Despite Prudential Insurance Co. of America's claims that its demutualization plan is "fair and equitable," the insurer has been hit with a lawsuit that calls the plan illegal and seeks to block the company's conversion from a policyholder-owned company to a publicly traded company.

The suit, which comes in the wake of extensive questioning about the demutualization plan at a public hearing convened by the New Jersey insurance commissioner, was filed July 24, 2001, in Essex County Superior Court, and seeks nationwide class action status.

The complaint hopes to have Prudential's demutualization plan declared illegal, to block it from going forward, and to invalidate the results of the policyholder vote on whether or not to demutualize.

At the center of the dispute is a controversial clause in the company's plan about who should receive benefits in the conversion.

"Actuaries can argue back and forth all day about what is fair," says Brad Friedman, a partner of Milberg Weiss Bershad Hynes & Lerach, the law firm representing the Prudential policyholders bringing the claim. "Our point is that what Prudential is trying to do is illegal — even by the law that they wrote specifically for their demutualization."

According to the lawsuit, in all previous demutualizations, policyholders who "owned" the mutual company were compensated, generally in the form of stock, cash, or policy credits, for losing their "ownership" of the insurer, but consumers who had policies with subsidiaries of the mutual company did not receive compensation.

Prudential plans to include policyholders of its subsidiary Pruco Life Insurance Co., and owners of other "nonparticipating" policies, in the distribution of cash, policy credits, or stock in the newly demutualized company — a move that the lawsuit claims is unfair to all of Prudential's other policyholders.

According to the complaint, nonparticipating policyholders, who don't receive dividends, can't vote for company directors or even for the demutualization plan, and generally pay less for their policies than participating policyholders, will be given approximately $1 billon — 11.8 percent of the total compensation — of the value of Prudential at the expense of the participating policyholders.

"To put it simply," reads the complaint, "these nonparticipating contractholders have never owned 'a piece of the rock' and should not be allowed . . . to receive a share of it at the expense of participating contractholders."

Prudential continues to claim that its plan is "fair and equitable," echoing the language of the New Jersey State law that governs demutualizations — a law that Prudential critics say the insurer wrote and shepherded through the state legislature.

"We have received the complaint and are reviewing it," says Laurita Warner, a spokesperson for Prudential. "We plan to vigorously defend against this suit."

Warner contends that because the policies of its Pruco life subsidiary were sold through Prudential agents and are substantially similar to other Prudential products, including these nonparticipating policyholders in the demutualization's benefits is the "right thing to do."

The policyholder voting, which is currently ongoing by telephone, mail, and on the Web, will close on July 31, 2001, at 4 p.m. According to New Jersey law, Prudential's demutualization plan must be approved by a vote of more than 1 million of the insurer's policyholders, with a two-thirds majority of the votes in favor of the action.

After the policyholder vote is taken, New Jersey Insurance Commissioner Karen Suter has 45 days to decide whether or not to approve the demutualization.

Bill Heine, a spokesperson for the New Jersey Division of Banking and Insurance, said that the commissioner is currently reviewing Prudential's demutualization plan, but declined to comment on the lawsuit.

Milberg Weiss recently received $90 million in attorney fees following the 1996 settlement of a class action lawsuit that claimed that Prudential agents systematically engaged in fraudulent activities in the sale of life insurance, including churning, forgery, and misrepresentation of life insurance as investment products for $2.5 billion.