Houston law firm, The Clearman Law Firm (TCLM), has launched a nationwide probe of banks they contend insure employees’ lives without their knowledge or consent in violation of US law.
TCLM, led by attorney Scott Clearman, is taking aim at bank-owned life insurance, or BOLI, a staple of many US banks’ balance sheets, including giants Bank of America, Citigroup and Wells Fargo.
Bank holding companies and stand-alone banks reported BOLI assets of $120.4 billion in 2007, up 15.9 percent compared with 2006, according to consulting firm Michael White’s 2008 BOLI Holdings Report sponsored by benefits consultancy MullinTBG, a unit of US insurer Prudential.
With BOLI, a bank names itself as the beneficiary of life policies covering its employees. Usually, a bank buys a policy on a group of officers and directors and uses the cash value and proceeds to recoup benefit expenses.
Clearman told LII that BOLI is particularly galling given the hundreds of billions of dollars of taxpayers money spent bailing out banks that stand to profit from insurance taken out in on employees recently laid-off.
Thousands of bank employees “have been laid-off, and yet the banks still stand to benefit financially when those employees die”, Clearman said.
He added: “It is a startling for a lot of consumers, and banks are by far the biggest holders of these policies. An employer who pays for your day’s wages should not be making money off your death, especially when you are not even asked for the personal information needed to initiate the policy.”
At the heart of legal arguments against BOLI is the fact that banks buying a BOLI policy must provide the insurer with personal information of each covered employee, including name, sex, age and social security number.
Social security numbers are then used to conduct “death sweeps” where banks generally hire brokers to gather public records to see if an employee or former employee has died.
If an employee learns of secret insurance on his or her life, some states allow them to sue the employer for invasion of privacy. For example, an Oklahoma court held that the employee has an invasion of privacy claim based upon the employer’s unauthorised use of confidential information for profit.
Clearman also argues that, after an employee’s death if their family learns about the insurance, states such as Texas and Oklahoma allow the family to sue the employer and recover death benefits the employer received.
“For a living person, the question is whether they misappropriated someone for a financial purpose, and the remedy in most places is disgorgement of profits – the money the bank has made from the policy, especially as the policy flows along, but also upon the individual’s death,” said Clearman.
He added that a deceased’s estate might have a legal case for lack of insurable interest, meaning that the state doesn’t allow insurance to be written for someone without their permission. It is a bit of a Catch 22, though, as banks often never inform employees that they are taking out insurance in their names.
“It is almost impossible for plaintiffs now to even find out that they have BOLI in their names,” TCLM stressed. “We have to be able to find out that a person worked at such-and-such a company and then we can find them and inform them that there is a secret life policy out on them.”
In Texas, TCLM has used “discovery suits” to determine whether a bank has BOLI.
Precedent supports TCLM’s strategy. In 2006, the firm settled a multi-million-dollar claim on behalf of former Wal-Mart employees and has won similar settlements in other BOLI-related claims.
TCLM is finding plenty of potential litigants, as employees are often offended when they learn an employer has bought insurance covering its employees’ lives, without their knowledge and consent and without giving any benefit to employees or their families.
Use of employees’ personal information in order to buy BOLI policies and reap financial gain for corporate policyholders, has heightened attention to the issue, but legislative remedies have met resistance.
Clearman said that between 2002 and 2007, Texas Congressman Gene Green introduced legislation on four occasions that would require employers to notify employees if it insured their lives for its own benefit. The legislation was defeated each time.
In 2006 the Pension Protection Act (PPA) came into force and while much of the act related to retirement plan laws revision, it also included a provision that effectively codifies into federal law best practices for using corporate-owned life insurance, known as COLI, and the closely related BOLI, to fund employee benefits programmes.
Tax-free benefits abound
“In my experience, people don’t bother to get permission, and even after 2006, when the PPA asked for written permission, they still aren’t getting permission,” Clearman said.
“The federal law says you can’t be fired for refusing permission, but if the bank plays it shrewdly, not only does the employee think it is important if they are to be hired, but the employee even might think there is a benefit coming to them, when there is not, or the benefit is but a fraction of what the bank is getting.”
He explained that premium payments, usually paid upfront in a lump sum or in several instalments, are invested in government and corporate bonds or other investments. The policies generate tax-free investment gains in addition to tax-free death benefits when employees die. The bank is the sole beneficiary.
Value of a BOLI portfolio is usually recorded on a bank’s balance sheet at the cash-surrender value of the policies. Change in cash-surrender value in an earnings period is accounted for as tax-free, non-interest income.
Advantages of BOLI for banks are powerful. BOLI allows a bank to earn tax-free income, because the earnings – from growth in the policy’s value and payouts when an insured party dies – are held within the contract on a tax-deferred basis.
The tax-free component has led many banks to start investing more in BOLI over the past five years, and has Clearman seeing many courtroom battles to come.