Salaries, Perks & Pensions!

JANITOR INSURANCE

Employer profits hidden in coverage of workers, even after retirement

By THEO FRANCIS AND ELLEN SCHULTZ

THE WALL STREET JOURNAL

Shortly after the 9/11 terrorist attack we began to wonder whether employers would profit from the deaths of their workers in the World Trade Center.

It took more than a year to fully answer the question, but it turned out to be true. Employers have been buying life insurance on the lives of their workers at all levels - with the company as the beneficiary. And, contrary to the industry's claim, companies buy policies on hundreds, or even thousands, of employees at a time.

The policies act like giant tax-shelters, and the earnings within the insurance policies boost company income. As workers die, the death benefits bring tax-free cash to corporate treasuries.

Rank-and-file employees usually have no idea that they are covered by such policies, and though managerial employees may know about the coverage, they usually don't realize the size of the policies taken out on their lives. Employers often receive a half-million dollars or more at the employees' deaths, and the policies remain in force until they die-even years after they change jobs or retire.

Employers claim they use the insurance to "finance" employee benefits, but we showed that this is a tenuous claim. In fact, our articles demonstrated that many workers who have died - including a convenience store clerk murdered on the job and a nurse killed while making a home visit to a patient - were ineligible for employee benefits. We also interviewed managers who weren't eligible for retiree health benefits from former employers who had insured them - the principal reason employers cite for buying the coverage.

We also questioned company claims that they use life insurance to "finance" executive deferred compensation programs, which are special 401 (k)-type plans open only to highly paid employees. We found that companies are only a little more likely to "use" life insurance for this purpose than they are to pay for benefits for rank-and-file workers. Moreover, most companies don't really dedicate the insurance to whatever benefits they say they are financing - the policies are just ordinary corporate assets, like any other investment.

Hidden practices

Regulators have tried repeatedly to curtail the tax breaks critical to make corporate-owned life insurance profitable over the years, but with the help of insurance lobbyists - often former key government officials - employers again and again found ways around the rules. In fact, while life insurance was originally intended as a safety net for widows and orphans, employers are now among the biggest buyers, and beneficiaries.

None of this was apparent in the weeks after 9/11, however. As attention gradually shifted from the tragic loss of life to the financial costs of the attacks, companies warned that the final bill could be huge: Billions of dollars of property had been destroyed, and thousands of people had been killed. Employers were seeking government aid and tax breaks after the attacks, to help them with the costs of providing benefits to surviving family members.

At the same time, we knew that companies typically have insurance to protect themselves. We also knew that companies often insured their executives for large sums, payable to the company, to protect themselves from financial loss if key people die. Ellen Schultz remembered that years ago companies had bought policies on low-level workers - so-called janitor coverage.

We began to consider whether employers might, in fact, have profited from the deaths of their workers in the terrorist attacks - and even their former workers or retirees. We called insurers and employers, who told us repeatedly that employers no longer buy life insurance on lower-level workers. We could learn virtually nothing about payments from key-man policies.

So, we turned to corporate filings with the Securities and Exchange Commission. A number of the companies who lost employees on 9/11 are publicly traded, and file annual 10-K and quarterly 10-Q reports with the SEC. These are searchable using services like 10-K Wizard Technology Ltd.'s Web site, www.10kwizard.com. We also looked at companies' Form 5500 filings with the Labor Department, which detail benefit programs - including the life insurance they provide to employees.

None disclosed 9/11-related payments. But in the course of our search, we came across several vague references that suggested some companies were still chasing tax benefits from the policies they had bought on employees - and even that some policies remained outstanding. These companies had sued the Internal Revenue Service to try to recover tax deductions from the policies that the IRS had denied.

These are practices employers prefer to keep hidden: buying life insurance on workers as a tax dodge. Employers wouldn't discuss the issue, beyond repeating the vague language we found in their filings. Consultants and insurance company officials would only discuss a few aspects of the practice. Regulators and government officials knew almost nothing about it.

A few people both understood some of the technical details or circumstances around the practice, and were willing to talk to us (although mostly on background). We relied mostly on written documents in an area where disclosure is incredibly weak. Companies have to report almost nothing about these practices. What little they do disclose is hard to decipher, with insurance proceeds rolled into different parts of the income statement and balance sheet at different companies - and virtually never broken out and described in detail.

We kept digging.

Regulators collect no data, and insurance industry trade groups professed to have none as well. So we had to sift through thousands of pages of corporate filings, legal documents, court exhibits, federal and state regulations and state codes going back to 1990 and earlier. Much of the material was available only in paper form, and had to be examined by hand. Virtually none of it is covered by federal or state freedom of information laws, though SEC filings and court documents are readily available.

We started by trying to track down the tax lawsuits. Several were still in tax court, but others had been appealed to federal district courts across the country. Researcher Elizabeth Yeh got us docket sheets for these cases, and published opinions for a few of them, and we tried to zero in on the filings that might help us most. Although we mostly used document-retrieval services, in Delaware, Journal stringer Tom Greer tried to get what we asked for from the federal court there, in a case involving CM Holdings Inc. Most of the documents were sealed.

Still, those documents proved invaluable in piecing together how janitor insurance worked. Moreover, buried within the files that we did get was a so-called "death run" - a list of all the employees the company had insured, with their Social Security numbers, dates of birth and other details - including the amount for which they were insured.

