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NEW YORK - Wal-Mart Stores Inc. last week sued its life insurers, American International Group Inc. and Hartford Financial Services, to get back $150 million it says it lost through a life insurance policy for employees, Reuters reports. The retailer's move could potentially open the door to a flood of lawsuits against life insurers.
The suit charges that the insurers, who sold the firm so-called corporate-owned life insurance (COLI) policies, did not warn them sufficiently of the risks of the plans, and the effects of new tax laws.
COLI, which is insurance taken out on employees' lives, often without their knowledge, is a popular funding mechanism for many firms, where they borrow money back from the insurers out of the premiums they pay, as a way to finance other operations.
Up until 1996, firms buying the life insurance claimed tax deductions on the loans, but the practice was brought to a halt when Congress passed laws clamping down on the practice.
Wal-Mart says it lost money on the plans after the change in tax laws, and stopped the policies in 2000.
More than half Fortune 500 firms bought COLI plans, industry experts say, and according to evidence from the IRS in a court case two years ago, about 85 firms have tax liabilities of about $6 billion on COLI policies, according to Reuters.
The IRS has won several court judgments against firms looking to claim tax deductions on COLI loans, with one judge calling the practice "a sham in substance."