For Plaintiffs, More of Same in Insurance Accords
By REED ABELSON
The New York Times
August 28, 1997
A funny thing is happening on the way to the courthouse, as class-action lawyers and the insurance industry mop up some of the worst sales abuses heaped upon consumers in recent years.
While lawyers are walking away with upward of $150 million in cold, hard cash for representing customers who said they had been duped into buying policies that may have been unnecessary or overrated, millions of policyholders are being offered something far less tangible to settle class action lawsuits.
They can take their chances of getting cash through arduous arbitration or they can take a package of low-interest loans and discounts on a handful of insurance, annuity and mutual fund products. In short, they would be ponying up more cash to do new business with the same institutions that let them down.
The insurers and the plaintiffs' lawyers are celebrating these deals, some of which still await court approval, as being worth billions of dollars to consumers and a brilliant way to end the litigation. But critics of the settlements argue that the discounts are nothing more than a marketing gimmick for the insurers -- a low-cost way to hold on to their customers -- and a way for lawyers to collect large fees by inflating the settlements' value.
This is only the latest variety of a series of settlements criticized for handing consumers scrip in lieu of cash. People who thought that they had overpaid for airline tickets because of price-fixing wound up with a small discount off the price of another trip. Owners of leaky Mustang convertibles got a $400 coupon toward the purchase of a new Ford. Contact lens wearers who said they were overcharged by Bausch & Lomb were given a little cash and certificates for more products.
Now the coupon craze is being embraced by life insurance companies, including the New York Life Insurance Company, the Prudential Insurance Company of America, the Transamerica Occidental Life Insurance Company and the John Hancock Mutual Life Insurance Company.
While the details of each settlement differ, the deals usually consist of a low-interest loan to cover the premiums on an existing policy and a discount on the purchase of a new product. (In some cases, policyholders might qualify for a small enhancement of the cash value of an existing life insurance policy, without putting additional money down.)
But in most cases the insurers have confined the price breaks to a narrow universe of so-so products while insisting on the broadest possible release from liability for past and future claims.
"I think it's a brilliant concept," said Melvyn I. Weiss, a prominent class-action lawyer in New York whose firm, Milberg Weiss Bershad Hynes & Lerach, served as lead counsel in many of the cases that have resulted in noncash settlements. "It's a great solution to policyholders; it's a great solution to the company."
But critics, who include consumer advocates, state regulators, academics and even some plaintiffs' lawyers, are not so sure.
The settlements are "being copied because plaintiffs' lawyers want fees, and the defendant knows it's a wonderful way to buy peace," said Michael Malakoff, a Pittsburgh lawyer who is seeking a reversal of the Prudential settlement reached last September on the ground it shortchanges Prudential's victims.
A lot of the problem lies in the settlements' sheer breadth. Unlike other coupon settlements, which are typically limited to the people who bought the car with the faulty design or were taken advantage by the unfair pricing practices, these settlements are much more sweeping in nature. They include anyone who bought a life insurance policy when the deceptive sales techniques were being employed, sometimes for more than 15 years. As a result, the critics say, the people who were actually deceived could end up with much less than if they were the sole beneficiaries of the settlement, and people who do not yet know they were harmed may also come up short. The very fact that the insurers are willing to be so expansive and include all potential claimants, critics argue, is a sign that these enhancements do not "cost" the companies much at all.
"It's a marketing tool for the defendants and a cheap way to buy out of liability," said Susan Koniak, a visiting law professor at Cornell University.
The liability that so concerns the industry giants arises from three types of unsavory sales practices aimed at generating commissions that have become the focus of scandals and class-action lawsuits in recent years.
Some cases involve "churning" -- pressuring customers to use the cash value of their old policies to buy new ones no better than the ones they replaced. Other cases accuse agents of overstating how much policies would earn in the late 1980's when interest rates were in the double digits, sometimes going so far as to offer "vanishing premium" policies, where the income was eventually supposed to cover the annual premiums. When interest rates fell, policyholders were hit with bills they had never expected. The third category of complaints involve policies that were inappropriately billed as investment or retirement vehicles.
To be sure, some people who were deceived will end up getting cash. All the settlements give policyholders a brief window of opportunity to opt out to pursue their own lawsuit, an option few people may even realize they have. The settlements also offer cash to those who can prove that they were harmed. Under the Prudential settlement, the largest of its kind and which involves nearly 9 million customers who bought 10.7 million policies between 1982 and 1995, the insurance company has agreed to pay out at least $410 million in cash relief and could eventually pay out more than $1 billion. About 1.1 million policyholders have indicated that they want to go through arbitration, according to the company.
For the bulk of customers, the plan's architects had alternative relief in mind. Hence, at Prudential, a package of low-interest loans and discounts on whole-life insurance, annuities and some in-house mutual funds that by some estimates might be worth another $800 million. "When we looked at the kinds of problems people were having, people were just disappointed in the performance of the product," said Paul Lang, a vice president of policy owner relations for Prudential, explaining why the company did something for them, too.
Certainly, the company has not made it easy for people who want cold, hard cash to get it. Prudential, for instance, requires policyholders to complete a 19-page claim form if they choose arbitration, one reason why consumer advocates urge anyone interested in arbitration to seek the help of a state insurance department, a lawyer or financial adviser rather than go it alone. "I think you need expert advice," said J. Robert Hunter, director of insurance for the Consumer Federation of America.
What is more, critics put little value on the package of discounts and low-interest loans being offered to consumers as part of these settlements. "It is not relief at all; it does not remedy the harm done," said Gary Betz, special counsel to the Attorney General in Florida.
