Prudential Memo Warned Against Refund Advice
Two senior Prudential Insurance Co. executives sent a memo to all agents in California and other Western states in August 1993 telling them that the company would penalize agents and offices that gave out information on how to seek refunds for clients who may have been the victims of fraud.
The memo was issued as growing numbers of customers were complaining that they had been victimized by misrepresentations in the sale of life insurance, and the company was facing mounting costs from refunds. The memo, a copy of which was given several days ago to The Times by a former agent, provides the first evidence that current, high-level Prudential executives imposed a policy that seemed designed to thwart customers’ efforts to get redress from the giant insurer.
Prudential spokesman Robert DeFillippo strongly denied that was the intent of the memo. He said it was simply meant to discourage agents from trying to profit by writing unnecessary replacement policies for customers. But the explanation appears inconsistent with the contents of the memo, which threatens financial penalties simply for giving advice to customers, and former agents said in interviews that it all but stopped agents from helping customers who had been victimized.
The memo apparently was never shown to the multi-state task force of insurance regulators that recently investigated Prudential, the nation’s biggest insurance company. The memo may prompt a push for a tougher settlement with Prudential by states, including California and Washington, that haven’t yet signed an accord proposed by the task force. Regulators in both states were given a copy of the memo by The Times.
Dennis Ward, head of the California Insurance Department’s enforcement division, said investigators are questioning the company about it. He said the memo may lead California to demand changes in the settlement to get money back for more of California’s estimated 750,000 Prudential life insurance customers. A spokesman for Deborah Senn, the Washington state insurance commissioner, said Thursday that she “found it very disturbing and she plans to look into it immediately.”
As reported, the task force, led by Prudential’s home state, New Jersey, earlier this month found that the company’s agents had engaged in a nationwide pattern of deceit in the sale of life insurance, persuading customers with paid-up policies to buy new, bigger ones with false promises that they wouldn’t have to pay premiums. The practice is known as churning.
In many instances, loans were taken out without customers’ knowledge against the old policies to finance the new ones, wiping out the old policies’ value. Often, several years after the new policies were bought, customers discovered that they were liable for large premiums and that all of their life insurance had lapsed.
The two-page memo, dated Aug. 16, 1993, was signed by Joseph F. Mahoney Jr. and James A. Novack. They were the two top sales executives in charge of Prudential’s Western region, which has headquarters in Woodland Hills. Mahoney has since been promoted to become president of Prudential Preferred, one of the company’s two main divisions of sales agents.
The memo said that although helping a customer cancel a policy and get a refund might appear to be in the client’s best interest, agents should consider the financial impact on other agents and the company. It said giving refunds except in unusual circumstances “doesn’t make good business sense.”
Mahoney and Novack wrote that “should it be evident that actual advice was given to an insured giving instructions on how to request a return of premium, we will redirect any charges associated with returning the monies, i.e., lost commissions, due interest, etc., against the office that made the recommendation.”
The memo also said no new commissions would be paid to agents for a year on any customer who obtained a refund on a canceled policy.
J. Robert Hunter, the former Texas insurance commissioner who is now director of insurance for the Consumer Federation of America, shown a copy of the memo, said it appears “to provide a huge disincentive to do what’s right for the customer.”
In interviews, former agents said there were instances of “predatory” salespeople persuading customers to seek refunds on old policies just so they could earn commissions by writing new ones for them. But they said the memo did far more than stop that practice. They said the threat of financial penalties stopped many offices from helping customers sort out serious problems with their insurance.
The former agent who gave the memo to The Times declined to be identified, but said: “The message was ‘Don’t get caught trying to help people.’ ” Another former California agent and district manager, Howard Siegel, who worked in the Woodland Hills sales office, said: “When that memo came out, they [agents] were discouraged from ever getting involved because they would get in trouble and lose commissions.” Siegel is a self-described whistle-blower who has filed an arbitration case against Prudential claiming he was wrongfully dismissed for reporting churning and forgery to his superiors; the company claims he was fired for padding his expense account.
Mahoney and Novack declined to be interviewed and referred a reporter to Prudential spokesman DeFillippo. DeFillippo said the purpose of the memo was only to “lessen the number of replacements for replacement sake, where the agent was doing it simply to get another commission.”
