Jury Awards $14 Million in Fraud Suit : Courts: Life insurance providers must pay 1,800 servicemen and veterans whose benefits were cut.

Confirming claims of a sophisticated fraud, a San Diego Superior Court jury awarded $14.38 million Monday to 1,800 servicemen and veterans after finding that their life insurance provider sharply cut the benefits on policies it paid out and eliminated coverage at age 60.

Finding fraud and bad faith, the jury directed Nationwide Life Insurance Co. and its San Diego-based agent, the nonprofit Armed Forces Benefit & Aid Assn., or AFBAA, to pay the 1,800 servicemen and veterans--who are scattered across the country--$11.78 million in general damages.

The panel also ordered Nationwide to pay an additional $2.6 million in punitive damages.

By abruptly deciding in 1975 to eliminate coverage on the policyholder’s 60th birthday, Nationwide violated its contract with the servicemen and veterans, the jury found.

Only upon turning 60 did policyholders learn of the change, although they had been paying $9.90 a month in premiums, many of them for years, expecting lifelong coverage. That left many without benefits and facing the difficult task of obtaining new policies at affordable rates, said their Pittsburgh-based attorney, David Patterson.

In addition, Patterson said, Nationwide decided in 1975 to reduce the benefits it paid on the policy, from $10,000 to $2,000, again without notifying policyholders.

The suit also alleged that AFBAA falsely promoted itself as an armed services-affiliated vendor, persuading many who purchased a policy beginning in the 1960s that the contract was backed by the federal government. It was not, Patterson said.

Calling the scheme a “very sophisticated fraud,” he said the verdict should serve as a reminder to insurance companies to “fully and fairly” disclose terms and coverage.

He also said the verdict shows the importance of “class-action” suits, those in which people with common interests--who could not, alone, bear the high cost of litigation--take up a case together.

“The company knew that, when they gave a widow $2,000, it was in essence hush money and they were going to satisfy her to where she could not, under her circumstances, bring a case for $8,000,” Patterson said.

“To her point, she’s suffered a significant loss--not only her husband but 80% of her coverage,” Patterson said. “But from Nationwide’s standpoint, (the money) is really peanuts.”

Neither officials nor attorneys for the insurance company could be reached Monday for comment.

Beginning in the early 1960s, Nationwide, based in Columbus, Ohio, served as the underwriter of insurance offered to active and retired military personnel by AFBAA, according to the suit. The association provides group life insurance to servicemen, veterans and their families at a discount in return for a membership fee and dues, the suit said.

The suit was filed in 1988 in San Diego, where AFBAA is situated and where a sizable number of the policies were sold during the Vietnam War buildup. It was brought on behalf of three Vietnam veterans who were notified at age 60 that they no longer had insurance coverage.

One of the three, John William Pierce of Gulfport, Miss., learned two months before his 60th birthday that he had cancer stemming from exposure to the defoliant Agent Orange, Patterson said. Upon turning 60, Pierce “got a birthday card from Nationwide saying, ‘No coverage,’ ” Patterson said.

The other two named plaintiffs are Ralph Woods of Carmichael, Calif., and Billy Hicks of Spring Hill, Fla., Patterson said. Hicks, who had been acquainted with Patterson, drafted the lawyer into the suit.

The suit grew within about four months to include 1,800 people, all veterans and servicemen whose coverage was canceled at age 60 or whose benefits were reduced.

When the suit was filed two years ago, a Nationwide attorney said policies issued in the 1960s did not specify the age 60 cutoff, only that benefits would end with automatic termination of AFBAA membership--at age 60.

In later policies, the deadline was spelled out clearly, the company contended. Policyholders also were offered the option of buying individual policies at age 60, but at substantially higher rates, it contended.

Advertised through military publications and promotional literature, AFBAA’s name suggested a connection to the federal government, Patterson said. The ads also featured red, white and blue colors, a picture of the U.S. Capitol and representations of an American flag waving in the breeze and of a bald eagle, Patterson said.

“It was marketed by Nationwide and by AFBAA with the appearance that it was government-sanctioned,” Patterson said.

By 1975, Patterson said, the customer pool that bought the policies had begun aging, prompting Nationwide’s business decision.

“In term insurance, in a group, you cannot maintain a fixed benefit and a fixed premium if the whole group ages. One has to give,” and in this case it was the number of customers eligible for benefits as well as the 80% cut in the payout, Patterson said.

After a trial before San Diego Superior Court Judge James R. Milliken, the jury deliberated a little more than two days before finding that the insurance company had violated laws against fraudulent misrepresentation, fraudulent concealment of facts, bad-faith insurance practices and conspiracy, Patterson said.

It awarded the $2.6 million in punitive damages later Monday after hearing that Nationwide’s 1989 net worth was $400 million, he said.