Prudential Deceived Clients, Failed to Monitor Impropriety, Report Says
Prudential Insurance Co., the nation’s largest insurer, engaged in a prolonged, nationwide pattern of deceit in the sale of life insurance, and its management failed to monitor improper activity or discipline agents, according to a report issued Tuesday by a panel of state regulators.
The report by a 30-state task force led by New Jersey, Prudential’s home state, called for a record $35-million fine, as expected. It also disclosed details of a plan to reimburse customers, which by some estimates could cost the company $1 billion, although some aspects of the plan appear to heavily favor Prudential. The panel also recommended that notices of the proposed settlement go out to 10.5 million policyholders nationwide, including about 750,000 in California.
New Jersey said 31 states had agreed to the settlement and nine others had indicated their intent to do so. But notably absent from the list were six members of the task force, including California, which said they need more time to study the proposal. Some, including Wisconsin and Washington, expressed concern that the settlement may not be adequate and are continuing to investigate the company.
New Jersey Insurance Commissioner Elizabeth E. Randall called the so-called remediation plan for consumers fair and said it provides for independent monitors to protect customers. But key aspects of the plan appear to favor Prudential, including requiring customers, many past retirement age, to come up with detailed evidence and appear at hearings if they want to pursue claims. It also leaves much of the initial assessment of claims in the hands of Prudential employees and allows the company to appeal unfavorable decisions by arbitrators.
It does allow for a no-fault option, requiring no proof from customers but providing minimal benefits to them, and possibly even resulting in financial benefit to the company.
The life insurance investigation is the second major scandal to beset the company in recent years. Since 1993, Prudential has paid out well more than $1 billion as a result of charges that its Wall Street brokerage subsidiary, Prudential Securities, committed massive fraud in the sale of limited partnership units to small investors.
Contradicting Prudential’s long-standing claim that life insurance violations were isolated acts by rogue local agents, the 232-page task force report says that violations were pervasive and weren’t limited to any one region of the country. It says that from 1985 to 1994, Prudential used misleading sales material, knowingly promoted agents with numerous complaints against them and “failed to responsibly police and discipline its agents.” The task force began its investigation in April 1995.
However, the report does not assess how high up the chain of command wrongdoing occurred and it singles out no individuals for blame. Some state commissioners and lawyers for customers have criticized the task force for not doing so. Randall said that was beyond the task force’s scope. She said there was no indication that top managers had instigated wrongdoing.
Prudential has undergone extensive management changes, including the installation of a new chairman, since allegations of widespread wrongdoing surfaced in 1994. In a statement, Chairman Arthur F. Ryan didn’t dispute the report’s findings and apologized to customers. He said the improper practices cited in the report “are intolerable to Prudential,” adding that “we pledge to satisfy all legitimate policy-owner claims.”
The report centers on allegations of “churning,” which entails persuading customers to buy additional policies using dividends or money borrowed against existing policies, often with false promises that customers wouldn’t have to pay any additional premiums.
In many instances, customers later found that the new premiums wiped out the built-up value of their old policies and that failure to pay still more premiums left them with no insurance coverage. The task force also found that some agents repeatedly forged customer signatures on account documents and that many agents illegally had customers sign blank, undated agreements, allowing the agents to draw money from existing policies to pay new premiums.
A separate report issued by New Jersey alone Tuesday accused the company of failing to cooperate with its investigation, including refusing to turn over internal audit reports. But Prudential spokesman Robert DeFillippo said that “we cooperated fully with the New Jersey insurance department.”
Customers won’t be obliged to participate in the proposed settlement, but if they agree to any part of it, they will lose their right to take part in class-action lawsuits against the company that are pending before a federal judge in New Jersey. The suits seek punitive damages as well as compensation.
Under the remediation plan, customers could elect a no-fault option, requiring no proof of wrongdoing. The only benefits they would be eligible for, however, are low-interest loans to pay premiums or the opportunity to buy more life insurance without having to undergo medical exams. The report acknowledges that this provision could financially benefit Prudential.
But customers who believe they have strong claims and want additional compensation from the company would have to fill out detailed claim forms and supply evidence to claims evaluators. The claims would be reviewed by and compensation decided by Prudential employees, although with some independent review of their decisions and a promise by state regulators that the process would be subject to an independent audit.
The proposed $35-million fine would be apportioned among the states based on the number of Prudential policies sold in each state. The largest previous fine against an insurance company was a $20-million penalty paid in 1994 by Metropolitan Life Insurance Co. for misrepresenting life insurance as retirement plans. California’s share of the Prudential fine would be $2.3 million if the state agrees to the settlement.
The task force said customer complaints of churning began coming in to insurance departments around 1985. Randall confirmed that until 1995, well after public allegations of wrongdoing by Prudential had surfaced, New Jersey had never conducted an examination of Prudential’s sales practices, even though it’s the largest company New Jersey regulates. She rejected suggestions, however, that states could have prevented much of the problem by acting sooner. Randall said the number of complaints received each year wasn’t large enough to generate alarm.
