OCC Bulletin 2004-56 Imposes New Responsibilities Upon Bank Management To Advise Their Directors Regarding Risks To Bank-Owned Life Insurance Programs
The Office of Comptroller of Currency, in conjunction with all other federal banking agencies, recently issued OCC Bulletin 2004-56 concerning bank-owned life insurance programs (“BOLI”). OCC Bulletin 2004-56 imposes new responsibilities upon bank management to: (1) develop and revise risk assessment procedures for BOLI programs, (2) report annually to its board of directors regarding BOLI performance, and (3) undertake a detailed pre-purchase due diligence for any new BOLI programs.
One of the driving forces behind OCC Bulletin 2004-56 is a developing line of precedent in the very similar area of corporate-owned life insurance programs (“COLI”). Specifically, OCC Bulletin 2004-56 was issued in partial response to Mayo v. Hartford Life Ins. Co., 354 F.3d 400 (5th Cir. 2004). The Mayo case was brought by the estate of a former Wal-Mart employee who argued that Wal-Mart violated Texas law by taking insurance upon his life without a valid insurable interest. Texas law prohibits an employer from taking life insurance upon an employee unless the employee is a key individual whose continued life provides the corporation a pecuniary benefit. Texas law holds that mere employment does not create this pecuniary benefit. The Texas remedy if an employer takes life insurance upon an employee without an insurable interest is that the employee—not the corporation who paid policy premiums—may recover the death benefits. OCC Bulletin 2004-56 specifically requires banks to examine their BOLI programs to ensure that their assets do not face a similar risk.
In order to understand the context of the Mayo decision, it is necessary to understand that COLI programs have been attacked in two successive waves of lawsuits—first by the IRS and now by the plaintiffs’ bar. On the tax front, COLI programs received significant negative press in the mid-1990’s because some corporations had insured the lives of thousands of low-level employees in sham life insurance programs with no economic substance aside from the tax benefit gained by deducting interest on loans taken against the policies. Congress prospectively closed the tax loophole by enacting HIPAA in 1996 and the IRS retrospectively disallowed pre-1996 deductions through a series of suits.[i] Fortunately for banks, regulatory restrictions on the “business of banking” prevented such shelters from gaining widespread acceptance in the banking industry. As a result, the tax lawsuits largely have left the banking industry unharmed. Indeed, contemporaneously with the enactment of HIPAA, the OCC issued Bulletin 1996-51 to clarify those instances in which BOLI was proper for banks.
Unfortunately, the tax lawsuits and related press alerted the plaintiffs’ bar to the enormous scale with which some corporations had insured the lives of their employees. This led to the current wave of Mayo lawsuits challenging the corporations’ insurable interests in their employees’ lives. Generally, the Mayo lawsuits concern three primary issues: (1) what level of employee may be insured, (2) what type of consent is needed, and (3) what remedy is provided to the employee if insurance is taken without an insurable interest.[ii] While not all states provide a Texas-style remedy wherein the employee’s estate may recover death benefits, there are a significant number of states that afford this relief.
Perhaps most importantly, courts in the various states that have considered these Mayo-type lawsuits have upset corporate expectations by rejecting the use of a trust to establish governing law concerning whether the corporation had an insurable interest in the life of the employee. Instead, these courts have analyzed the insurable interest issue under the governing law of the state where the employee lived or worked. As a result, any corporation or bank with BOLI/COLI assets must examine each of its programs to ensure that it has complied with state insurable interest laws in every state where one of its insured employees lived or worked. Indeed, OCC Bulletin 2004-56 requires this assessment for all regulated banks.
Frost Brown Todd has significant experience advising bank and corporate clients with regard to BOLI/COLI programs. Our attorneys have stayed ahead of trends in BOLI/COLI insurance by advising our clients concerning the tax implications of the programs, performing pre-purchase analysis, and developing risk controls in response to the latest wave of insurable interest lawsuits. We presently maintain a database of state insurable interest precedents ranging from prerequisite employment responsibilities, consent necessary to effect the coverage, and other limitations applied by the various states in connection with these programs. We provide ongoing advice to a number of clients regarding these and other BOLI/COLI issues.
We would be happy to meet with you and discuss these or other developments in the areas of BOLI/COLI insurance programs that may affect your own assets. Please contact Greg Mitchell (Lexington office), Jeff Teeters (Cincinnati office) or David Walulik (Cincinnati office) if we may assist you in this regard.
[i] See e.g. Winn-Dixie Stores v. C.I.R., 113 T.C. 254 (1999) aff’d 254 F.3d 1313 (11th Cir. 2001); American Electric Power, Inc. v. U.S., 136 F.Supp.2d 762 (S.D. Ohio 2001) aff’dth Cir. 2003); IRS v. CM Holdings, Inc., 254 B.R. 578 (Bankr. D. Del. 2000) aff’d 301 F.3d 96 (3d Cir. 2002).326 F.3d 737 (6
[ii] See e.g. Torrez v. Winn-Dixie Stores, Inc., 118 S.W.3d 817 (Tex. Ct. App. 2003); Ball v. SBC Communications, Inc., 2003 Tex. App. Lexis 5286 (Tex. Ct. App. 2003); Tillman v. Camelot Music, Inc., 2003 U.S. Dist. Lexis 21662 (N.D. Okla. 2003); Rice v. Wal-Mart Stores, Inc., 2004 U.S. Dist. Lexis 14109 (D. N.H. 2004).