There may be blood in the water so to speak for the so-called “dead peasant insurance policies” or COLI (corporate owned life insurance policies), which were essentially a means for companies to earn secret(sometimes), tax-free money from the death of their employees.

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Essentially, the idea behind the process was that companies would take out life insurance policies on employees without their knowledge(in one of the six states where consent of employee was not required), and, if they did this with a large enough number of employees, statistically they were going to reap substantial tax free money. This was and is common with upper-level management of large companies, however, it is relatively new with rank and file employees (last 25 years or so). These policies can and do help companies with tax liabilities, as they can take in these proceeds in theory tax-free, and can even borrow against the policies. Companies could argue they can be used to pay death benefits for employees and are simply being reimbursed for substantial training and investments in the employees and other business purposes. The argument also arises, who is being harmed?

On the other hand, the Plaintiff`s bar and some activists claim this infringes on the rights of workers and is an unfair way for employers to profit from the death of rank and file employees. The families usually get nothing (although recently small policies are being offered to employees as a sweetener). COLI’s have resulted in claims against WalMart, Dow Chemical, and Winn Dixie among others. Many companies have dropped the practice based on the controversy. It looks like they may soon be joined by the banking and insurance industries who underwrite and sell these policies.

The central issue is whether or not an insurance company (and employer) may take out a life insurance policy on an employee without their knowledge or consent. Many states have outlawed this practice, but not all, including our own.

Most recently, the case of Havenstrite v. Hartford Life Insurance Company saw a Federal Court (Northern District of Oklahoma) allow a case to proceed against the insurer under the theory of misappropriation of identity. While it has a long way to go, it will be interesting to follow the progress of this case and others we see on the horizon.

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