>Specifically, the policy violates an "insurable
interest" doctrine in Texas.
Under this provision, insurance policies that name a
beneficiary that lacks an "insurable interest" in the life
of the policy owner are void, the US 5th Circuit Court of
Appeals ruled.
>In this case, the appeals court turned to previous
Texas state case law and found three entities that can be
considered to have an "insurable interest"
- close relatives
- creditors
- those having an expectation of financial gain from
the insured's continued life.
>This poses a problem for COLI policies in general
and drew real questions about Wal-Mart's interest in
issuing these policies for its rank-and-file workers.
Under these arrangements, companies purchase
broad-based COLI arrangements only to take the policy out
on workers with the company as the beneficiary. By
borrowing most or all of the cash value within the policies
and deducting the interest on the loans, companies could
generate cash flow with little capital outlay (See
COLI Wars
).
Wal-Mart's case is unique in that the company issued
these policies that are usually reserved for inhabitants of
a corporate C-suite to rank-and-file employees.
This was done, the enormous retail chain argued, as
a way to fund the company's employee benefit plans.
Under Wal-Mart's COLI arrangement, a trust was established
in 1993 to serve as the legal
holder of COLI policies insuring the lives of its
employees and naming Wal-Mart as beneficiary of the
policies. The program was discontinued in 1998.
That same year, rank-and-file Wal-Mart employee
Douglas Sims passed away, and the company received benefits
under a COLI policy issued on Sims's life.
When Sims's estate learned of the COLI and the
estate sued Wal-Mart, alleging the company violated Texas's
insurable interest doctrine by collecting the policy
proceeds.
The US District Court for the Southern District of
Texas granted summary judgment in favor of Sims's estate
finding
Wal-Mart lacked enough of a financial interest in the lives
of its rank-and-file employees to be considered having an
"insurable interest."
The appellate court concurred.
>Also denied by the district court, and affirmed by
the appellate court, was the Bentonville, Arkansas-based
retailer's argument that Georgia law, rather than Texas
law, applied to the COLI at issue and, under Georgia law,
the COLI on Sims's life was legal.
>The appeals court did not see it this way.
According to the court, Texas law applied because the
parties "resided" in Texas and the employment relationship
between Wal-Mart and Sims took place solely in
Texas.
"[T]his case does not involve a dispute over the
'rights and duties of parties' to a contract. Instead,
this case involves the application of Texas' common law
on insurable interests in the context of an insurance
contract to which Sims was not a party," the appeals
court said.
The case is
Mayo v. Hartford Life Insurance Co.
, 5th Circuit Court of Appeals, Number 02-21059.