Prudential Deal Could Affect Many in State

On the eve of the expected announcement of a record $35-million fine against Prudential Insurance Co. by a group of states, the California Insurance Department said Monday that thousands of Californians might be among the victims of life insurance fraud by the company.

Candysse Miller, a department spokeswoman, said the state has no firm estimate of the number of victims but expects to send letters to about 750,000 Prudential customers once California agrees to a proposed settlement with Prudential, the nation’s biggest life insurance company.

Miller said the 750,000 figure represents essentially all of Prudential’s life insurance customers in the state. Only after the state receives their responses, she said, will it know how many of them may have been the victims of misrepresentations and a practice known as “churning.”

Churning involves persuading customers to use the value of existing life insurance policies to buy more policies, often with the false promise that they would not have to pay additional premiums. Agents benefit from churning by getting commissions.

Customers have also complained that Prudential did not tell them that the cash value of existing policies was being used up to pay for the new policies, sometimes causing policies to lapse and leaving customers without insurance coverage.

One indication that the number of California victims is in the thousands is the number of formal complaints the California department received--660 by Miller’s count. The actual number of victims is expected to be significantly larger.

It could not be determined how many complaints other states received, but California’s number is far higher than in several states that launched aggressive independent investigations, including Florida, which received slightly more than 100, and Connecticut, with 66.

A 30-state task force, led by New Jersey, is expected to announce today a report of its investigation of Prudential, a $35-million fine against the company and the terms of a settlement plan under which customers would be reimbursed. By some estimates, that could cost Prudential up to $1 billion.

Some states, including California, however, are not expected to agree immediately to the settlement and want more time to study it. Some, including Washington, have called for further investigation following recent allegations that Prudential may have improperly destroyed documents to hide them from investigators. Prudential has strongly denied that.

Miller said California will not decide before Aug. 1 whether to agree to the proposed settlement.

California participated in the multi-state task force that investigated Prudential but has not launched an independent investigation into churning, Miller confirmed.

She said the state has been receiving complaints about Prudential’s sales of life insurance since 1985 and has looked into some of those complaints. But she said she did not know why no full-scale investigation of the company was ordered.

An investigative report issued by the Connecticut attorney general’s office in November gives examples of how churning allegedly occurred. It said Prudential agents visited existing customers who were approaching retirement age and urged them to buy additional policies.

In one example cited in the report, an agent told a customer that, using the dividends paid on existing policies, he could buy additional life insurance without having to pay additional premiums. The agent, however, allegedly didn’t explain that money would be borrowed from the built-up cash value of the old policies to pay premiums on the new ones.

The agent also told the customer he could safely ignore bills he received for premium payments, the report said. Within a few years, the customer discovered that all the cash value and dividends on the old policies had been used up and that all the policies had lapsed for nonpayment of premiums.

Prudential has acknowledged that some churning occurred but contends that wrongdoing was confined to individual agents and was not pervasive throughout the company.