tax-free income, bank-owned life insurance, if a Texas law firm has
its way. Scott Clearman, senior partner at the firm, discusses with
Charles Davis why he believes banks are infringing
employees’ legal rights by insuring their lives, often without
their knowledge.
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.
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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.
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By GlobalDataHe 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.”
Death sweeps
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.
