Prudential Will Settle Fraud Cases With 3 States
Moving to quell rising opposition to its proposed settlement with millions of defrauded life insurance customers, Prudential Insurance Co. on Thursday agreed with regulators in three states to offer better terms to many of the customers and to pay nearly $19.4 million in new fines to the three states.
The settlements amount to a capitulation by Prudential to demands by the states and some private lawyers for a better deal for the customers. They represent the company’s most significant step in months to defuse a rising threat to its business by angry state regulators, two of whom have threatened to revoke Prudential’s license to do business.
But they may cost the giant insurer hundreds of millions of dollars more in payments to aggrieved customers than it originally anticipated. Objectors to the original terms had complained they would have left many customers with no reimbursement for their losses.
Full details of the “agreements in principle” Prudential reached with Florida, Massachusetts and Texas had not been released late Thursday. But Florida authorities said that if its pact is finalized, as expected, it would all but remove much of the burden on elderly customers to provide documentary proof that they were defrauded by their Prudential sales agents.
Officials said other improvements in the settlement would ensure that more customers recover all of their financial losses, and would give more control to state insurance regulators and less to Prudential over the evaluation of claims.
In return, Florida, which had been conducting the most aggressive investigation of Prudential in the country, said it would drop its threat to revoke the company’s license.
Still refusing to accept the terms, however, is California Insurance Commissioner Chuck Quackenbush, who has also threatened to revoke Prudential’s license. A spokesman for Quackenbush said he hadn’t reached any agreement with Prudential and is still negotiating.
“We’re not satisfied” with the company’s offers, said Dana Spurrier, the spokesman. As many as 750,000 Californians were defrauded in purchasing Prudential life insurance, the insurance department has said.
The settlements, which were reached after Prudential Chairman and Chief Executive Arthur F. Ryan flew to Florida and met personally with Florida regulators in two marathon negotiating sessions, come days before a crucial court hearing over a massive class-action settlement.
At that hearing, scheduled to begin Monday, U.S. District Judge Alfred M. Wolin is to rule on the fairness of the proposed settlement, which covers as many as 10.7 million Prudential customers.
Regulators in Florida, Texas, Massachusetts and California, and lawyers for some policyholders, formally opposed the settlement. They argued that the pact placed unfair requirements on customers to submit documents proving that they were misled, even though many of the alleged misrepresentations were made orally by Prudential agents. They also said the complicated system of judging claims would make it impossible for all but a handful of customers to get full reimbursement for their losses.
The deal with the three states may be good news for aggrieved customers nationwide because Prudential has said that any better terms it offers to one state it will automatically extend to all.
It wasn’t immediately clear how much the new terms might cost Prudential, which suffered a series of downgrades by credit-rating agencies of its claims-paying ability because of the life insurance scandal. The settlement cost has been estimated at between $410 million and about $1.5 billion. Florida Insurance Commissioner Bill Nelson said the new agreement could at least push the cost toward the higher number.
“Prudential has used deception for 15 years to take the money of mostly elderly policyholders,” Nelson said at a press conference at the state capital, Tallahassee. He said Florida’s accord “will help more than 128,000 Floridians and millions more of policyholders across the country to get their money back.” He contended that under the original settlement proposal “most customers would have gotten no money back.”
Prudential declined to comment on the potential cost or specific terms of the agreements because some details are still being negotiated. Company spokesman Robert DeFillippo said, “We are very pleased that we have reached agreement with Florida, Massachusetts and Texas, which allows us to provide remedies to policyholders in those states.”
At issue in the class-action suit and state investigations are charges that from 1982 through 1995 Prudential agents routinely defrauded life-insurance customers in several ways. One method, called “churning,” victimized primarily older customers with paid-up life-insurance policies. They were often persuaded to take out new, much larger policies on the promise that it wouldn’t cost them anything. They allegedly weren’t told that their old policies were being drained of cash value to fund the new ones, and that once that money was used up, they were hit with unexpected bills for high premiums. Many of the clients lost their coverage.
Other customers were sold “vanishing premium” policies on which they were told the cash value of the policy would increase enough to pay future premiums. But the projections were overly rosy and customers were left with policies requiring them to pay large premiums indefinitely.
Under the new agreements, customers who believe they were defrauded still must fill out claim forms, said Florida Insurance Department spokesman Don Pride.
Policyholders’ lawyers who objected to the settlement greeted the news of the proposed improvements warily, especially because the text of the agreements hasn’t been disclosed yet. Michael P. Malakoff, a Pittsburgh, Pa., lawyer who is one of the leading objectors, contended that the announced improvements may not help much. He said Prudential has ample records showing which of its customers were churned, and said the victims of churning shouldn’t be required to fill out claim forms. He estimated that less than 3% of customers with legitimate claims would read the voluminous notice Prudential has sent out and fill out the claim forms.
But the state officials said that some of the fines and penalties Prudential offered to pay--which are much larger than those called for in previous agreements--will be used to establish outreach programs to encourage and help customers to fill out the forms.
Florida is to receive $15 million in penalties from Prudential, which previously had offered it less than $1 million. Texas will get $2 million and Massachusetts $2.4 million.
Although the so-called “fairness hearing” on the class-action settlement is still scheduled to start Monday in federal court in Newark, N.J., the agreement by three of the objecting states is likely to take the wind out of the campaign to derail the settlement completely.
