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Case Shows How 'Janitors Insurance' Works to Boost Employers' Earnings

Thursday, April 25, 2002 - 00:00
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Editor's note: 

This article is part of a series that won the 2003 George Polk Award for Financial Reporting. A list of those articles is available at

How valuable is the business of managing what is known as "janitors insurance"?

One clue comes from a St. Louis court case, in which a financial-consulting firm won a $118 million jury verdict against Hartford Life Insurance Co., arguing that the insurance giant stole its method of administering these kinds of policies to smooth earnings.

Through so-called janitors insurance, hundreds of companies have taken out life-insurance policies on millions of workers of all kinds -- with the companies as the beneficiaries. Employers take out the coverage because the policies provide tax-free investment buildup for the companies and provide tax-free death benefits when the workers, former employees and retirees die.

The practice is murky, because companies aren't required to disclose much, if anything, about their janitors-insurance programs in Securities and Exchange Commission filings, and state insurance regulators don't monitor the practices.

However, some clues about the magnitude of money at stake in janitors policies, which also are referred to generically as corporate-owned life-insurance policies, or COLI, can be gleaned from the recent court case. Many of the documents in the case, filed as Bancorp Services LLC v. Hartford Life Insurance in U.S. District Court in St. Louis, have been sealed. Indeed, most of the court record could be sealed today, if federal judge Carol E. Jackson grants a request from Bancorp Services, which brought the suit.

Bancorp Services said it had developed a proprietary way to help companies smooth the returns in their COLI programs. (The COLI programs include both janitors COLI and executive COLI.)

Companies often have millions of dollars in the insurance contracts and report the changes in the value of the assets each year in their financial statements as income or expense. This can cause earnings to fluctuate, as the value of the underlying investments rises and falls. Bancorp Services argued in court that it had developed a proprietary system for administering "separate account stable value protected insurance products," which allow companies holding them to record steady income from the policies and avoid marking the underlying investments to market.

By using a smoothing technique like this, a company with millions of dollars in COLI can always show positive earnings from the policy, even if the returns have fallen. In court filings, Bancorp argued that its method made COLI considerably more attractive, because companies could avoid taking hits to income during down markets. Under typical COLI policies, "the long-term return may be highly advantageous for the company, [but] the short-term volatility that the company must report on its books is undesirable," Bancorp maintained.

So companies like Bancorp, and insurers like Hartford and Metropolitan Life, a unit of MetLife Inc., offer customers what amounts to an earnings-smoothing machine. Using Bancorp Services' system, for example, a company holding a COLI policy can record a steady gain -- say 8% or 10% a year -- and only periodically adjust that rate to accommodate market fluctuations.

To achieve the goal, the insurer essentially passes the short-term market risk off to a third party. The insurer keeps track of the policy's market value separately from the smoothed "book" value, the value reflecting a steady return. The policyholder records the increase in the smoothed book value to its income statement each year. If the company surrenders the policy, it collects the market value, and the third party that holds the short-term market risk must make up any difference between market and "book" value.

Accordingly, a company "is not required to report the volatile market value of the invested funds, but may instead report the smoothed book value of the policy's cash value," Bancorp Services wrote in a court document.

In its suit, Bancorp accused Hartford, a unit of Hartford Financial Services Group Inc., of stealing its techniques. Bancorp also portrayed the administrative system as crucial to COLI policy management, arguing in court that without it, Hartford "would be unable to track the values of the policies or to process death benefits for these policyholders."

In the case, Hartford argued that the methods it used had been around for a while, and weren't Bancorp Services' trade secrets. On March 15, a jury disagreed, returning a verdict for Bancorp Services and ultimately an $118 million judgment for breach of contract and misappropriation of trade secrets.

Bancorp couldn't be reached for comment Wednesday, and an attorney for the company declined to comment.

Hartford said it was disappointed by the jury's verdict and could appeal. "We strongly believe that the conduct of both Hartford and [subsidiary International Corporate Marketing Group Inc.] in this matter was appropriate."