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Report: Prudential did nothing wrong in settlement process

A report done by the order of the U.S. Third Circuit Court in Newark, N.J., says that Prudential Insurance Co. of America committed no transgressions in its handling of policyholder claims for compensation following a $2.8 billion class action settlement.

In 1996, Prudential agreed to the giant settlement to resolve allegations that the company routinely "churned" policyholders. Churning is an illegal practice in which agents encourage customers to use built up cash value in their whole life insurance policies to purchase new policies. This caused customers to lose their cash value and any other benefits they had accumulated. Agents "churn" customers because they receive a commission on every new policy sold.

The report, authored by the law firm Milberg Weiss Bershad Hynes & Lerach LLP of New York, which represented the plaintiff class in the case, is the culmination of the firm's investigation that was ordered by U.S. Third Circuit Judge Alfred J. Wolin, who oversaw the class action settlement.

Judge Wolin ordered the investigators to look into allegations made by dozens of current and former Prudential employees who worked at Prudential's Minnesota settlement claims-handling office. (For details, see Prudential employees tell of settlement-claim abuses and discrimination.) The employees, who have filed suits in Minnesota, claimed that Prudential managers ran contests to see who could close the most cases in the shortest amount of time, among other significant accusations, such as race and sex discrimination. Those who closed cases the fastest were promoted or given raises, according to the employee allegations.

Prudential "did not intentionally, or through gross negligence, cheat, shortchange, or otherwise disadvantage claimants" in the settlement process.

What's more, the employees allege that Prudential coached its claims handlers to downscore claims whenever possible. Claims were graded on a scale of zero to three, with three as the highest score. The higher the score, the more a claimant — a Prudential policyholder looking to get his or her part of the settlement — would receive in compensation.

But the Milberg Weiss report states flatly that "there is insufficient credible evidence to support the Neff cleints' allegations. We conclude that Prudential did not intentionally, or through gross negligence, cheat, shortchange, or otherwise disadvantage Claimants. Nor have we found credible evidence of widespread or systemic errors or problems that inadvertantly went uncorrected. We find the Neff clients' allegations to the contrary to be without merit."

So how does one explain the allegations from the Minnesota Prudential employees? The Milberg Weiss report says:

  • The employees didn't understand the scope of the whole settlement process or how pieces fit together. They only saw their small portion of the process.
  • Prudential did indeed offer prizes based on productivity in scoring claims, but the report dismisses these as "typical and legitimate techniques used every day in business throughout America."
  • The employees failed to perceive that there were numerous quality-control review points throughout the process, some of which the employees had no part in and didn't even know about. For example, any claim that didn't receive the highest score of 3 was automatically reviewed by independent accounting firm Peat Marwick.
  • There were errors in individual cases, but this was "a consequence of human error that is natural and predictable."
  • The employees alleged there were "unregulated" (and thus illegal) training sessions that contradicted the training performed in the presence of regulators, but the report says "the only 'unregulated' training was training that was not required to be regulated."
  • The employees say they were forced to score claims without having all the necessary documents (such as policy records), but the report contends that decisions to score claims without benefit of documentation came "only after diligent and repeated efforts to obtain the documents had been exhausted" and, if a document was later found, it was considered once received.

Conflict of interest?

Theresa Freeman, managing attorney at the Neff Law Firm, the firm handling many of the Minnesota employee cases, blasted the report, saying, "Milberg Weiss had 35 million reasons to have the report come out the way it did. And Sonnenschein Nath & Rosenthal [Prudential's defense firm] wanted to rubber-stamp their own process, too."

Freeman says that Milberg Weiss stands to receive the final $35 million of its $90 million in attorneys' fees because of the outcome of the report. She says her firm will proceed with the Minnesota employee lawsuits "with vigor" despite the report's findings.

Brad Friedman, one of the attorneys from Milberg Weiss involved in the investigation, had no comment beyond the report. "The report speaks for itself," he says.

Judge Wolin lauded Prudential and the settlement in a five-page opinion regarding the report. Wolin says the settlement was "an extraordinary success." Prudential spokesperson Robert DeFillippo says, "We're pleased that the judge and the report completely vindicates Prudential." DeFillippo also calls Freeman's allegations "ludicrous," saying that the report suggests that the Neff Law Firm attempted to obstruct the investigation and that the Minnesota employees have little legal ground upon which to make their claims. "We had said from the very beginning that their charges were groundless," he says.

With Prudential's settlement-payment process at its end, this may effectively close the door on the scandal.

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