With the death run, we were able to use the Social Security Administration index of deaths to identify some of those who had died. Ultimately, we were able to find their families, who had no idea that the insurance even existed, including the family of Margaret Reynolds, who died of Lou Gehrig's disease at 62. Her family received a $21,000 insurance payment, while her employer received $180,000.

Some six months after we began working on the piece (after a number of interruptions for, among other things, coverage of Enron's executive compensation and 401(k) plan woes) we had a story. It wasn't the one we first went looking for, but it was compelling.

Understanding technicalities

As we prepared the story for publication, we checked in one more time with a few particularly helpful sources. One had mentioned a law firm in Texas that had filed lawsuits against several companies over janitor insurance policies. We called, and at the same time pulled the decisions that were available through Lexis-Nexis.

The attorneys put us in touch with the families they had represented, and helped fill in details of the cases, which helped us with the human picture. There was William Smith, a 20-year old convenience-store worker killed by an armed robber, which meant $250,000 for his employer; Doug Sims, a distribution-center worker who died at 47 of a heart-attack, bringing Wal-Mart Stores Inc. $64,504; Peggy Stillwagoner, 51, a home-health nurse, who brought her employer $200,000 after she was killed in a car accident two months into a temporary job.

Even as we were finishing the first story, it became clear to us that we had barely scratched the surface. We quickly followed with a story that explained whether - and how - workers could learn if they were insured by employers past and present. Since insurance is regulated on a state-by-state basis, this meant calling many state insurance commissioners and trying to understand a variety of statutes, some of which regulated corporate-owned life insurance to varying degrees, and others of which were silent on the topic.

We also dove more deeply into bank-owned life insurance, which insurance industry sources told us had recently been a big growth area. We learned that banks, unlike companies in any other industry, had to report their life-insurance assets in filings with federal regulators. Bank and thrift call reports, available through the Federal Deposit Insurance Corp.'s Web site (www.fdic.gov), list the figure on a schedule obscurely titled "Other Assets," and even then only if the assets reach a certain threshold. With the help of financial-services analyst Eric Connerly, at Boston Partners, an asset-management company, we were further able to estimate how much of a profit a number of banks made from their insurance investments. In some cases it was stunning: 2 percent or 3 percent of earnings at a number of banks, and as much as 12 percent or 15 percent at some.

When you're trying to figure out a practice that few experts will describe to you, it's crucial to take the time to learn the technical material. We had to learn the basics of life insurance accounting, proxy and annual-report disclosure requirements, and understand the interplay between life insurance, corporate finance and tax law before we could construct a complete picture of how companies were using life insurance on their employees as a corporate finance tool to boost the bottom line.

This was even more true as we began working on what was clearly the most important follow-up to the initial piece: a history of janitor insurance. We had touched on the subject in our initial article, but we had seen hints that there was much more to the story. Trying to understand employees' rights in various states, we saw more clues: Simply by reading insurance laws in state after state, and in several cases looking at prior versions of the law (usually available through Lexis-Nexis) or the original legislative bills, we saw steady, gradual changes in "insurable interest" laws, which determine who may buy life insurance on whom. It bore all the marks of a concerted lobbying campaign. Court documents also had suggested that major brokers and underwriters of janitor insurance had lobbied to make sure the practice became, or remained, legal.

We ultimately framed the story around Dow Chemical Co., which had sued the IRS over a program that looked much like the others that had landed in tax court. Dow's consultants also had been instrumental in shaping Michigan's law to be friendlier to the practice - something we learned by poring through hundreds of pages of exhibits in Dow Chemical's lawsuits, and later confirmed with the consultants. (Earlier this year, Dow won its case in U.S. District Court in Bay City, Mich., though the federal government may appeal.)

Dow's case was highly technical, but even more so, the history of the practice was intimately linked to accounting practices and developments in tax law. Without a solid technical understanding, we would not have been able to even confirm critical information with the companies we wrote about. Many companies denied even the simplest facts (including the fact that they owned this type of life insurance), until presented with the evidence. To help readers through the technical morass, we wrote a simple explanatory sidebar to our Dec. 30 history story.

We also were finally able to make the 9/11 connection that we suspected from the beginning. Unfortunately, this story was much harder to tell through ordinary people. There were no lawsuits involving this kind of practice against employers in the Trade Center (yet), so there was no easy way to find human faces. Anecdotally, from insurance-industry insiders, we knew companies had collected on 9/11 deaths, but concrete details were elusive. Even a year after the fact, insurers and other companies hadn't made any mention of gains or losses from janitor insurance. Finally, in the third quarter of 2002, Hartford made the kind of disclosure we were expecting. It didn't give us everything we wanted - the human face - but we had to be willing to go with what we had.

The response to the janitor insurance articles has been long-lasting. After the initial articles ran, U.S. Sen. Jeff Bingaman of New Mexico proposed eliminating tax benefits for corporate-owned life-insurance policies held on employees who have been gone from an employer for more than a year. U.S. Rep. Gene Green of Texas proposed a bill requiring employers to tell past and present employees about any coverage bought on their lives since 1985 (attributing his decision in part to Houston Chronicle articles that detailed the Texas janitor insurance lawsuits).

The National Association of Insurance Commissioners last fall published guidelines calling for employers to get written consent from insured employees. This year, U.S. Rep. Rahm Emmanuel of Illinois (and about a dozen cosponsors), proposed eliminating the key tax benefits of corporate-owned life insurance, as has Sen. John Edwards.