Nightmare On Main Street

Kimberly Lankford
Kiplinger's Personal Finance Magazine
May 2000

INSURANCE | Prudential's billion-dollar CLASS ACTION SETTLEMENT has an unsettling sequel.

NOT EVEN Hollywood could have scripted this horror story.

Fade in: Prudential insurance agents get caught collecting hefty commissions on insurance policies that turn out to be far more expensive than the agents had led customers to believe. Similar scams surface around the country, and regulators in 29 states team up to investigate the company.

After reviewing ten million company records, the G-men allege in July 1996 that Prudential "knew of cases of alleged misrepresentation and other improper sales practices by its agents, and in many instances failed to adequately investigate and impose effective discipline." The Florida insurance department and attorney general's office, which also conducted investigations, allege that managers were told not to report consumer complaints, that training films glorified deceptive sales tactics, and that managers ordered critical records destroyed.

In the climactic scene, state regulators fine Prudential more than $50 million. The National Association of Securities Dealers piles on $20 million more. The company settles a class-action lawsuit on behalf of every customer who bought a cash-value policy between January 1, 1982, and December 31, 1995--a total of 10.7 million policies--and agrees to pay an additional $2.8 billion to its customers.

But just when you thought it was safe to buy insurance again, there's a sequel: A building where key data is stored suddenly bursts into flames, and a judge fines Prudential $1 million for not safeguarding the documents. The settlement process itself is criticized as unfair, confusing and too drawn out. Some policyholders aren't paid until more than two years after submitting their claim forms.

Then, last fall about 40 Prudential employees who work in a department that determines how much money each claimant receives file suits of their own. They allege that the settlement process was sloppy and the claims investigation "a fraudulent plan to further defraud policyholders," and that they weren't allowed to give policyholders as much money as they deserved. When they complained to management, the employees say, they were harassed.

And the saga continues.

Scenes from a settlement

ON THE BIG SCREEN, the picture looks impressive. Owners of a half-million Prudential policies who didn't report any problems were given a price break on new policies. Owners of another 645,000 policies chose alternative dispute resolution (ADR) and submitted allegations of misleading sales practices, according to Brad Friedman, a lawyer with Milberg Weiss Bershad Hynes & Lerach, the New York City law firm representing the class. Friedman says that most of the ADR participants were offered one of the two highest levels of relief: reimbursement for the full cost of their premiums plus interest, or reimbursement for their premiums, minus the cost of insurance, plus interest. Average award: $4,300, most of it in cash. "We bent over backwards to do the right thing for policyholders," says Prudential spokesman Bob DeFillippo.

But zoom in on the settlement and you see different perspectives. "I never dreamed of getting my money back," says Ted Kotch of Delray Beach, Fla., whose agent had told him he'd have to pay policy premiums for only eight years. When Kotch continued to be billed after that and refused to pay, the premiums were deducted from his policy's cash value. Kotch submitted a "vanishing premium" claim and received a $7,000 settlement. "It was like found money," he says.

On the other hand, Ben Blascovich thought the whole procedure was "a big joke." In Coal Township, Pa., Blascovich's hometown, "everyone trusted the insurance agent." So three years after Ben and his wife, Celeste, bought a $50,000 life insurance policy from Prudential in 1981, they didn't bat an eyelash when another agent contacted them and told them that the policy was generating enough dividends to pay for an additional $50,000 policy.

More than a decade later, Celeste was shocked when she opened the mail and discovered that a $14,000 loan had been taken out on the first policy. Later she found that more than $1,000 had been borrowed from a policy that Blascovich's mother had bought for him in 1958.

The Blascoviches hadn't authorized either loan and eventually learned that the agent had arranged for the loans to pay premiums--a classic case of churning old policies into new ones, with big fees for agents.

When the Blascoviches tried to contact the local Prudential office, "they would never return our calls," says Ben. They finally received paperwork as part of the settlement, but they had to plow through a complicated 18-page booklet explaining the "remediation plan" and fill out a 20-page ADR claim form. "Thank God, I'm a college graduate," says Ben. "It took many frustrating hours."