The package in the New York Life settlement, which was reached two years ago and was the first insurance deal of this type, represents "minimal or token compensation for class members," agreed Joseph M. Belth, editor of The Insurance Forum newsletter. Short of arbitration, it offered "no benefit to an individual who desires to avoid further transactions" with a company that may have misled them.
Consumers tend to agree. In the case of New York Life, for example, only 4,000 people out of the 3 million who were eligible opted to take a discounted annuity or life insurance policy. Only 500,000 out of the nearly 9 million covered by the Prudential settlement expressed an interest in one of their products, about a fraction of the one million or more initially estimated.
Besides luring fewer takers than initial projections, these settlements will cost the companies much less than the economic value assigned to them because the insurers will be bypassing their high-cost sales forces.
New York Life, for example, offered to knock half off the first year's premium on new insurance policies covered by the deal, meaning it should net the same as if an agent had made the sale at full price. That is one reason it estimates it will only spend $65 million to deliver $250 million in promised benefits. The deal was structured that way, according to Robert J. Hebron, vice president and associate general counsel, so that the company, which is owned by its policyholders, would not be "robbing Peter to pay Paul."
From the perspective of the policyholders, where the money is coming from is irrelevant, Mr. Weiss argues. But it is hard to argue that the settlements will do much to inhibit the insurers from misbehaving again.
And consumer advocates would certainly be happier if the discounts could be sold for cash or applied to any of the insurers' products.
"Is it better than nothing? Yes," said Peter Katt, a life insurance adviser in Kalamazoo, Mich., who has clients who are Prudential policyholders. But he and other financial advisers argue that the discounts being offered are no better than what is available from other companies if consumers bother to shop around.
The discounted annuities and insurance policies can generally be matched by buying from a low-cost company in the first place, while the discounted mutual funds that are being offered, at least in the case of Prudential and the Phoenix Home Life Mutual Insurance Company, which has also reached one of these settlements, tend to have high expenses and be mediocre performers. Though Prudential says it may yet alter the deal, policyholders can only buy "B" class shares in the the seven funds now eligible for the discount. This class carries steep annual marketing fees that would often outweigh the value of the initial discount after four years' time.
Only one fund, the Prudential Diversified Bond Fund, has been a top performer at least in the last year, according to Morningstar Inc., the fund research company. The rest were beaten by most of their peers over the last three years, including Prudential Municipal Fund-Intermediate Series, which placed close to the bottom of its group.
The dozen funds Phoenix is offering its policyholders also have high yearly marketing fees. Most of those funds have been poor performers as well, like the Phoenix Growth Fund, which trailed its peers the last year.
The insurance companies' eagerness to offer millions of policyholders these deals suggests they may do more for their bottom lines than they let on. Steven S. Oscher, an accountant retained by Florida to look into the Prudential settlement, said in a report that the increase in sales of insurance, mutual funds and annuities that Prudential will enjoy from the discount program "may ultimately allow Prudential to underwrite the payment" of the arbitration program.
Prudential denies it would ever come out ahead. "This wasn't a sales campaign," Mr. Lang said. "It was solely designed to help people who thought they didn't have what they wanted."
Maybe so. But the settlements may do more to help the insurance companies and class-action lawyers who created them. As two of the New York Life policyholders complained in court in a written objection to the settlement, "We don't see the law firm taking its compensation in the form of a negligibly favorable annuity from New York Life the way it would have its clients do."
In the settlement reached last September, nearly nine million policyholders were told they could seek arbitration or sign up for the discounts with no questions asked.
ARBITRATION (Estimated cost upward of $410 million)
About 1.1 million policyholders indicated that they want to go through arbitration. After filling out a 19-page claim form, they will be assigned a score of 0, 1, 2 or 3. Those who score 0 will get nothing. Those who score 1 get whatever discounts they would have otherwise received outside of arbitration. All others would either receive a cash award, have their policy reinstated if it lapsed or have future premiums waived. Policyholders have the option of appealing to an independent reviewer.
THE DISCOUNT PROGRAM (Estimated cost up to $800 million)
About 490,000 people have indicated that they are interested in participating in this program.
Anyone with an existing policy that has a premium due may be eligible to take out a low-interest loan priced at Prudential's short-term cost of borrowing. They may also choose one of the following:
A whole life insurance policy -- Prudential will contribute 50 percent of the first-year's premium, 25 percent of the third-year's premium, 25 percent of the fifth-year's premium and 15 percent of the seventh-year's premium.
An annuity -- Prudential will contribute 2 percent of the initial payment for smaller annuities; 3 percent for larger ones. Prudential will contribute another 2 percent of the initial payment at the end of the second year and another 1 percent at the end of the third year.
A mutual fund -- Prudential will waive 4 percent of the purchase price on the B class shares for any one of seven mutual funds. These B-shares carry some baggage, though, in the form of higher-than-usual marketing fees in the early years. (pg. D4)
Virtually every major life insurance company has been sued by policyholders who said that their agents had engaged in deceptive sales practices. Agents have been accused of churning policies or pressuring customers to cash out their existing policies to buy new ones, selling vanishing premium policies in which the earnings were supposed to be sufficient to pay for the premiums within a short period and inappropriately calling some policies investment or retirement vehicles.
The insurers either denied the accusations or argued that these practices were not widespread. But many, including those below, have chosen to settle the lawsuits by offering policyholders a choice of arbitration or discounted products. Table lists five examples of litigation against several insurance companies.