "'Dead Peasant' Policies: The Next Big Thing in Insurance Litigation." In her post, Ashby Jones refers to an article in the WSJ online written by Ellen Schultz that deals with a specific case in Texas.
Ms. Jones describes these policies as "often secret" and "taken out by companies on unwitting employees, which can yield sizable corporate tax breaks." In her article, Ms. Schultz opens as follows: "For years, American companies have taken out life insurance on millions of their employees, harvesting tax advantages that fatten their coffers and collecting death benefits when they die. Now, some family members are crying foul."
The facts of the particular case in Texas are wrenching: A bank employee suffering from brain cancer allegedly being told he was eligible for $150,000 in supplemental life for which he enrolled. Shortly thereafter, he was fired by the bank and he died a few years later at the age of 41 leaving a wife and two young children. They received no life insurance because the supplemental policy terminated when he was fired. Some time later, the wife apparently received a check that was sent to her in error for over one and a half million dollars - it was payable to the former employer-bank that insured then fired her husband.
Of course, these issues are not new and the Wall Street Journal has covered them extensively in the past. The majority of comments to the blog post were on that fact. However, there were also general discussions of COLI policies and key person insurance vs. coverage on non-key employees. One commenter concluded, I believe erroneously, that "Currently, COLI is used primarily for masses of non-key employees in order to get tax benefits, a practice known as "janitor insurance" or "dead peasant insurance." Another commenter said: "I did not know that insurance companies issued life insurance policies on individuals without physical exams of the person to be insured. This sounds like a lottery. Can anyone get in or is this only for the "big" guys?" The world is a different place than the last time this issue surfaced.
I am certainly no litigator and I don't know if Ms. Jones and Ms. Schultz are right that there is an impending surge in these cases, but I do think that negative publicity around life insurance generally couldn't come at a worse time. I hope that as the discussion around the future of insurance regulation develops, these are not the type of facts and policies that dominate the press coverage. It was "bad" facts such as these and publicity generated from those facts that gave the SEC the justification they needed to sweep indexed annuities into their jurisdiction based on the need for additional consumer protection.
AIG sold 350 thousand of these polices to Wal-Mart.
Someone should keep a better eye on these types of policies on their employees, it just doesnt seem right that a employer can do this unless of course the person is unreplaceable such as a partner or key person.