A year and a half after sending in the forms, the Blascoviches still hadn't heard from Prudential. The turning point came when Blascovich was surfing the Web and found Michael Weaver, a former Prudential agent who was one of the first to publicize the company's sales practices and now helps policyholders and their lawyers with their cases. Weaver passed on Blascovich's name to a network news producer. When Prudential heard that Blascovich would be describing his situation on TV, the company assigned a vice-president to look into his case--and soon after that all the loans were forgiven.

For Carmella and Charles Catrino, Prudential policyholders from Edison, N.J., "this whole thing has been a nightmare," says Carmella.

The Catrinos' story has twists at every turn. In 1987 two agents came to their home and said that a $5,000 policy Charles had bought in 1955 had accumulated enough dividends to pay for new policies on each of their teenage daughters. While the agents assured them they wouldn't have to pay any more premiums, the Catrinos "thought it was too good to be true," says Carmella. Sure enough, about six months later the Catrinos received a premium bill for several hundred dollars, which they couldn't afford. They cashed out the policies in 1989.

But the Catrinos don't know exactly how much they received because they threw out the paperwork after dropping the policies--a move that would come back to haunt them.

After the class-action settlement was reached several years later, the couple received notices about their daughters' policies, plus forms for a policy on Charles's life that they didn't even know they owned. They asked Prudential for more paperwork, but didn't receive it until long after the claim forms were due.

A year and a half after sending in their ADR forms, the Catrinos received notices telling them to expect $74 from the settlement for Charles's mysterious policy, $1,301 for one daughter's policy and just $138 for the other's--even though the girls' policies had been purchased for equal amounts on the same night and cashed out for almost equal amounts.

The Catrinos were puzzled and disappointed. They thought more money had disappeared but couldn't prove it without the paperwork. Eventually, Prudential acknowledged that $4,500 in dividends and policy loans had been taken from the 1955 policy to pay for not one but two policies on Charles--neither of which he had authorized. And it was too late to file a claim for the second policy, although Prudential promised to "consider" the issue later.

The Catrinos planned to appeal the $74 award until the second policy was considered. But after several conferences and six different legal representatives, "they finally wore us down," says Carmella. Earlier this year, the Catrinos accepted the settlement.

DeFillippo says the Catrinos are among a large group of customers who received letters explaining that their additional claims would be considered after the ADR process is completed, and they should be receiving more information soon.

The sequel

BUT THE PLOT gets even thicker. After policyholders filled out their claim forms, the paperwork was sent to claims-examination offices, where Prudential employees and temporary workers were to review the forms, ask the company for histories of the policies and the agents involved, and figure out what happened. But with 645,000 claims to process, it was often difficult to piece together the chain of events and follow the money trail, especially because many claimants were unaware of policy loans--or even that they owned policies.

"It would take the average person approximately six months to become proficient at resolving the disputes, but the training course lasted three weeks," says Pamela Muldoon, a former Prudential employee. "I trained about 300 people who were right out of college with no insurance background." Muldoon, whose background is in theater arts, says she herself was "insufficiently trained to be training." Hired as a temp in 1996, she became a Prudential employee within a year, and by 1997 was instructing claims examiners.

Several Prudential employees who evaluated the ADR claims have accused Prudential of "teaching and coercing" ADR employees never to give claimants the highest score; encouraging them to rush through claims examination; and denying them access to company records that would have increased payouts to claimants. Last fall Muldoon and nearly 40 other employees in the Minneapolis claims-examination office filed lawsuits alleging that Prudential harassed them after they complained to the company about the problems.

In the suits, employees cite company-sponsored contests in which examiners were rewarded for speed. One employee was promoted after allegedly scoring claims in ten minutes, which, according to the suits, "does not allow for proper scoring to be done correctly." Everett Larson, one of the examiners suing Prudential, says that complicated claims could take "a day or more to do," especially in churning cases in which examiners had to retrace the money's path through several policies. When Larson refused to participate in the contests, he says, "they tried to get me to quit."

