Court To Reconsider Whether Wal-Mart Was Duped By AIG Regarding “Dead Peasant” Policies

For a time in the 1980s and early 1990s, so-called “dead peasant” or “dead janitor” life insurance policies were the rage with some large corporations. These policies are a form of corporate-owned life insurance, or COLI, in which a company, usually without telling the employee, insured the lives of lower paid workers, with the corporation as the beneficiary.
Some said these kind of policies present an inherent “moral hazard” dilemma. Unlike “key person” insurance, which insures top executives whose loss of knowledge and leadership could devastate a company, there is little to no obvious insurable interest in a lower paid worker who can (it sounds harsh to say it, I know) be replaced fairly easily. A small digression: this brings to mind an observation made by Vin Scully, the late great announcer for the L.A. Dodgers, who once said,”Andre Dawson has a bruised knee and is listed as day-to-day (pause). Aren’t we all?”
Of course, no serious person thinks the policies created incentives for corporations to rub out workers for life insurance policies, or to increase workplace dangers, because of the threat of lawsuits and regulatory punishment. They did sound unseemly to many, and like a scam to many others, including the IRS, which on several occasions denied that corporations had a insurable interest in the policies. In at least one case I heard about, an Oklahoma court actually awarded the policy benefits to a man’s widow rather than the corporation. You can read more about dead peasant policies here, in a story creatively headlined “Does Your Boss Want You Dead?” (A theory that I have yet to see explored is whether workers can insure the lives of their bosses).
The news is that the Delaware Supreme Court has agreed to hear a request by Wal-Mart Stores Inc. to revive its suit that AIG and other insurers falsely touted the tax benefits of these policies. In addition to the IRS, some states have cracked down on COLI policies, forcing employers to tell workers what amount of life insurance is taken out on them and who is the beneficiary. According to the Andrews Delaware Corporate Litigation Reporter, Wal-Mart is appealing the dismissal of its lawsuit that seeks to recover $130 million it lost when the federal government ended tax benefits the company gained from taking out $1.3 billion in small life insurance. The IRS’s decision really hurt, because it applied the policy change retroactively. AIG’s defense has been that it never gave tax advice and isn’t qualified to do so.

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