Prudential to Pay $410 Million For Misleading Policyholders

The New York Times
September 25, 1996

In the latest chapter in a long-running dispute over the sales practices of the country's largest life insurer, the Prudential Insurance Company of America said yesterday that it would pay at least $410 million in an attempt to put the matter behind it.

But Melvyn Weiss, a New York lawyer who negotiated the settlement on behalf of policyholders, indicated to reporters in the presence of Prudential executives that it would probably be well into next year before anyone received compensation.

To take effect, the settlement must be approved by insurance commissioners in all 50 states and the District of Columbia as well as by United States District Judge Alfred Wolin in Newark, where Prudential is based. In addition, the holders of as many as 10.7 million policies will have a chance to express objections at a hearing early next year.

It is also unclear whether scores of policyholders and at least half a dozen whistle-blowers who are suing Prudential separately will choose to join in the settlement reached by Mr. Weiss or continue to fight for compensation on their own.

As recently as Thursday, officials in seven states, led by Attorney General Scott Harshbarger of Massachusetts, expressed concern that negotiations between Mr. Weiss and Prudential would leave the burden of proving wrongdoing with the policyholders.

In an evident effort to assuage state regulators, Mr. Weiss flew to Boston yesterday morning to explain the agreement to Mr. Harshbarger.

Whether he succeeded was not clear. Joanna Connolly, an Assistant Attorney General, said Mr. Harshbarger was reserving comment until he and his staff had studied the agreement, a document she described as ''several inches thick.''

''I understand a lot of factors have been changed somewhat,'' Ms. Connolly said. ''but I don't know how much the burden on the policyholder has been reduced or affected.''

In a message to Prudential employees yesterday, Arthur F. Ryan, the company's chairman, called the agreement a ''significant, welcome step.''

In July, after a joint investigation that had lasted more than a year, a group of state insurance departments concluded that for more than a decade -- a period during which it sold nearly 11 million life insurance policies -- Prudential had improperly urged some customers to cash in or borrow against existing policies to buy new, often more expensive, ones.

In accepting the findings in July, Prudential agreed to pay a fine of $35 million and to compensate policyholders.

It was the latest case of deceptive sales practices to emerge in the insurance industry. In the last few years, such giants as the John Hancock Mutual Life Insurance Company, the Metropolitan Life Insurance Company and the New York Life Insurance Company have agreed to compensate policyholders for similar practices.

These cases have embarrassed the industry and, many executives say, contributed to a decline in sales.

In 1994, the company reported an overall loss of $1.2 billion. Prudential's securities-brokerage unit had just paid $1.5 billion to settle cases with customers in limited partnerships who said the partnerships had been sold to them as far less risky than they actually were. State regulators were then receiving the first complaints of improper insurance sales practices by Prudential. Last year, Prudential showed modest earnings of $580 million on revenue of $42.91 billion.

In his statement to employees yesterday, Mr. Ryan described the insurance settlement as a ''critical milestone in our efforts to resolve concerns about life insurance sales.''

Mark Puccia, a managing director of Standard & Poor's insurance-rating division, said it was clear that the company was ''concerned that the ongoing suits were prolonging the black eye that Prudential is suffering'' and that executives wanted to ''put this problem behind them as fast as they can.''

Mr. Puccia said Standard & Poor's would be reviewing Prudential's rating, but he did not indicate what changes, if any, were likely.

Neither Mr. Weiss, the lawyer who negotiated the settlement, nor Prudential executives would estimate how many policyholders might make claims or how much the company might ultimately pay in compensation.

Mr. Weiss said the minimum compensation of $410 million was ''an enhancement'' of what Prudential had earlier agreed to pay policyholders in its agreement with the investigating states. But Prudential had not estimated the costs of that agreement.

Thus, without a thorough study of the agreement, it was difficult to demonstrate just how policyholders would benefit more now. Brad Friedman, a partner of Mr. Weiss, said that several steps had been taken in the latest agreement to make it easier for policyholders to receive compensation. If approved, the new agreement would supersede the earlier one.

Copyright © 1996 The New York Times Company

Click here to return to our homepage