Paying for bad policies - N.E. Life next insurer to settle class
Mar 13, 2000
The life insurance industry is caught in an expensive and twisted version of "The Price is Right."
One by one, insurers are going before judges and, after some haggling, agreeing to pay millions - sometimes billions - of dollars to policyholders who claim they were misled by sales agents.
The next contestant? New England Life - come on down.
The Boston-based subsidiary of Metropolitan Life Insurance Co. is nearing a settlement that would affect 583,000 policies purchased between 1983 and 1996, say sources familiar with the 4-year-old class action lawsuit.
If New England Life is not the next major settlement, it's only because General American Life Insurance Co. or any one of several other insurers caved in first, industry observers say.
"Just about everyone who owns a life insurance policy in the United States has either already received a class action notice or will receive one during the next three years," said John Pentz, a Sudbury lawyer who worked on last year's settlement with New England's parent company, MetLife.
The class action lawsuits stem from what critics say were shady sales practices that began in the early 1980s and spread like wildfire throughout the industry.
It began with agents enticing policyholders to use the equity in smaller, usually paid-up policies to buy larger policies, a process called "churning."
Others were sold policies and told that within 10 or so years, the dividends would exceed the premium and the policy would pay for itself - the so-called "vanishing premium." The returns were unrealistic, however, and the premiums kept coming due.
The latter practice was widespread, industry observers said, because if one insurer was offering double-digit returns, others had to follow suit or risk losing business.
The lawsuits that followed those practices has cost Prudential Insurance Co. of America $2.7billion, MetLife $1.7 billion and John Hancock Financial Services Inc. $713million, to name some of the higher-profile settlements.
Meanwhile, New England and General American lead the list of insurers nearing settlements. Others on that list include the MONY Group Inc. and Guardian Life Insurance Co. of America.
"We are, as I'm sure the plaintiffs attorneys are, hoping to negotiate a settlement that's reasonable to both parties," said Peter Harrington, a spokesman for New England Financial.
When will the lawsuits against insurers end?
"It's really up to them," says Barry Weprin, a New York lawyer whose firm has worked on about 40 lawsuits, including the New England and two dozen other pending cases.
"If they want to settle, the cases will be over quickly," Weprin said. "The companies that are fighting are prolonging the process."
The insurance industry never admits any wrongdoing in its settlements, but has nonetheless stopped the controversial sales practices. Several years ago, it took steps to improve its image by creating the Insurance Marketplace Standards Association, which promotes ethics within the industry.
"The life insurance industry is working now to reinforce its bonds of trust with consumers," said Jack Dolan, spokesman for the American Council of Life Insurers in Washington.
Class action lawsuits are generally brought forward by a handful of policyholders, but the decisions affect thousands, if not million, of policyholders.
Pentz, the lawyer who worked on the MetLife case, recently founded The Objectors Group - a trio of lawyers who offer free advice to policyholders who receive class action settlement notices in the mail.
If a settlement is reached, policyholders are sent notices listing their options, but the information can be difficult to understand, Pentz says. The MetLife settlement notice was 36 pages and written by lawyers, he says.
Policyholders are usually offered a cash award based upon the amount of their policy. Others may be rewarded with reduced premiums or additional benefits - especially if they don't respond to notice, as is often the case.
The award doesn't take into account whether a person has a strong, well-documented case against the company, Pentz says. Those people often take what is offered, instead of objecting to the award and holding out for more.
Pentz is hoping to get larger settlements for policyholders who were burned badly.
"The ultimate goal is to change the industry practice for how class actions are communicated to the class and how the fairness hearings are conducted and how the class' reaction to the proposed settlement is measured," he says.
The New England Life Insurance Co. is reportedly nearing a resolution of a 4-year-old class action lawsuit affecting thousands of policyholders. Similar settlements against other insurers have resulted in billions of dollars in payments.
Prudential Insurance Co. of America, Newark, NJ., $2.7 billion settlement, At least 10 million policyholders, Settled 1996
Metropolitan Life Insurance Co., New York, NY., $1.7 billion settlement, 7 million policyholders, Settled 1999
John Hancock Financial Services Inc., Boston, MA., $713 million settlement, 4 million policyholders, Settled 1997
Allmerica Financial Services Inc., Worcester, MA., $31 million settlement, 400,000 policyholders, Settled 1999
The New England Life Insurance Co., Boston, MA., Not settled yet, 583,000 policyholders, Expected in 2000