New York Life in Accord On Class-Action Settlement
By MICHAEL QUINT
The New York Times
August 15, 1995
The New York Life Insurance Company said yesterday that it had agreed to a plan for settling class-action lawsuits and other customer complaints that could give three million policyholders $250 million or more of benefits.
The agreement covers all the company's customers who bought life-insurance policies between 1982 and 1994, on which the company pays an investment return. By merely asking, those policyholders can collect low interest-rate loans or money from the company, to increase their life insurance or annuities. The amounts depend on the size and age of the policy, and will range from $50 to the tens of thousands of dollars.
"Rather than fight to the death because we did not do anything wrong, we decided to get this behind us," said Harry G. Hohn, chairman and chief executive at New York Life. He added that payments would be offered even to customers who were not misled, because it was too difficult to create rules to cover every case and because "there was a disappointment to policyholders" from the drop in investment returns.
Declining interest rates caused New York Life and many other companies to reduce sharply the investment returns they pay on some kinds of life insurance policies. Declines from 11 percent or even more in the early 1980's to 7 percent or less currently mean that investment gains accumulated more slowly and it took longer to accumulate enough money to be able to pay each year's premiums from investment gains.
The decline in investment returns led to many complaints from customers who expected to pay premiums for only seven or eight years, after they were told they had to continue paying premiums out of their own pockets for many more years. Other customer complaints -- also eligible for arbitration -- involve sales of insurance as a retirement plan without adequately describing the plan as insurance and the replacement of an old policy with a new policy, even when that was not in the customer's best interest.
New York Life, like many other insurers, reacted to reports of improper sales activity by reviewing all of its agents' sales material and creating a special department to monitor sales practices.
As customer lawsuits have multiplied, insurance companies have adopted different tactics for handling them. Among companies taking a tougher stance, the John Hancock Mutual Life Insurance Company earlier this month sued lawyers who have been active in class actions against insurers, accusing them of filing cases solely to gain publicity that would attract more policyholders as clients.
Customers of New York Life not satisfied by the no-questions-asked offer may take their case to an arbitrator, who will evaluate each case according to guidelines agreed to by the company and lawyers representing policyholders.
Walter Shur, a former chief actuary at the company who returned from retirement to work as a special consultant, said he expected no more than 10,000 cases to be arbitrated.
New York Life and several other insurers have been accused of wrongdoing in class-action lawsuits filed by Ronald R. Parry, a partner at Arzen, Parry & Wentz in Covington, Ky., and by Milberg Weiss Bershad & Lerach, a New York law firm.
A New York State judge has allowed the plan to be mailed to customers, and a formal hearing for approval of the plan is scheduled for Nov. 15.
J. Robert Hunter, former Texas insurance commissioner and now director of insurance for the Consumer Federation of America, said the agreement was "a reasonable compromise" for policyholders. But he added that regulators and insurance companies needed to do more to prevent further abuses.
To reduce the incentive for agents to use misleading sales tactics, the Consumer Federation has called for insurance companies to spread sales commissions over many years rather than concentrating commissions in the year of the sale.
New York Life executives said they did not expect the company to lose top-notch credit ratings because of the settlement. The $65 million estimated cost of the settlement is less than the company's cost of providing the benefits to policyholders.