Compliance May 17, 2005

Court Throws Out Workforce-Wide COLI Purchase

May 17, 2005 (PLANSPONSOR.com) - A federal appeals court has ruled that corporations cannot buy corporate-owned life insurance policies (COLIs) for all of their full-time workers because they don't have an insurable interest in their whole workforce.

Reported by

Fred Schneyer

>In overturning the decision of a lower court, the US 10 ^th Circuit Court of Appeals said that an employer has to have a “substantial economic interest” in the employee in order to be an insurance beneficiary. While companies can have an insurable interest in key employees, they don’t have the same interest in all their workers, the appeals judges said.

>Circuit Judge Monroe McKay, writing for the appeals court, said that “considerable expenditures in relation to the company’s overall budget” constituted substantial economic interest. In that vein, “human resources’ monies spent to attract and keep employees is a general cost of doing business and is not sufficient alone to support a finding of substantial interest in a specific employee’s continued life.”

>According to McKay’s decision, Camelot purchased approximately 1,400 COLI policies in 1990 to insure the lives of all its full-time employees to ease its tax burden. This included employee Filipe Tillman who died in 1992. The music retailer filed for bankruptcy protection in 1996 after receiving $340,000 from its COLI policy on Tillman. The court said Camelot had “actively concealed the existence of the COLI policies from the insured employees.”

>When the personal representative of Tillman’s estate learned about the policy and the proceeds, the representative filed suit, arguing that Camelot did not have an insurable interest in Tillman’s life and that Camelot had been unjustly enriched by the COLI policy proceeds. A judge in the US District Court for Northern District of Oklahoma threw out the suit, ruling that Camelot did have an insurable interest in Tillman’s life and was not unjustly enriched by the proceeds of the COLI proceeds. The appeals court threw out that ruling in the latest decision.

>The opinion in Tillman v. Camelot Music Inc. 10th Cir, No. 03-5172, 5/11/05 is here .

>Congressional lawmakers recently resurrected several previous attempts to restrict companies from taking out COLI policies to top executives and highly compensated workers (See US House Bill Reins in COLI Policies ).