Prudential Agrees to Pay $15.4 Million

Prudential Insurance Co. reached an agreement with California regulators Friday under which it will pay a record $5.5-million fine as part of a $15.4-million package of penalties to the state.

In exchange, Insurance Commissioner Chuck Quackenbush dropped a threat to revoke the company’s license to do business in the state because of its alleged fraud in the sale of life insurance policies.

“This is the biggest fine California has ever gotten out of an insurance company,” Quackenbush said in an interview. “We think it’s a fair settlement.”

Friday’s action follows Prudential’s settlement on Thursday with Florida, Texas and Massachusetts, under which it will pay those states a total of $19.4 million in fines and penalties and improve reimbursement terms for defrauded policyholders. At the time, a spokesman for Quackenbush said the state wasn’t satisfied with the terms being offered.

But Quackenbush said Friday that the only change in the ensuing 24 hours was in the dollar amount of the penalty, up from the $2.3 million Prudential had first proposed in July.

He said that all other aspects of the accord, including changes in the way customers’ claims for reimbursement would be judged, are identical to what the three other states negotiated.

All four states had formally opposed an earlier settlement on grounds that it unfairly burdened policyholders by requiring them to prove, with documentary evidence, that they were deceived by their Prudential sales agents.

As for the California penalties, state officials said that not all of the $15.4 million would be given outright to the state. The amount includes $5.5 million that Prudential agreed to put up as an investment in an insurance department program aimed at encouraging insurers to invest in enterprises in low-income areas.

California’s package also includes $3 million for an outreach program and $1.4 million to reimburse the state for the cost of its investigation.

The settlements cover customers who were defrauded when they bought life insurance policies from 1982 through 1995. One of the main alleged illegal practices was “churning,” whereby agents persuaded customers who had paid-up life insurance policies to buy bigger policies with the false promise that it wouldn’t cost them anything. The customers weren’t told that the cash value of the old policies would be siphoned off to pay for the new ones, or that they would eventually face big premium bills for the new policies.