Pending Prudential Settlement Criticized

California and six other states warned this week that Prudential Insurance may be on the verge of settling a massive class-action lawsuit on terms unfavorable to the company’s life insurance customers nationwide.

In an unusual public statement issued on behalf of the seven states late Thursday, Massachusetts regulators alleged that a pending settlement of the private class-action suit “does not include appropriate and fair relief to the hundreds of thousands of policyholders who were harmed and deceived by the Prudential’s practices.”

The seven states have banded together to demand a tougher settlement from Prudential than one negotiated over the summer by New Jersey and accepted by all other states after an investigation of alleged fraud in Prudential’s sale of life insurance policies.

But the small group of states fears that its efforts could be undermined by negotiations to settle a class-action lawsuit filed by private lawyers on behalf of Prudential customers. That suit is pending in federal court in New Jersey.

In July, a multi-state task force of insurance regulators led by New Jersey reported that Prudential, the nation’s biggest insurance company, had engaged in a nationwide pattern of deceit in the sale of life insurance.

It found that the company had used misleading sales material and had pressured customers with paid-up policies to turn them in or borrow against them to buy new ones on unfavorable terms. Customers were also falsely told they wouldn’t have to pay premiums on the new policies.

The seven states are worried about the class action because a settlement, if approved by the court, would bind virtually all affected customers unless they take steps to “opt out” of it. Opting out requires filling out a form and sending it in by a deadline. Typically, only a tiny percentage of consumers covered by a class-action settlement opt out.

Prudential and Melvyn I. Weiss, the lead class-action lawyer, confirmed Friday that they were in settlement talks. They said no settlement had been reached and declined to discuss terms under consideration.

Joanna Connolly, assistant attorney general in Massachusetts, confirmed that the states had not seen a copy of the proposed settlement. But she said that, based on talks with Prudential, they believed it would be unfavorable to customers because it would put too much burden of proof on them to qualify for compensation.

She said the customers, many of them elderly, would have to produce written proof that they had been defrauded. Instead, Connolly said, the seven states want Prudential to give compensation based on the company’s own records.

Legal experts have sometimes criticized class-action lawyers for settling suits on terms that appear favorable to the company being sued, thereby obtaining large legal fees but getting relatively little for their clients.

Weiss said he was constrained by the court from discussing any details of the settlement under discussion. When a reporter asked if the terms might be unfavorable to his clients, Weiss said, “Go . . . yourself” and hung up.

In earlier public statements, Weiss had strongly criticized the New Jersey task force’s settlement as inadequate for customers.

Prudential spokesman Robert DeFillippo said, “I simply can’t comment on the talks.”

The other states are Florida, Texas, Louisiana, Virginia and Washington.