Unsettlement : For Prudential Clients, It Won’t Be Easy to Collect in Fraud Suit
A few weeks ago, 80-year-old Selma Seps received a legal notice telling her that she has a chance to get money back from Prudential Insurance Co. if the company committed fraud in selling her life insurance.
But before the retired Los Angeles schoolteacher can collect, Seps will first have to read a 53-page legal document, fill out a complicated 18-page claim form and marshal documentary proof that Prudential sales agents lied to her in conversations five years ago.
About 10.7 million Prudential clients nationwide, including 750,000 in California, received the same notice by mail, and once they wade through the paperwork, they will be eligible to present their cases to a panel of arbitrators hired by the insurance company. Only if the arbitrators or an appeals panel accept their version of events will they receive any reimbursement.
Seps, like many other Prudential customers interviewed by The Times, views the process as an impossible burden. Especially irksome is the requirement that she document her conversations with Prudential agents.
“What they told me, they told me verbally,” Seps said. “There’s no record of it. They could just say I imagined it.”
But those are the terms reached in a massive class-action settlement between the company and lawyers for aggrieved customers. Many consumer advocates, including insurance regulators from several states, believe the requirements are so onerous that in the words of plaintiffs lawyer Samuel Wilner of Beverly Hills, they amount to “the second victimization” of Prudential’s customers.
As recently as Thursday, Wilner’s law firm publicly advised policyholders to “opt out” of the settlement in writing to preserve their chance of obtaining better recompense by pursuing independent lawsuits.
Adding to the confusion, regulators in California and four other states are continuing to negotiate settlements with Prudential--raising the prospect that they might strike a better deal, with unknown consequences for customers who had earlier agreed to the class-action settlement terms.
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At issue is how Prudential marketed life insurance to millions of customers. In a practice known as “churning,” Prudential agents often allegedly persuaded holders of old policies to add new, bigger ones, on the false promise that they wouldn’t have to pay any more money in premiums.
Many customers have complained that they were never told that the cash value built up over years in their old policies would be “borrowed” to pay the premiums on the new ones. In many cases, the cash balances were insufficient to cover all the new premiums due. The result: Unsuspecting clients eventually found that their cash values had been drained and they faced unexpected bills for hefty premiums at the risk of losing all of their life insurance coverage.
Meanwhile, the agents had pocketed commissions for the new policies.
Prudential agents also allegedly committed fraud in the sale of “vanishing premium” policies to new customers. These were policies on which large upfront premiums would supposedly earn so much in investment interest that after a few years no further premiums would be needed to keep the insurance in force.
However, many customers and regulators say Prudential’s investment forecasts were faulty or dishonest and that customers learned belatedly that they would have to continue paying premiums indefinitely.
These customers also face the hurdle of making a claim against Prudential based on what they say were oral misrepresentations by sales agents.
“The guy did it all on the laptop,” said James A. Hunka, 42, a cable TV engineer from Merrick, N.Y. In 1989, Hunka bought a $100,000 life insurance policy from a Prudential agent who showed him a computer screen demonstrating that at the end of nine years--when Hunka’s daughter would be starting college--he would be free of the annual premium. But the agent left behind no printed material documenting his rosy projections.
Instead, Hunka learned recently that he will probably have to continue paying annual premiums of about $1,680 for an additional 30 years.
Such practices have generated dozens of private lawsuits against Prudential as well as investigations by insurance regulators in several states. Some sources say Prudential’s liability to customers could be as high as $3 billion.
That gave Prudential an incentive to reach an out-of-court settlement in the most important case, a class-action lawsuit being heard in federal court in New Jersey. The proposed settlement led to the legal notice mailed to Seps, Hunka and other customers throughout the country.
Prudential, the nation’s biggest insurance company, contends that the pending settlement is “fair and equitable to our policyholders who have legitimate claims,” according to a company spokesman. “Allegations that the burden of proof is too great on customers or the [settlement] processes too complicated are greatly exaggerated.”
But a growing number of policyholders, lawyers and state officials in California and elsewhere contend that the burden of proof should be on Prudential, which has been accused in a multi-state investigation of a pervasive pattern of wrongdoing in the sale of life insurance.
“I don’t like the class-action settlement,” said Bill Nelson, Florida’s treasurer and insurance commissioner, whose state is leading an aggressive independent investigation of Prudential. In most cases involving senior citizens that he’s familiar with, he said, “the deception occurred by an oral representation.”
That is the allegation, for example, in the case of Rose Stevens, 83, of Altadena. Stevens and a group of her neighbors say in a lawsuit that all of their signatures were forged on life insurance documents by the same former Prudential agent.
But documenting the claim may be difficult, Stevens said, because the agent didn’t give them copies of any documents, even the actual policies. The copies Prudential later provided when her daughter Traci Stevens wrote to Prudential requesting copies were so poorly reproduced that they are unsuitable for comparing signatures.
Nelson and other critics contend that the settlement’s complex terms will prevent a large proportion of customers from getting all of their out-of-pocket losses back.
Under the proposed settlement, customers submitting to binding arbitration could win redress including the reinstatement of lapsed policies and the return of money improperly taken from old policies to pay for new ones.
Prudential must also put up at least $410 million in cash to be divided up among policyholders with legitimate claims. However, the company may deduct from that sum anything it spends to provide other mandated remedies, including the reinstatement of policies.
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Critics say the settlement would cap Prudential’s liability at little more than $1 billion, according to company estimates. That would help it avoid a costly reduction in its rating by insurance ratings agencies. By settling the case, moreover, the company would avert any chance of having to pay punitive damages that could be imposed by angry juries.
Plaintiffs lawyers opposing the settlement also object to the unorthodox way it was reached.
Lawyers for policyholders have charged in court papers that the federal judge presiding over the settlement railroaded it through after holding secret hearings to which only Prudential’s lawyers and the lead class-action attorneys were admitted.
District Judge Alfred M. Wolin of Newark, N.J., ruled on Oct. 28 to bind 10.7 million customers automatically to the settlement unless they follow formal, detailed steps to “opt out” by Dec. 19.
Plaintiffs’ lawyers say that gives aggrieved customers little time to decide whether to accept the settlement terms.
In most cases, they would not even learn they had a possible claim until they received the settlement notice, only a few weeks before the deadline.
“Customers cannot possibly evaluate the proposed settlement agreement by Dec. 19,” said Andy Dogali, a St. Petersburg, Fla., lawyer, in an objection filed with the court.
“They have this train going so fast that nobody can get off it, and they’re forcing everybody onto it,” Dogali, who represents 40 customers, said in an interview.
The settlement won’t go into effect until after the judge holds a required “fairness hearing” on Jan. 21, after which there could still be appeals. Some plaintiffs lawyers have also moved to dismiss Wolin from the case on grounds that he has improperly favored the defense.
Paltrow reported from New York and Rempel from Los Angeles.
