Fired? Former Employer May Profit from your Death: You could end up a 'dead peasant'

HOUSTON — Irma Johnson never really thought of herself as a crusader.

But the quiet widow from The Woodlands has been featured in a Michael Moore movie, watched her story retold on “Good Morning America” and is trying to let others know that their employers may have purchased secret insurance policies on their lives and stand to profit handsomely when they die.

The industry darkly refers to the policies as “dead peasant” life insurance.

And but for a post office error, Johnson might not have learned that when her husband, Dan Johnson, died of brain cancer in 2008, the bank that had fired him years earlier got $4.7 million in insurance proceeds on his life.

After accidentally destroying an envelope containing a check for nearly $1.6 million made out to Amegy Bank, the post office misdirected it to Johnson's home because Dan Johnson's name also was on the check.

Her attorney, Mike Myers of McClanahan Myers Espey in Houston, said she wasn't supposed to know Amegy had the insurance policy on her husband, a project manager whose annual salary had been about $70,000.

“How could they be profiting off my husband?” Johnson asked recently during an interview with the Houston Chronicle.

Friday, Johnson settled a lawsuit she filed to force the bank to reveal it bought policies in 2001 on more than 40 bankers, including coverage on Johnson, who'd been diagnosed with terminal brain cancer about 18 months earlier and been out sick for several months.

She was asking for the net proceeds Amegy received, $3.8 million— the death benefit minus the premiums it paid — and settled for an undisclosed amount.

“We settled to the mutual satisfaction of both parties,” Amegy Bank spokeswoman Leigh Akin said.

In Amegy's formal response in the lawsuit, the bank said it purchased life insurance policies on a group of vice presidents and other officers to offset the cost of providing employee benefits.

Amegy said taking out such policies is a “common practice among banks and other industries and is recognized and permitted by the applicable banking regulatory authorities.”

The policies were voluntary, the bank noted, and Dan Johnson understood he'd be covered indefinitely, even if he left the bank.

Banks have purchased hundreds of billions of dollars of “bank owned life insurance” on the lives of their employees. The policies typically remain in effect years after an employee leaves the bank, Myers said.

Myers said banks receive significant tax advantages on the policies. They can write off the interest they pay on loans to buy the insurance; money invested in the policies grows tax deferred; and if the insured person dies, the death benefit is tax-free.

“It's a very significant investment return for a company in the 40 percent tax bracket,” said Myers, one of the lawyers who sued Wal-Mart over its dead peasant policies and ended up settling for $15.4 million for surviving family members in Texas and Oklahoma. Cases in other states still are pending.

“There are probably a lot of former Amegy employees who are walking around right now who are worth millions of dollars dead to Amegy and they don't know it,” Myers said.

U.S. Rep. Gene Green, D-Houston, charges that companies buy the policies solely for the tax advantage. He's been pushing a bill that would remove the incentive.

“If you don't have an insurable interest in someone, it's an investment,” he said, and should be subject to regular income tax.

Green also regularly files a bill that would force employers to disclose amounts and beneficiaries of such policies. But the legislation hasn't been a front-burner issue as Congress has wrestled with health care reform, a turbulent economy and other priorities.

Dennis Nixon, chairman and president of Laredo-based International Bancshares Corp., defended the use of bank-owned life insurance policies. A bank employee can generate significant benefit costs over the length of their employment, he said, so the policies can help pay for those costs.

“People who participate in those programs consent to those programs,” Nixon said. “Most people are not concerned about it because it doesn't cost them anything.” He called the practice “as common as street addresses.”

Nixon didn't know how many policies International Bancshares has purchased on its employees' lives, but added he wouldn't disclose the number even if he did know.

Dan Johnson was diagnosed with cancer in 1999 and had to learn to speak and to walk again following operations to remove his tumor. By 2001, he was getting warnings that his once-stellar job performance was suffering and was demoted to a nonsupervisory position, according to the lawsuit.

A few months before he was fired in 2001, Johnson was told that he was eligible to receive extra life insurance, Myers said. If he died or was disabled while working at the bank, his wife would receive $150,000.

What wasn't said in the consent form, according to Myers, was that the bank would receive 67 times Johnson's annual salary. That was material information Amegy should have disclosed to its terminally ill employee, Myers argues.

Myers said he also believes the consent form wasn't valid because the bank bought the policies before obtaining permission from Johnson, and that when it did, he wasn't of sound mind.

Amegy said in its filing that it believes Dan Johnson understood the consequence of his actions. It also said he agreed not to sue in the future in exchange for settling a disability complaint he filed with the Equal Employment Opportunity Commission after his termination.

Irma Johnson, a mother of two young boys, said she was perplexed when she opened the envelope with the big check inside just before Christmas 2008 and called the insurance company. She quickly learned the policy wasn't meant for her. Nor did she ever receive the $150,000 portion that she thought she had coming to her.

Her story was featured last year in “Capitalism: A Love Story,” filmmaker Michael Moore's critical examination of U.S. economic practices.

What's especially upsetting, Johnson said, is that her husband couldn't buy life insurance to protect his own family once he found out about his cancer. Yet his employer could, she said.

“To let him go,” she said, shaking her head, “and then to cash in on him like that.”

By L.M. Sixel - Houston Chronicle