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.