Prudential To Pay Record Fine Settlement Calls For $35 Million In Fines, But Total Cost Could Hit $1 Billion

Prudential apologized to policyholders Tuesday as it agreed to pay a record $35 million in fines and set up a restitution plan for up to 10.7 million customers for failing to curb widespread sales abuses by its agents.

The restitution plan could be much more costly than the fines being paid to states that conducted a joint investigation of the Prudential Insurance Co. of America. The negative publicity could harm sales, something that led Wall Street credit agencies to place Newark, N.J.-based Prudential under close scrutiny.

New Jersey’s banking and insurance commissioner, Elizabeth Randall, whose department headed the 30-state investigation, said restitution could cost Prudential $100 million. The report task force’s 232-page report, however, said this could balloon to $1 billion.

The fines will be distributed to states on the basis of the number of residents holding policies.

The report on deceptive sales practices, including misleading consumers about the cost of policies, did not recommend any action against top Prudential executives. But it said management knew of sales abuses by agents and routinely failed to investigate and impose effective discipline.

“The abuses were widespread and did occur across the country. Consumers put their confidence, and their money, into Prudential, and some of the company’s agents misled them,” Randall said.

Prudential Chairman Arthur F. Ryan, who came to the company in a management shake-up after investment scandals surfaced, said the insurer would move swiftly to prevent these problems from occurring again.

“The improper practices cited by the task force are intolerable to Prudential,” said Ryan. “We apologize to our policyowners who may have been misled. We pledge to satisfy all legitimate policy-owner claims.”

The review focused on accusations of “churning,” in which agents persuade customers to use the built-up cash value of older life insurance policies to finance more expensive ones. The report said agents took advantage of customers who were ill-informed or deceived about the cost of the transaction.

The report said Prudential will contact policyholders who bought permanent individual life insurance contracts from 1982 to 1995.

Under the plan, policyholders will be able to file for a “no fault” remedy that consists of preferred-rate loans or the opportunity to buy more life insurance or annuities.

The plan also allows policyholders to seek greater compensation through an alternate dispute resolution process that will be based on an agent’s complaint history or a policyholder’s proof of misrepresentations.

Randall promised that the process will not be cumbersome. She said those who have been wronged could get full refunds of premiums, continued coverage without having to pay more premiums, or partial refund of premiums.

Individuals also can sue Prudential. But the task force said its proposal “should provide faster relief to consumers than if they pursued litigation against Prudential through the courts.”

The $35 million fine is what would be paid if every state signs on to the plan.

An additional nine states say they intend to sign the agreement. That leaves 11 states that have not said they would agree to the plan: California, Florida, Michigan, Wisconsin, North Carolina, Washington, West Virginia, Rhode Island, Nebraska, New Mexico and Alaska.

But Prudential said it anticipates several of these states will approve the plan by the end of the week.

Randall said action was not taken against top Prudential officers because the task force did not find management deliberately sought to mislead its sales force.

The largest previous fine against an insurance company was the $20 million penalty paid in 1994 by the Metropolitan Life Insurance Co. for improperly selling life insurance as retirement plans.

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This sidebar appeared with the story: LOCAL IMPACT Washington is among 11 states that have not sent letters of intent to participate in the settlement. It would receive $545,500 if it agrees to participate. Idaho and Montana each will receive $250,000.