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For Prudential customers, it's payback time

The Prudential Insurance Co. of America, after having been hit with the largest fine ever against a U.S. insurer, is in the process of gearing up an unprecedented program to pay back any consumers who might have been misled into bad insurance deals by Prudential agents.

Late in September, a New York law firm announced its hard-fought settlement with Prudential in a proposed class action suit. That settlement was designed to replace an earlier deal put in place by a multi-state task force that documented the problems in the first place.

The settlement between the law firm and the company differs from that presented by the multi-state task force in several respects. First, the law firm's settlement specified some dollar amounts. Prudential would have to pay out at least $400 million and perhaps more than $1 billion. Score one for policyholders. Second, the law firm's settlement, if it is certified by the judge as a class action proceeding, makes it easier in some cases for people to collect. It eases some evidence guidelines and provides for more generous guidelines. Score two for policyholders.

The third major difference, however, could be seen as a drawback for some policyholders. Under the terms of the law firm's proposed settlement, if you simply do nothing, you lose your right to take action in the future. You would have had to file notice with the court by Dec. 19 if you wanted to opt out and retain your right to sue later. About 10,000 to 12,000 people chose to do so. Also, four states filed formal objections with the court.

The company still hopes the class action settlement will allow them to put the whole scandal behind them. If it eventually does go through, they could conceivably fix their cost on the payout, allocate the money, then be done with it.

That is something they could not have achieved under the terms of the multi-state task force settlement. Under the terms of that settlement, if someone chose not to take action at all, they could have still take action later.

Too much of a burden?

Ultimately, if the deal is approved by the judge, Prudential will have to work with customers who purchased permanent individual life insurance policies from the company between 1982 and 1995. There were more than 10.7 million sold during that time. Those who feel they have been wronged can pursue a claim.

Under the terms of the proposed settlement signed Sept. 22 by Prudential and a New York City-based law firm, Milberg Weiss Bershad Hynes & Lerach, there would be at least $410 million to $1 billion paid out to those who make successful claims. In addition, there would be other relief available, such as loans and the ability to get new policies.

This whole process started rolling last year when a Multi-State Task Force came out with a scathing report outlining abusive sales practices by Prudential agents. The task force, and the law firm, plans to stay involved as Prudential goes about the process of repaying customers. The task force also got the company to agree to a $35 million fine in addition to the money that will go towards repaying customers.

The task force is trying to coordinate with every one of the state insurance departments. The four states that are opposing the settlement have cited their concerns that the proposed penalties are not harsh enough and that the pay back program puts too much of a burden on consumers.

Several options and help being offered

Under the scenario that had developed as of late September, there are several options if you are an eligible customer. You could elect alternative dispute resolution, the most arduous process and the one with the promise of the highest payback for aggrieved customers. Or you could opt for basic claim relief, which is less complicated and potentially less lucrative. Or you could just not worry about it and opt out of the process altogether.

Under the proposed settlement between the lawyers and Prudential, money paid out under the alternative dispute resolution process must be at least $410 million if there are 110,000 successful claimants or less. If there are around 330,000 or more successful claimants, the pot goes up to about $1.08 billion or more.

And those are just minimums, there are no caps.

In some cases, folks might get cash. In other cases, they might get a new policy, or loans or other types of relief. Under some circumstances, they could get more than they initially paid out.

When it comes time to pay for all this - fines, refunds, administrative fees - the bill is bound to be a big one. But it won't put Prudential under. The largest life insurance company in America, at least when it comes to assets, has billions socked away to cover its various obligations. And, sad to say, it has experience dealing with these kind of thing. The same kind of problems surfaced in Iowa in 1983. But the problems are not unique to Prudential, by any means. Several other insurance companies have been hit with fines for preying on their own customers.

Sounds confusing? You can call Prudential's Policy Holders Relations Center, 1-800 837-3645, to get more information. Or call your state insurance department. You can check our guide to state-specific information for phone numbers.

Sounds like something you should check out? First, read our Q & A on how you can start determining whether you might be entitled to a payback. We also have a copy of the statement made Sept. 22 on the settlement between Prudential and the lawyers representing the plaintiffs in the class action suit.

To complicate matters, there were problems with document destruction in four states, including Iowa, Florida, New York and Massachusetts. Critics point out there could be more. The company says some of its employees, now former employees, destroyed company documents in connection with the case. The company says the employees acted on their own and have since been fired. The employees, at least some of them, said the company asked them to do it and are suing the company. The department of insurance in Florida, where some of this supposedly took place, is looking into it and has issued subpoenas in connection with the allegations.

If you do end up getting involved in the process, we'd love to hear how it's going. Prudential says it is doing everything it can to make this whole process as painless as possible. The Multi-State Task Force says they'll be watching to make sure that is the case, and to lend a hand where they can.

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