Nelson Charges Prudential With Deceptive Sales Abuses Says Thousands of Florida Consumers Were Decieved
(Editor's note: This is a press release from the Florida insurance department, Dec. 9, 1996. Prudential and Florida reached a settlement agreement 19 Feb. 1997.)
TALLAHASSEE -- State Treasurer and Insurance Commissioner Bill Nelson today charged Prudential Insurance Co. with deceiving thousands of elderly consumers into buying additional life insurance that cheated them out of their retirement nest eggs. He vowed to recover whatever funds are needed to fully compensate those who lost money.
Nelson said Prudential -- by engaging in deceptive sales practices for more than a decade -- misled as many as 100,000 Florida customers into using cash value of policies they already owned to buy new, and sometimes unneeded, policies. The practice is known as "churning." Additionally, Nelson said he intends to seek restitution for consumers beyond any punishment he imposes on the company.
Nelson, who began investigating Prudential's sales abuses 20 months ago also accused the insurance giant of obstructing the investigation by destroying potential evidence and refusing to respond to a subpoena for other information considered critical to the case. He said he will now issue a new subpoena and, if it's snubbed, ask an outside hearing officer to compel Prudential to produce the information.
"The message is that no matter how big you are, you still have to obey the law," Nelson said. "We've seen the destruction of records and stonewalling of our investigative efforts. Now, it's time for Prudential to live up to its responsibility to consumers -- many of them elderly whose golden years have been tarnished by this deception."
Attorney General Bob Butterworth joined Nelson at a Tallahassee news conference and pledged to continue his own, long-standing investigation into Prudential.
"Too many senior citizens were personally and financially devastated by this company," Butterworth said. "We will pursue all the options available to us to ensure that those who suffered are fairly compensated."
All told, up to 100,000 Floridians -- usually people over 60 -- may have teem deceived by their Prudential life insurance agent, Nelson alleged. The investigation also revealed that: company managers were told not to report consumer complaints; training films glorified deceptive sales tactics; and, managers ordered critical records destroyed.
Specifically, Nelson charged Prudential with engaging in deceptive acts for a period of about 13 years, beginning in the early l980s. In some instances, customers' signatures were forged. In others, customers were deceived and induced to borrow against their old policy to pay for a new one that supposedly wouldn't cost them a penny.
Prudential, which initially placed blame for irregularities on rogue agents, now has 21 days to respond to Nelson's charges or face stiff penalties They range from fines to suspension or revocation of its license to sell life insurance in the country's fourth largest state.
If the company disputes any of the allegations, it can request a court-like administrative hearing.
Nelson launched his investigation in April 1995 with a visit to Tampa to meet with more then a dozen consumers who claimed they were misled during a life insurance transaction with Prudential Investigators later compiled a profile of abused policyholders:
- They're currently 69 years old, with a high school education, and retired to Florida;
- They were 37 years old when they first purchased a Prudential life insurance policy; They were an average of 62 when Prudential sold them a second policy;
- Sixty-eight percent of these churning victims were male, 32 percent female
- Nearly three-fourths of the policyholders either did not receive or were not left ales materials, relying instead on oral statements of the Prudential agent.
Along with a few other hold-out states, Florida has declined to join other states in a proposed settlement of churning cases nationwide. Earlier this year, Prudential reached an agreement with 43 states to pay a $30 million fine and set up a restitution fund for people who could prove they were churned by its agents
The company also agreed to settle a class-action lawsuit contending it defrauded customers through churning. The class-action settlement, pending before a federal judge in New Jersey, would build upon the settlement reached with regulators in the 43 states.
However, Nelson said today the settlement offer with the states unfairly places the burden of proof on policyholders and won't enable them to fully recover their losses. He and Butterworth jointly will file strong objections later this month and oppose the settlement at a fairness hearing scheduled for Jan 21 in Newark.
"This proposed settlement is a bad deal for policyholders," Nelson said. "It does not begin to compensate Florida's consumers, whose pockets were picked."
Nelson added that because records have been destroyed, regulators may never know the scope of the problem nationally, or in Florida "We may never know how many people were harmed, or by how much," Nelson said. "But we do know that across the country, there were over three-million potential victims That's because at least that many people bought life insurance from Prudential in a highly suspect transaction
"These transactions, Nelson said, were called: 1) churning; 2) the vanishing premium, or abbreviated payments; and, 3) disguised life insurance.
The "churning" scenario typically involved someone who bought a Prudential policy many years ago. The policyholders would be contacted out-of-the-blue by a Prudential agent and told he or she could get a new policy at no additional cost. In fact, the premiums on the second policy would be paid for by draining the cash value in the first policy -- which the customer rarely knew or understood.
"Vanishing Premium" abuses occurred when policyholders were given unrealistic expectations of when dividends would be built up enough to pay a policy's premiums.
Selling life insurance as a private pension plan was another abuse uncovered by the investigation. "Agents sold plain-old life insurance to elderly people, who did not want it or who could not afford it, by disguising a policy as a 'tax-favored investment plan' or an 'inflation safety net,'" Nelson said. "These tactics were and are a deceptive trade practice. For starters, I will insist that Prudential returns every penny that has been taken away from Florida consumers."