ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Friday, February 7, 1997 TAG: 9702070055
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
DATELINE: NEW YORK
SOURCE: PATRICIA LAMIELL ASSOCIATED PRESS
WITH A CLASS ACTION SETTLEMENT IN THE WORKS, a $35 million fine levied and threats of jerking the company's license, Prudential's woes have the rest of the industry scrambling to regain trust.
When Violet Trerice was growing up during the Depression in Holyoke, Mass., her mother took in laundry from the local Prudential insurance agent and paid a quarter a week on policies for Violet and her seven siblings.
So when a Prudential agent came unannounced to Trerice's mobile home in Holiday, Fla., in 1982, she let him in. The agent reminded her that her husband had a $5,000 Prudential life insurance policy, and she had one for $1,000. Both were paid up.
``He advised me to take out a (new) $5,000 policy, and I wouldn't have to pay any premiums, because the premiums and the interest on the first policies would pay it,'' Trerice recalls. So she bought two policies for a total of $10,000 coverage.
Trerice assumed that if her husband died, she would be paid $10,000 for the new policies plus $6,000 for the original two, and that they wouldn't have to pay a dime in premiums.
But in 1987 the Trerice's began receiving bills from Prudential. After asking the local office, she was told that not only would she have to begin paying Prudential more than $700 per year to keep the new policies in force, the older policies were completely drained of any cash value and were worthless.
The Trerices and scores of other people, mostly senior citizens, have sued Prudential charging they were subjected to deceptive sales pitches. There is also a class action pending, the company has been fined $35 million by state insurance regulators, and Florida and California regulators have threatened to pull Prudential's license to sell there.
Seven months after admitting to fraudulent sales practices, Prudential Insurance Co. of America is settling the class action, defending the additional lawsuits, contending with charges that it destroyed damaging documents and trying to repair its image with industry regulators, analysts and the public.
``We are learning these lessons,'' said Prudential spokesman Bob DeFillippo. ``They've cost us a lot, and they've cost us our reputation.''
Prudential, the nation's largest life insurance company, isn't the first to admit such charges. But some doubt whether the Prudential penalties under discussion, or any penalties other companies have paid, are sufficient incentive for the industry to reform itself.
Some regulators aren't happy with the proposed class action settlement, which must be approved by a federal court in Newark, N.J., after a public hearing Feb. 24.
Florida, California, Massachusetts and Texas are contesting the proposed settlement as a bad deal for policyholders. California and Florida have threatened to yank Prudential's license in those states unless it is improved.
Virginia has refused to sign the settlement. Kenneth Schrad, spokesman for the Virginia Corporation Commission, said the SCC staff is conducting its own negotiations with Prudential. "Hopefully, we will be able to finalize something very soon," Schrad said.
The company's Roanoke general manager, Robert O'Hanlon, was out of the city Thursday and a spokeswoman in the office declined to comment.
Prudential has agreed to spend at least $410 million to reimburse up to 10.7 million people who bought policies from 1982 to 1995. Accountants at Arthur Andersen & Co. said it could cost up to $2 billion.
Because the settlement is not capped and its potential impact on the company is unclear, A.M. Best & Co., Moody's Investors Service and Standard & Poor's Corp. are considering downgrading Prudential's claims-paying ability, a widely-used measure of an insurance company's health.
A.M. Best analyst Michael Albanese said even a $2 billion payout would barely dent the bottom line at Prudential, which has $12 billion in surplus.
The bigger problem, he said, is ``the potential damage to their reputation in the marketplace, not just to Prudential, but to the industry as a whole.''
Industry groups are considering industrywide marketing standards. And state insurance regulators are considering model state regulations designed to stop the practices Prudential and other companies are charged with using.
One idea under consideration is to spread agent commissions out over several years instead of paying them all up front, which some argue encourages churning.
But Robert Hunter, director of insurance for the Consumer Federation of America and a former insurance commissioner of Texas, believes these changes will be temporary and mostly cosmetic.
The problem with the Prudential settlement, Hunter said, is that it was fashioned by state regulators who are largely funded by, and too friendly with, the insurance industry.
Kevin Henossy, executive secretary of Spread the Risk Inc., an insurance watchdog organization, said the Prudential case ``brings to light the problem of trying to regulate a national business on a state-by-state basis and the need for some kind of federal oversight.''
``The industry recognizes that this is a problem and is dealing with it, and the companies in their own way are dealing with it,'' said Ken Vest, spokesman for the American Counsel of Life Insurance.
Staff writer Mag Poff contributed to this report.
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