Legal News

?Dead Peasant? Policies: The Next Big Thing in Insurance Litigation

By Ashby Jones

Ever heard of “dead peasant” insurance policies? We hadn’t either, until recently. In a nutshell, they’re often secret insurance policies taken out by companies on unwitting employees, which can yield sizable corporate tax breaks.

They’re also, it turns out, spawning a good deal of litigation. The National Law Journal recently ran a piece on lawsuits related to the policies. And in today’s WSJ, reporter Ellen Schultz weighs in — focusing largely on an odd Texas lawsuit.

The point of “dead peasant” policies seems to be this: Companies contribute money to the policies, which then can be used to pay for a variety of company expenses. In addition, when employees, retirees and former employees die, the company receives tax-free death benefits.

In the Texas case, the widow of a disabled former employee of Houston-based Amegy Bank NA is suing to recover $1.6 million in life-insurance death benefits the bank received after her husband died last year.

According to the complaint, filed Monday, in May 2001, after he’d received treatment for brain cancer, the bank told Daniel Johnson that he was eligible for supplemental life insurance of $150,000. He signed up. Four months later, the bank fired him. He died in the summer of 2008, at 41. His wife and two young children received no life-insurance death benefits because her husband’s coverage was terminated when he was fired.

But in December of last year, Johnson’s wife found out more about the policy when she received, in error, a check for $1,579,399.10, from Security Life of Denver Insurance Co., payable to Amegy. She sued, alleging that the bank knew Johnson was cognitively impaired when it asked him to sign the agreement and consent forms, and withheld from him that the bank would receive such a large payout upon his death. Under Texas law, material omissions can constitute a form of fraud, the suit maintains, so it seeks to have the consent agreement invalidated. If the consent is invalidated, the benefits would flow to Johnson’s estate.

Amegy Bank, a unit of Zions Bancorp, a Salt Lake City bank-holding company, declined to comment, saying it hadn’t had a chance to review the suit.

Full post as published by Law Blog - WSJ.com on February 24, 2009 (boomark / email).