Court Strikes Down Wal-Mart Rank-and-File COLI Policy
>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
- 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.
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