While many companies buy life insurance on their key executives whose unexpected deaths might hurt the corporate bottom line, so-called "dead peasant" policies are different because the deaths of low-level employees do not affect a company�s financial health.
The Wall Street Journal reported in a series of articles last April and May that companies have secretly taken out these COLI policies on rank-and-file employees, usually without the workers� knowledge or consent. Free from the usual corporate euphemisms, printouts that list all the workers covered and for how much are called "death runs."
Dead Peasant Insurance Schemes
An attorney for Hartford Life Insurance Co. estimated that nearly one-fourth of the Fortune 500 companies have invested millions of dollars in these policies, covering between 5 million and 6 million employees. Among them, Nestle USA has corporate-owned life insurance on 18,000 employees. Dow Chemical admits it has these types of policies but will not divulge the numbers. Disney, which owns ABCNEWS, refuses to discuss it at all.
The amounts of the individual policies vary. Wal-Mart cashed in a policy for $64,000. Camelot Music insured some part-time workers for $273,000 each, according to an article in the Houston Chronicle.
The scheme was uncovered by the Internal Revenue Service when the tax agency found companies were earning tax credits by deducting interest on loans taken out on the face value of the COLI policies. Not only were the companies getting tax benefits on the increased value generated from the policies� investments, but they were receiving tax-free benefits when the policy paid off on the death of current, former or retired employees.
The IRS is investigating at least 85 firms that sheltered more than $6 billion from federal taxes using suspect COLIs. The crackdown has already sparked Wal-Mart, Winn-Dixie, Procter & Gamble, AT&T and other big employers to cancel their policies. The IRS is now receiving millions in back taxes from Camelot Music, Ruddick Corporation and others reporting these questionable deductions.
The issue has come under greater scrutiny since it was revealed that Enron-owned Portland General Electric held COLIs on the lives of its employees. The insurance, which Portland General purchased during the mid-1980s, has generated nearly $80 million in a special trust fund that the company uses to fund benefits for the utility�s managers, directors and executives.
Apparently, insurance firms like Hartford Life and AIG Life are more than happy to sell these policies.
Uncovering these policies is difficult. Some companies have buried the numbers and payments so deeply and ambiguously on their books that even the firms� own accounting departments are unaware of the existence of the "dead peasant" policies. On the other hand, Shell Oil has given COLI policy information to employees, some of whom are PACE members, when the employees filed an information request.
No Restrictions on Use
The insurance industry claims these policies help offset retirement costs. "It�s a very effective method for a corporation to fund retiree benefits," says Linda Lanam, vice president of American Council of Life Insurers.
But there is no restriction on how the money is used.
"There is no evidence in any of the cases that we have seen that benefits for these policies were used for anything other than corporate profit," said Scott Clearman, a Texas attorney representing employees in that state, where the scheme is illegal.
Other than Texas, the scheme is entirely legal in every state with the exception of California, Ohio, Illinois, Minnesota and Michigan, where employee consent is required. In Georgia, companies also can legally carry "dead peasant" insurance on their workers� spouse and children.
Congressman Gene Green was first elected to Congress from the 29th Congressional District of Texas in 1992 after 20 years in the Texas House of Representatives and the Texas Senate. In 1996 he was appointed to the powerful House Energy and Commerce Committee. He currently serves on the following subcommittees: Telecommunications and the Internet; Health; and Environment and Hazardous Materials.
Since his election to the House of Representatives, Congressman Green has been a champion of education, labor and health issues. He has worked hard to increase job-training services, access to technology, reform managed care, provide affordable prescription drug benefits to seniors and increase the minimum wage.
Congressman Green has a 95% lifetime correct voting record on worker issues, according to the AFL-CIO.
Green introduced H.R. 4551 in the House on April 23. This bill would require companies to tell employees, former employees and their families if the companies took out insurance policies on their lives, and also to disclose the policy amount and name of the insurer. The bill would be retroactive to Jan. 1, 1985, and would require employers that take out new policies to notify employees within 30 days.
