Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
AN EMPLOYER’S INSURABLE INTEREST IN RANK AND FILE
EMPLOYEES: TILLMAN V. CAMELOT MUSIC, INC.
For decades, employers have taken out corporate owned life insurance policies (COLIs) on their key employees to protect against financial losses, such as transition costs, that the company might incur in the event of a manager’s death.1 Beginning in the late 1980s and early 1990s, companies increasingly began taking out COLIs on all of their full-time employees, not just senior personnel and management.2 Companies such as Camelot Music, Inc. (Camelot) can takeout COLI policies on their full-time employees and pay premiums on the policies, then borrow money against the accrued value of the policies, up to the fullvalue of the policies, to pay for employee benefits programs.3 COLI policies are popular among employers because they allow employers to provide benefits programs to their employees at lower costs. Because companies can deduct some or all of the interest paid to insurance companies on the loans, the COLI policies provide a source of low-interest revenue to pay the costs of employee benefits programs as well as to reduce the income taxes paid by the corporation.4 In Tillman v. Camelot Music Inc., the Tenth Circuit held that Camelot did not have an insurable interest in the life of Filipe Tillman, one of numerous full-time employees on whom Camelot had taken out a COLI policy.5 Under Oklahoma law, the personal representative of a decedent’s estate may collect death benefits paid to an employer under a COLI policy in which the employer lacked an insurable interest in the employee’s life.6 Consequently, the Tenth Circuit’s holding opens the door for Brenda Tillman, the personal representative of Mr. Tillman’s estate, to sue Camelot for the full value of benefits payable to the company under its COLI policy upon Mr. Tillman’s death.7 The Tenth Circuit’s holding reflects an increasing willingness on the part of courts to interpret the insurable interest doctrine to invalidate COLI policies taken out on rank and file employees. Considered in conjunction with decisions recognizing a decedent estate’s right to recovery, the Tenth Circuit’s decision is cause for concern for corporate employers who currently hold COLI policies on their rank and file employees.8 The Tillman court’s decision may expose employers to significant liability by providing support to the estate of a decedent employee that sues to recover COLI death benefits paid to an employer. Corporate employers may no longer find COLI policies to be an attractive tax planning mechanism as a result of the increased costs and potential liability associated with holding them. Part I of this Note provides the relevant facts regarding the nature of the employment relationship between Mr. Tillman and Camelot, as well as the COLI policy taken out on Mr. Tillman’s life. Part II analyzes the Tenth Circuit’s holding that Camelot lacked an insurable interest in Mr. Tillman’s life but was not unjustly enriched through its receipt of death benefits under the COLI. Part III of this Note analyzes the law and public policies guiding the insurable interest doctrine, tracing it from its origins in 18th century Britain to Oklahoma’s application of the doctrine under both common and statutory law.9 Next, Part III critiques the Tillman court’s divergence from Oklahoma precedent, proposing that moral protectionism influenced the court’s decision to adopt the Fifth Circuit’s interpretation of the insurable interest law—an approach that has traditionally been less flexible than Oklahoma’s.10 Further, Part III of this Note discusses how the Tenth Circuit’s moral protectionism produces internal contradictions in its opinion.