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'Janitors Insurance' Issue Leaves Workers in the Dark on Coverage

Wednesday, April 24, 2002 - 00:00
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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, and a web archive of this article is maintained at

Scott Mayo, 41 years old, is alive and well. But extremely unhappy with his former employer, CM Holdings Inc., which took out a life-insurance policy on him. When he dies, the company, for which he worked as a store manager in San Antonio until early 1990, hopes to receive $336,814.

Like many companies, his employer took out life insurance on its workers, with itself as beneficiary. This coverage -- often called "janitors insurance," or "corporate-owned life insurance," or COLI -- typically remains in force even when workers quit, retire or get fired.

"It's a morbid, sick little thing they've gotten into," says Mr. Mayo, who worked for CM Holding's Camelot Music subsidiary for about a year. "To me, morally and ethically, that's not a proper way of doing business." Trans World Entertainment Corp., which acquired CM Holdings in 1999, declines to comment.

The fact that Mr. Mayo found out about the life-insurance policy is unusual. He learned of it only when he was contacted by a law firm assembling a legal case against CM Holdings. Indeed, though hundreds of companies have policies on millions of workers, as The Wall Street Journal reported on Friday, many employees can't get any information about whether they're covered by janitors insurance unless someone at the company is willing to tell them.

That could change, however, if a federal legislation introduced Tuesday by Rep. Gene Green (D., Texas) is passed by Congress. The bill would force companies to tell employees, former employees and their families if the companies have taken out insurance policies on their lives, and also to disclose the amount of each policy and the name of the insurer.

"The whole point of the bill is to bring some daylight on this issue," explains Rep. Green. The bill would be retroactive to Jan. 1, 1985, and would require employers that take out new policies to notify employees within 30 days.

Currently, state insurance codes provide little help for workers who want answers about whether a company has insurance on their lives, or how much the death benefit will be. Nor can someone find out whether a family member's employer collected -- or will collect -- a benefit from the death of a loved one. In Georgia, in fact, employers can even collect death benefits on the children and spouses of their employees. When asked about the law, the state's insurance regulators said employers and insurers don't report the details of COLI transactions to the state; a spokesman said further information wasn't available Tuesday.

Some states, including Florida, don't regulate janitors insurance at all. Many states, including New York, California, Michigan, Ohio and Minnesota, require employers to get workers' prior consent, even though many workers may not be fully aware of what they are consenting to. For example, companies in some cases give workers an incentive to agree to the janitors insurance by promising them a $1,000 or $5,000 insurance benefit for their families -- without telling them that the insurance benefit that the company receives is far larger. In some states, including Illinois, "negative consent" is allowed -- in which employees are insured unless they act to avoid it. If employees in that state don't write to reject the coverage within 30 days, they are covered.

State rules typically are unclear about whether employers have any obligation to tell workers about coverage once it has been taken out. So, even in states where employers have to get written consent before buying janitors insurance, they might not have to tell employees who ask about the coverage years later.

As a result, most employees have no clue that they are covered. Court documents show that CM Holdings not only didn't ask for employee consent, but hid the janitors coverage internally as well. The company is battling the Internal Revenue Service over tax deductions taken in connection with the policy.

According to March 2000 testimony by Jack K. Rogers, who had been the company's chief financial officer, the company funneled death-benefit payments from the insurer though an executive payroll account before transferring the money to the company's general account. If the money had gone straight to the general account, he noted, "that would have necessitated the inclusion of a number of more people ... in knowledge of the COLI program" -- in particular, employees in the accounting department.

Until the 1980s, employers weren't allowed to take out policies on workers, because they had no "insurable interest" in their survival. In other words, the company couldn't argue that it would suffer financial hardship if janitors, file clerks and nonessential executives perished. Insurable-interest rules were designed to prevent life insurance from providing an incentive for murder or negligence, and ultimately to discourage one person from "wagering" on the life of another.

But after aggressive lobbying by insurance companies, most state insurance departments modified the rules to allow companies to take out "janitors" insurance. Almost no ancillary regulation was developed to address the practice.

Unions may have some ability to force companies to disclose whether they have janitors insurance, under National Labor Relations Board rules, says Jon Hiatt, general counsel for the AFL-CIO. Now that they know about it, "there will very likely be a number of unions seeking to find out about the practice," he says.

Some workers find out by chance. Three years ago, a co-worker told Richard Cowan, 65, a retired meter-reader and supervisor, that he had seen Mr. Cowan's name on a list of employees insured by his former employer, New Jersey utility Public Service Enterprise Group Inc. Mr. Cowan doesn't know how much PSEG will get when he dies, or when it took out the insurance. "I was very surprised, then I got a little annoyed," he says. "I'm going to live to be 100, so they can't cash in on this."

The Newark utility says it bought janitors insurance on "several thousand" retirees about a decade ago, and that any who are still living remain covered by the policy. But a spokeswoman says Mr. Cowan wasn't covered by the policy. The spokeswoman declines to say how much the company collects in death benefits, and says the company didn't notify the retirees about the policy because it wasn't required to.

Meanwhile, the only way for many employees to find out if they or their families are worth more dead than alive to their employers and former employers may be through lawsuits. Mr. Mayo sued CM Holdings, arguing that his former employer never had an insurable interest in his life under Texas law. CM Holdings countered that Georgia law should apply, because Camelot "intended to situate their COLI policies in Georgia, and intended for Georgia law to apply, " court documents note. The judge didn't accept that contention, ruling in March 2002 that she would apply Texas law as the plaintiffs requested. The case is pending in federal district court in Houston.

Ironically, Mr. Mayo's subsequent employer also has janitors coverage. Olin Corp., based in Norwalk, Conn., bought janitors policies on all salaried or nonunion hourly employees working at Olin on Dec. 31, 1992 -- including those on short-term disability on that day. When Olin spun off Arch Chemicals Inc. as a separate company in 1998, it kept the policies, and will enjoy death benefits from its former, spun-off employees when they die.

Olin declines to comment. A spokesman for Arch Chemical says that though many of its employees are covered under the insurance coverage Olin took out before the spinoff, Arch itself has no COLI policies and doesn't benefit from them. Says Mr. Mayo: "This stinks."

Mortality Tables

A look at how different states regulate "janitors insurance" -- which provides life insurance payments to employers when their workers, retirees, and former employees die. 

STATES Notification and consent rules Other rules
California Employer must obtain written consent from employees In some cases, employers may insure retirees and dependents
Florida No consent required Statute doesn't address janitors insurance
Georgia No consent required Employer may insure dependents of employees
New York Employers must obtain written consent, tell employees that they have a right to reject it Employer must explain how an employee can cancel the coverage at any time
Texas Employers can't insure ordinary employees Estates of employees have successfully sued to recover death benefits paid to employers
Washington Law doesn't restrict janitors insurance Insurable interest applies when policy is bought, so ex-employees may remain covered