Prudential could wind up paying $3.38 billion to settle fraud claims Plaintiff's estimate twice what insurer estimated

February 25, 1997|By BLOOMBERG NEWS

NEWARK, N.J. -- Prudential Insurance Co. of America could pay as much as $3.38 billion, more than twice what the company expected, to settle a sales fraud lawsuit, a lawyer for policyholders said yesterday.

Melvyn Weiss told a federal judge the cost of settling claims depends on how many policyholders ask for compensation. Prudential, the largest U.S. insurer, misled life policyholders for 13 years and will face at least $2 billion in payments, the lawyer estimated.

The more claims, "the higher this number gets, and Prudential has agreed to stand by it no matter what the price is," Weiss said at a hearing in U.S. District Court in Newark, N.J.

Lawyers for both sides yesterday urged U.S. District Court Judge Alfred Wolin to approve the settlement of the class-action lawsuit, which claims Prudential's agents persuaded customers to needlessly exchange life insurance policies for more expensive ones from 1982 to 1995.

As many as 10.5 million customers were victims of the practice, known as churning, which is designed to boost commissions. Wolin ended the hearing without issuing a ruling, giving both sides until March 3 to file arguments on the settlement.

Reid Ashinoff, Prudential's lead lawyer, said selling replacement policies wasn't illegal. Sales of replacement policies to generate higher revenue were an accepted industry practice, accounting for 40 percent of U.S. insurance profits during the 1980s.

"Prudential was by no means a rogue company," he said. "If this was wrong, an entire industry was wrong."

Even so, Prudential has fired more than 800 agents and managers in the past two years over their insurance sales practices, he said.

Prudential has agreed to pay at least $410 million to policyholders, and said it expects to pay about $1.2 billion by the time all claims are settled.

Lawyers for policyholders predict the suit will cost the insurer $2 billion, and the sum could rise to $3.38 billion if victims are aggressively sought out, Weiss said. Just 19,000 of about 10 million policyholders have rejected the proposed settlement, Weiss said.

Prudential settled fraud charges last week with regulators in California, Florida, Massachusetts and Texas, agreeing to pay fines and take steps to make it easier for policyholders to prove they were misled and collect compensation. That should help persuade the judge to approve its settlement, analysts said.

A separate hearing is scheduled March 17 on $90 million in fees lawyers want to charge for representing policyholders.

Policyholders have until at least June 1 to file a claim for compensation, and the company and an outside arbitrator will decide how much they will be paid. They can appeal if they aren't satisfied.

Pub Date: 2/25/97

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