At first, some supervisors told claims examiners to "take whatever time was needed" and tap into whatever resources were available, says Mark Cardenas, a claims team leader in the Minnesota office. Eventually, however, most of the records that would have produced higher scores--application forms, financial histories, agent statements--were eliminated from the scoring process, says Cardenas, resulting in lower awards.

Not so, counters Prudential spokesman DeFillippo. "Allegations that we didn't give people the remedies they deserved are absolutely groundless, given all the checks and balances built into the system," he says. Both plaintiffs' counsel and government regulators were involved, and policies that didn't get the highest score were "reviewed by independent counsel and could go through appeal."

As for speed, he says, "a year ago, we were under a lot of pressure from state regulators to go more quickly because policyholders deserved to hear from us. But it was equally important that we follow the guidelines."

Coming attractions

WHILE THE Prudential case is fading out, several other major productions are waiting in the wings, featuring some of the biggest names in the insurance business. A judge recently approved a $1.7-billion settlement involving seven million MetLife policyholders, and customers who signed up for claims examination should be receiving forms by mid April. Cases involving American General and American Express are in the early stages.

In one way or another, almost every major life insurance company has been involved in a similar class-action suit because of its sales practices in the early 1980s to mid 1990s, many of them brought by Milberg Weiss (the law firm typically gets tens of millions of dollars in fees for each settlement). Friedman says that the worst companies encouraged the practices, while others were guilty of benign neglect in failing to root them out.

Each settlement is unique. In the MetLife case, claim evaluators will be chosen by the plaintiffs' attorneys, and most policyholders will not be allowed to take their grievances to arbitration. Nevertheless, you can learn a lot from players who have made the scene:

* Hang on to your paperwork, just in case you have to trace a payment history or verify what you were told by an agent. In the Prudential case, "if you had any documents from an agent saying that the policy would be paid up in a couple of years, you would have scored a 3" and received the highest award, says a former claims examiner in California.

* Don't ignore class-action mailings. If you do, you'll still be considered part of the class (so you can't sue later), but you won't be eligible to have your policy looked at individually.

Piece together what happened, and then fill out the claim form. If, for example, you were told that payment for policy x was to come from dividends from policy y, look for policy y. And if you have trouble filling out the paperwork, get help (Prudential policyholder Ted Kotch attended a seminar given by Florida insurance commissioner Bill Nelson's office).

Know the lingo. Several of the Minnesota claims examiners contend that policyholders didn't get as much money if they didn't use specific terms such as "churning." And don't be afraid to appeal your claim results, if you have that option.

* Consider opting out of the class action entirely. At most, Prudential class members could recover the amount they had paid in plus interest (about 4% to 8% a year). But a lawyer with a strong case could sue for fraud, punitive damages or other types of relief. "I have yet to see a case where a person who has opted out has not don better than the ADR," says Weaver.

Policyholders who settle their suits with Prudential are usually required to sign a confidentiality agreement. Kenneth Chiate, a partner with Pillsbury, Madison & Sutro, which sued Prudential on behalf of 125 clients, refuses to comment on published reports that the suit was settled for an average of nearly $500,000 per person in addition to a return of premiums.

Weaver recommends pulling out as an alternative for policyholders who have "good documentation, good recollection and a fire in the belly," not to mention the stamina for a lawsuit that could be time-consuming and costly. Individual policyholders could not afford his hourly rate, says Chiate, and would have to "saddle up with 50 to 100 others." After getting a class-action notice, you usually have only about 60 to 90 days to find such a group. Whistle-blowers-turned-consultants--such as Weaver ( and former MetLife agent Rick Sabo ( can help direct you.

* Don't assume you're home free just because no problems have turned up so far. Sabo recommends getting a new illustration for any in-force policy, based on current interest rates and insurance costs, that shows whether the premium will really vanish, or whether the premium is big enough to keep the policy from lapsing. If your policy comes up short, it's too late to file a claim against Prudential or any other company involved in a legal action on which the deadline has passed. But you could drop the policy or pay in more money.

COPYRIGHT 2000 The Kiplinger Washington Editors, Inc.
COPYRIGHT 2000 Gale Group

Click here to return to our homepage