How did you become interested in the "corporate-owned life insurance" (COLI) issue known as "janitors� insurance" or "dead peasant" insurance?
I was contacted by Houston Chronicle business reporter Woody Sixel as she was preparing the story inquiring about the appropriateness of this type of insurance. I was appalled to learn that companies with no "insurable interest" in the life of an employee could obtain life insurance on their rank-and file workers. It was the secret nature of these policies that I found most disturbing. How can a worker or the representatives of workers negotiate with an employer if knowledge about a potential benefit is being withheld?
Do you expect much opposition from the insurance company lobby? Is there anything that the PACE membership can do to assist in the passage of this important legislation? Right now it is stuck in the Subcommittee on Commerce, Trade and Consumer Protection. Would members contacting their repre-sentatives about this issue move the bill along?
I find it hard to imagine that an insurance company would publicly fight the legislation because it only calls for the disclosure of these policies to the worker. If a company believes these policies are critical from a business perspective, they should be comfortable in disclosing their existence to their employees. PACE members could be very helpful in raising awareness of this issue with their member of Congress. I do not believe the federal government should ban corporate-owned life insurance because the states should decide this issue for themselves, but the federal government should ensure that everyone covered by these policies knows it.
Your bill would make it mandatory for an employer to notify the employee of a COLI. An investigation uncovered that some companies buried these policies so deeply that not even the accounting staff knew of their existence. Would this legislation assist workers in finding out if a company has a COLI on them? How can employees in states without specific legislation mandating that companies divulge COLI information find out if their own employer has taken out a "dead peasant" policy?
The secret nature of these policies is exactly the problem. Only the management of companies holding a COLI really knows who is covered.
Currently, if your state does not specifically require COLI disclosure, there is very little employees can do to see if their employer has a COLI on their lives.
Could you please explain why this needs to be addressed by federal legislation, and not on some state or local level?
I hope that states will move immediately to ban these types of policies and others may chose a less stringent path, but the right to know is something the federal government can ensure through legislation immediately without stepping on the decision-making process of the states.
Do you have any additional comments or clarifications?
In the age of Enron where secrecy and deception among our corporate officials has run amuck, I believe more accurate financial disclosures to employees will only make things better for everyone involved. It�s the employee�s life, not their employer�s.
How To Take Action on H.R. 4551
Contact your representative about H.R. 4551�the "Life Insurance Employee Notification Act"�and let him or her know you deserve to be told if your company has taken out a life insurance policy on your life, without your knowledge.
Also, ask your representative to sign on as a co-sponser to H.R. 4551.
To find out the name of your representative, go to www.congress.org/ You also can send an e-mail to your representative via this web page.
Congress has its summer recess during the month of August. Therefore, you can reach your representative in his/her home district office during this time.
Houston Locals Seek Information on COLI Policies
In 1996, Shell Oil Company management offered a $10,000 death benefit to over 13,000 of the company�s refinery and chemical employees. Shell would be responsible for paying the premiums, and the only conditions of this benefit were that the employee had to give written permission for the policy and the company could recover anything over the $10,000 payout. Shell told the workers that the policy could be written for as much as $750,000.
According to Alan Barnes, business agent of PACE Local 4-1 at Shell in Houston, the company made no attempt to hide the potential profits.
"Shell did openly propose it to the employees," said Barnes. "At the time, the death benefit seemed pretty good for any surviving family members."
However, a recent court case in Houston confirmed that Texas law does not permit employers to profit from the death of their rank-and-file workers.
Barnes has requested from Shell the names of the workers who signed up for the plan and who the company collected a death benefit on, as well as the dollar amount. He said he already is investigating the possibility of recovering the face value of the policies for the families of deceased union members. Texas law permits such a remedy.
PACE Region Six Representative Jim Lefton has filed information request letters with 16 companies where he represents PACE members. He asked whether the company had purchased a corporate-owned life insurance policy for any member of the bargaining unit. He also requested the names of the workers covered and all the details of the face value of any COLI policy.