MetLife settles suit, earmarks $1.7 billion for deception claims

By Marylynne Pitz
Pittsburgh Post-Gazette
August 19, 1999

Metropolitan Life Insurance Co. has agreed to set aside at least $1.7 billion to settle claims of improper sales practices involving 7 million current and former customers.

U.S. District Judge Donetta W. Ambrose gave preliminary approval yesterday to the settlement, which stems from a class-action lawsuit filed here on the policyholders' behalf four years ago. She scheduled a hearing Dec. 2 into whether the settlement is fair and reasonable.

The suit charged that the firm engaged in deceptive and improper sales practices involving insurance policies and annuities. The settlement would cover certain policies and annuities sold from 1982 through 1997.

Met Life plans to mail information about the settlement to 4 million current and 3 million former customers beginning Aug. 27. It also will set up a toll-free number for information.

The principal allegations were that the firm routinely engaged in "churning," a procedure aimed at generating sales commissions for agents, and sold so-called "vanishing premium" coverage, falsely assuring customers that premiums would end after a period of years.

In "churning," an agent would offer a client a new, bigger policy at the same price as the old one. Customers were not told that the cash value of the old policy was being used to cover the higher cost of the new policy.

When the cash value of the old policy was depleted, the customer would get a bill for the premium on the new policy that was often double the cost of their former coverage. Some were unable to pay and their coverage lapsed.

In "vanishing premium" policies, customers were told that after a number of years, accumulated dividends would cover the premiums and they would not have to pay any more.

But that only worked if the dividend rate on the policy, which is determined by the company, stayed the same or increased. If it dropped, the dividends would not cover the cost of the premium and customers would continue getting billed.

The settlement is the latest development in years of litigation and investigations involving several major insurance companies.

In 1994, MetLife paid $1.5 million to Pennsylvania regulators to settle churning allegations and paid $20 million in fines in other states.

Prudential Insurance Co. of America has paid $70 million in penalties and set aside $2.6 billion to pay policyholders who sued over similar sales practices.

John Hancock Mutual Life Insurance Co. agreed in June 1997 to pay $350 million to settle a class-action lawsuit by customers over churning.

Robert H. Benmosche, chairman and chief executive officer of MetLife, said yesterday's settlement provides "a fair resolution to issues that have been the subject of protracted litigation."

The company would set aside a general relief fund of $778 million, money that would provide additional death benefits for policyholders who choose not to pursue an evaluation of their claims of improper sales practices.

Another $690 million was earmarked for compensating policyholders who can show they were misled or not fully informed by MetLife agents.

David Manogue, a lawyer with the Pittsburgh firm of Specter Specter Evans & Manogue, who helped negotiate the settlement, said the case "wasn't about cash. It was about loss of value in people's insurance policies. What's being returned is additional value in their insurance policies."

Policyholders who lost coverage because of the improper sales practices will recover it, Manogue said.

"If someone is able to demonstrate that they were a victim of that scheme, they will get a policy credit so that their policy will perform in the way it was represented," he said.

The lawsuit also claimed that MetLife agents told customers they could purchase annuities that would fund retirement plans. Agents said the annuities were a good vehicle for funding a retirement plan because income taxes were deferred.

"Just about anything that funds a retirement plan, the income [tax] on it will be deferred. It's an illusory tax advantage that they are trying to sell to people," Manogue said.

The settlement also affects some policies in which MetLife, according to the lawsuit, passed along $63 million in taxes to policyholders even though its contracts prohibited them from doing so.

"They are entitled to charge for the cost of insurance. It's our position that a tax is not a legitimate cost of insurance," Manogue said.

MetLife will pay $40 million to settle that claim by providing additional coverage in those policies and has promised not to charge customers in the future for those taxes.

Lawyers in the case will seek up to $120 million in fees -- an amount equal to just more than 7 percent of the settlement amount, Manogue said.

But he said the fees would be paid separately by MetLife and not come out of the settlement amount. He said hundreds of attorneys worked on the case.

The amount of the fees that are ultimately awarded will be decided by Ambrose.

This report includes information from The Associated Press.

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