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Wal-Mart Sues Over COLI Policies

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NU Online News Service, Sept. 9, 3:15 p.m. — Washington

Claiming losses of more than $150 million, Wal-Mart Stores Inc., Bentonville, Ark., has filed a lawsuit against life insurance units of American International Group Inc., New York, and Hartford Financial Services Group Inc., Hartford, charging negligence, misrepresentation and breach of fiduciary duties related to the sale of corporate-owned life insurance policies.

Wal-Mart charges that the defendants failed to disclose the full range and magnitude of tax-related risks and insurable interest risks associated with COLI plans.

In addition, Wal-Mart alleges that the defendants failed to disclose that some state insurance regulators had disapproved of COLI plans such as those sold to Wal-Mart based on concerns relating to tax treatment, insurable interest and deviations from acceptable accounting, actuarial and operating principles in the life insurance industry.

Wal-Mart charges that the AIG Life and Hartford Life COLI policies deviated from acceptable accounting practices with respect to loading charges, netting out of premium, payment of dividends and timing of dividends, among others.

Moreover, Wal-Mart charges that the defendants “affirmatively misrepresented” that the COLI plans would be designed and administered in a manner that would minimize or eliminate the adverse financial consequences to Wal-Mart based on a change in tax legislation.

A representative for Hartford Life said the company will vigorously defend itself against the lawsuit.

An AIG representative said the company’s policy is not to comment on litigation matters.

In its complaint, which was filed in the Delaware Chancery Court, Wal-Mart says that in the early 1990s, it began exploring ways to adapt to changes in accounting for and funding of health and death benefits.

Wal-Mart says to accomplish its goal it looked at COLI plans, which were promoted by the insurance industry “as a means of providing corporate policyholders with positive cash flow through a complex interplay of actuarial analysis and Internal Revenue Code provisions governing life insurance.”

Eventually, insurance brokers recommended that Wal-Mart purchase policies from AIG Life and Hartford Life.

In addition, brokers also recommended that Wal-Mart purchase the policies through a “grantor trust” located in Georgia.

The purpose of this, Wal-Mart says, was to take advantage of a Georgia law regarding insurable interests, which the defendants said was the most favorable in the country.

Wal-Mart says that because favorable tax treatment was essential to the viability of the plans, it sought assurances from the defendants that contingencies would be in place to minimize or eliminate any negative consequences from a change in the tax code.

An agent for Hartford Life assured Wal-Mart that any future tax law changes would have a relatively minor impact, Wal-Mart alleges.

Wal-Mart charges that the Hartford Life agent said the company would offer a full refund if there were a tax law change in the early years of the plan.

The agent said the “worst case scenario” would impose costs on Wal-Mart of no more than $280,000, Wal-Mart alleges.

Similarly, Wal-Mart charges, the AIG Life representative said its policy was structured in a way “to minimize or eliminate the risk of a program un-wind in the event of adverse tax legislation.”

Based on these recommendations and assurance, Wal-Mart says, it purchased the policies.

However, Wal-Mart says, the policies “failed in their fundamental purpose.”

In 1996, Wal-Mart says, Congress passed the Health Insurance Portability and Accountability Act, which effectively eliminated many of the benefits of COLI policies.

Moreover, the company says, the changes were retroactive to policies issued after June 20, 1986.

Wal-Mart says it surrendered the policies in January 2000.

In August 2002, the company says, under threat of litigation, it resolved a dispute with the Internal Revenue Service regarding the tax treatment of the AIG Life and Hartford Life policies resulting in a substantial, unanticipated tax liability.

Moreover, Wal-Mart says, the company faces a class-action suit filed in federal court by former insureds based in Texas who charge the company lacked an insurable interest.

The federal court entered a summary judgment Aug. 8 stating that Wal-Mart lacked an insurable interest, adding that Texas law, not Georgia law, applies to the case.

Wal-Mart says the defendants earned profits of more than $100 million from their actions.

Wal-Mart is asking that the defendants pay Wal-Mart all the profits they have earned, plus interest, to prevent “unjust enrichment.”

In addition, Wal-Mart is asking for compensation for the losses it has already incurred and for reasonably foreseeable losses, plus interest.


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