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Serious Personal Injury - Life Insurance Sales Fraud - Class Action

Suits Settled By Prudential For $62 Million

The Wall Street Journal, FEBRUARY 16, 1999

Prudential Insurance Co. of America, apparently clearing the decks for its planned switch to a publicly traded company, quietly agreed last month to pay at least $62 million to 124 California policyholders who sued over allegedly abusive past life-insurance sales practices, according to people familiar with the case.

The settlement comes to at least $500,000 for each plaintiff, plus enhancements to their insurance policies, these people say. Legal fees and costs could eat up around 40%, however, they add.

Prudential’s spokesman, Robert DeFillippo, confirmed that a settlement was reached “in principle” last month on terms “acceptable to both parties” but wouldn’t provide details, citing confidentiality rules imposed by the court. Kenneth Chiate, an attorney for the plaintiffs, also declined to discuss the terms of the settlement.

While such sums are hardly material to a company with around $12 billion in capital, it appears that Prudential’s zeal to wrap up its past problems has been good news for at least some policyholders who sued rather than stay in a 1997 $2 billion class-action settlement. And news of the  settlement’s terms is likely to raise concerns among critics of the class-action pact that policyholders who stayed in could be getting insufficient remediation. Based on a rough back-of-the-envelope tally, the 650,000 policyholders who signed up for relief through the class-action stand to get an average $3,100.

Prudential says such an average is meaningless, however, since policyholders’ remedies are specific to each circumstance, which could warrant far larger payments than such an average.

All the legal actions center on allegations that from about 1982 to 1995, hundreds of thousands of Prudential policyholders were defrauded in the course of buying whole-life policies. Agents allegedly improperly exchanged, or “churned,” policies to generate fresh commissions or misled customers that such policies were certain to pay for themselves in several years  through so-called vanishing premiums.

Prudential won’t say how many individual lawsuits it has settled or continues to face. But lawyers and Prudential critics say the numbers are likely to be substantial, given that as of the end of 1998, Prudential reported facing 677 individual actions over such problems.

Those policyholders who opted to stay in the large class settlement, which the U.S. Supreme Court recently upheld as fair to policyholders, have been getting notices lately telling them their choices for remedies. Many complain that they can’t fully understand the notices, and several state regulators have expressed displeasure with the pace of settlement.

The California case, which was settled just before it was slated to go to trial in a state court in Los Angeles, had promised to be a highly public thorn in the company’s side. Attorneys in he case had fought and won the right to  call as a witness a former Prudential lawyer, Renwick T. Nelson II. It was Mr. Nelson who in 1996 went to Florida authorities to disclose what he alleged was a pattern of criminal conduct by Prudential. Transcripts of testimony Mr. Nelson gave to the Florida attorney general’s office showed that Mr. Nelson believed that Prudential management knew about allegedly fraudulent sales tactics for years, and that Prudential’s compensation and oversight systems encouraged such tactics.

David Sheller, an attorney in Houston who has more than 35 individual or family suits pending against Prudential, said he has been trying to get Mr. Nelson’s testimony in his cases and expects other attorneys to do the same. Mr. Nelson couldn’t be reached for comment.

Meantime, Prudential has been taking other steps to clean itself up for possible public ownership. It sold it’s ailing healthcare unit to Aetna Inc. in December, and announced 100 layoffs from two New Jersey offices, citing a realignment of resources.

Prudential has also been taking some additional charges partly related to putting the sales-practice problems to bed once and for all. In the third quarter of 1998, for instance, Prudential took a charge of $786 million for “surplus adjustments,” of which a portion – under half – was for litigating  and settling sales-practice cases, according to people familiar with the company. Prudential’s full-year 1998 results are due out in a week, said Mr. Defillippo, who declined to elaborate on the third-quarter numbers.

Rating agencies aren’t expecting continuing litigation to have a material, damaging effect on Prudential in the future. “There will be more reserves taken, even in 1999, but our view also is that the company can weather it,” said Neil Strauss, an analyst with Standard & Poor’s Rating Services.

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