General American settles lawsuit and agrees to pay state fine

By Mark Cybulski
August 25, 2000

General American Life Insurance Co. will pay $55 million to settle a nationwide class action lawsuit that alleges the company induced policyholders into cashing in their old policies for new ones and promising them on new policies that premiums would "vanish" after a period of time.

In addition to the settlement, General American will also pay a $120,000 fine to the Missouri Department of Insurance for its alleged sales violations.

The settlement affects approximately 251,000 current and former policyholders who purchased General American whole life policies between Jan. 1, 1984, and Dec. 31, 1996, and universal life policies between Jan. 1, 1982, and Dec. 31, 1986. The settlement, which was filed in court on Aug. 24, still needs approval from U.S. District Court in St. Louis. The lawsuit was filed in 1997.

In settling the lawsuit, General American admits no wrongdoing. "The decision to settle was a business decision," says Kevin Echner, president of General American Life, which is based in St. Louis. "Our resources are better spent serving our policyholders rather than defending lawsuits."

The lawsuit alleges the familiar "churning" and "vanishing premium" sales practices that have been the basis for lawsuits targeting many life insurers including Prudential Insurance Co. of America, Metropolitan Life Insurance Co., and American General Life & Accident Insurance Co. Churning is a practice in which policyholders are persuaded to use the cash value in their old policy to buy a newer one they don't necessarily need. Vanishing premiums is when an agent falsely predicts to customers that the cash value in their policy will perform so well that they can use it to pay for future premiums until the policy is paid up.

Jim Monahan, a spokesperson for General American, says he anticipates that current and former policyholders will be compensated with refunds or additional coverage, but the details have not been determined.

The Missouri Department of Insurance (DOI) began a market conduction examination of General American in 1995 that was spurred by policyholders' complaints. The DOI estimates there are 8,907 policyholders in Missouri who bought life insurance from General American under the "vanishing premiums" premise.

MetLife bought General American in January 2000 for $1.2 billion after General American was forced into liquidation. The $1.2 billion from the sale has been placed in an escrow account and will be distributed among General American's policyholders by the end of 2002. McConnell says that the settlement and fine General American will pay will not come out of the $1.2 billion sale price.

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