Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 19, 1995 TAG: 9503180016
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: JIM JORDAN KNIGHT-RIDDER NEWSPAPERS
DATELINE: LEXINGTON, KY. LENGTH: Long
And as her doubts grew, Warner took the policy to a former insurance agent who confirmed her fears.
Instead of $60,000 worth of nursing home insurance, the 65-year-old Lexington resident had been sold a $60,000 life insurance policy with ``a nursing home clause.''
In effect, she could use the policy's cash value - a few thousand dollars - to pay for nursing home care.
``I didn't need life insurance,'' Warner said. ``The thing that was so tempting was the nursing home clause. I found out later that the nursing home clause wasn't much good at all.''
So Wilma Warner joined a growing number of policyholders who are suing their insurance companies, saying they were deceived or defrauded by agents they trusted.
Most of the lawsuits, including Warner's, say insurance agents were engaged in a practice known as ``churning,'' ``twisting'' or ``piggybacking.''
Churning occurs when an agent lies or withholds information to persuade consumers to trade the cash value in an old policy or annuity for a new policy that allegedly provides better benefits.
In Warner's case, the trade involved a $21,000 annuity.
The agent earns a commission from the sale, but policyholders say they have lost cash value and been hit by unexpected premiums.
Insurance companies deny the allegations. They say that churning rarely occurs and that they are doing everything possible to prevent it.
What happens in most cases, they say, is that policyholders do not understand the policies and coverage they have bought.
None of the cases has gone to trial, and none of the allegations has been proved, but the growing number of lawsuits indicates a new militancy among policyholders.
Nationally, one of the largest lawsuits was filed earlier this month by three New England law firms that are seeking $500 million from Prudential Insurance Co. of America, the same company Warner is suing.
According to the lawsuit, thousands of senior citizens were sold additional insurance coverage by agents who falsely promised them that the added coverage would cost little or nothing.
The plaintiffs allege churning, saying the cost of the new policies was deducted from the cash value of the old policies, which amounted to hidden loans.
``The problem just seems to go on and on,'' said Peter R. Kensicki, head of insurance studies at Eastern Kentucky University.
(There are no such cases or complaints pending in Virginia, said Kenneth Schrad, spokesman for the State Corporation Commission, which regulates the insurance industry in the state.
("Churning is not against the law under Virginia regulations, although it may be unethical," Schrad said. But agents cannot misrepresent what the policy does, he said.
(Perhaps the reason no such cases have surfaced in the state is that regulators are strict, requiring companies to register new products for review by the SCC staff before they can be sold, said Charles B. Faulconer Jr., president of the Roanoke chapter of the American Society of Chartered Life Underwriters and Chartered Financial Consultants. That 120-member organization represe ts about 20 percent of the region's insurance agents and brokers, said Faulconer, an agent with the Equitable Life Assurance Society).
``In every business there is some issue that doesn't get solved. The National Association of Life Underwriters was formed over 100 years ago for one purpose: To stop stupid policy replacements,'' Kensicki said.
The association is one of the industry's largest trade groups.)
Even if there is a problem with an insurer, years might pass before it is detected because most policyholders - unlike Warner - do not read their policy when they receive it from the insurer, she said. The policy is read when there is a claim or when wrongdoing is suspected.
Prudential spokesman Robert DeFillippo said he could not discuss specific allegations made in the lawsuits.
He said the Prudential trains its agents and managers in ethical sales practices and enforces high standards. Violations can result in disciplinary actions, including firing.
Kensicki, a veteran insurance agent who came to Eastern Kentucky University five years ago, said changing insurance policies is not always a bad idea.
``It may be that the company came out with a new policy series that reflects better mortality or reflects higher current interest rates. It might make sense to change,'' he said.
``It's kind of like a chronic illness. It may not be a bad idea to change medicines, but you ought to still take medicine,'' he said.
Confusion has been caused in some cases by new types of insurance policies. As recently as the 1970s, Kensicki said, insurers would guarantee a certain rate of growth in cash value and a maximum level of expenses for each policy.
More recently, the industry has been sharing the risk with policyholders by offering policies that grow at changing rates depending on the economy.
``People don't truly understand how life insurance works,'' Kensicki said. ``I think that's why we have had all this trouble with variable life and all those interest-sensitive products.
``On the other side, too, there can't be any doubt that there are some insurance managers who are being pressed, or believe they are being pressed, to produce, and they will come up with gimmicks,'' he said, adding ``that's true in any business.''
Insurers are debating several changes that might protect policyholders and improve the industry's image, including:
Creating programs to certify life insurers who meet ethical standards.
Hiring compliance officers to audit managers.
Leveling commissions to reduce the large up-front payments received by agents for sales of new policies.
The insurer certification proposal is ``the industry's way of saying `we may have some loose cannons out there,' '' Kensicki said.
Some critics want the federal government to take over regulation of insurance companies from the states, but Kensicki said the failure of large numbers of federal savings and loan associations since the mid-1980s proves federal regulation isn't the answer.
Better training and screening for agents and agency managers could be part of the answer, he said.
For that reason, Kensicki said policyholders should look for agents who have earned such professional designations as CLU, for chartered life underwriter, or ChFC, for chartered financial consultant.
They have not only passed a rigorous series of examinations to prove they know their business, but they also have agreed to follow a code of ethics that is enforced by the American Society of Chartered Life Underwriters and Chartered Financial Consultants.
``Any violations and they can pull your designation and make it harder for the agent to earn a living,'' he said.
``I know 100 people I would be very comfortable buying life insurance from, but there are 2,000 others out there I don't know about. I just know some of them aren't doing it right.
``I would feel better if I knew they understood the business, as certified by CLU or ChFC, and that they are subject to those ethical requirements,'' Kensicki said.
"As in any business, you have people who are unethical and will take advantage of people to make a dollar," Faulconer said. "I think the majority of insurance agents will try to interpret the legalize (in a policy) and convert it to English for the layman.
"But it is a legal contract and the person why buys it has an obligation to read it," he said.
Business editor John Levin contributed to this story.
by CNB