Class Action Filed Against Prudential Over Retained-Asset Accounts

That didn't take long. In my post yesterday about the retained-asset accounts maintained by MetLife and Prudential, I predicted that a class action would be filed against the insurers based on their allegedly deceptive practices, such as not adequately disclosing that the accounts are not insured by the Federal Deposit Insurance Corporation and are invested in the insurance companies' general corporate accounts, and that the rate of return paid to the beneficiaries is far less than what the insurance companies earn for themselves, which means that the difference is profit to the insurance companies.

Yesterday, in the United District Court for the District of Massachusetts, plaintiffs filed a putative class action against Prudential Insurance Company of America. Lucey v. Prudential Ins. Co. of America, 3:10-CV-30163 (W.D. Mass.)

Here is the complaint, which is filed on behalf of a class defined as "All persons who were/are beneficiaries of SGLI [Servicemembers Group Life Insurance Program] , VGLI [Veterans’ Group Life Insurance Program] and/or TSGLI [Traumatic Injury Protection] benefits dating back to six years from the date of filing on this Complaint."

The suit alleges that Prudential failed to pay "monies generated by the benefit owed to Plaintiffs and the Class between the time of accrual of the benefit upon the death or traumatic injury of the insured and the time at which the full value of the benefit was eventually paid to Plaintiffs and the Class." The complaint alleges claims for breach of contract, breach of fiduciary duty, and breach of the implied duty of good faith and fair dealing, and seeks compensatory damages for the income earned by Prudential on its investment of the beneficiaries' proceeds, establishment of a constructive trust, and attorney's fees and expenses.

The representative plaintiffs include Kevin and Joyce Lucey, the parents of Jeffrey Lucey, who died on June 22, 2004. The complaint alleges that the Luceys received $53,000 (out of a benefit of $250,000) in July of 2004, and the balance of $197,000 by March 2009. Prudential paid interest of approximately 1% per year to the unpaid balance of the policy at the time of distribution of the funds.

The other representative plaintiff is Tracy Eiswert, the widow of Scott Eiswert, who died on May 16 , 2008. According to the complaint, Ms. Eiswert received the entire benefit of $400,000 on February 26, 2009, plus interest of approximately 1% for the period Prudential held the funds.

The complaint provides a detailed history of the laws that entitle service members and their families to benefits, as well as the types and amounts of available coverage. The complaint also provides some actual numbers to support the plaintiffs' allegations that the insurance companies -- in this case, Prudential -- have profited handsomely on the difference between the rate of return paid to beneficiaries and the companies' own rate of return:

37. For the year 2009 alone, the US Department of Veterans Affairs (“VA”) reports that [Prudential], as Administrator of the SGLI and VGLI programs, collected $982,811,925 in premiums, $213,241,777 in contributions from the various service branches, and $144,088,273 in investment income, and that it held reserves amounting to $2,529,652,423, indicating earnings exceeding $5.69% per year. [Prudential], in turn, paid to beneficiaries on the accrued claims only 1% interest on the accrued monies as of the day of death or traumatic injury of the insured.

38. For the year 2009 alone, the VA reports that [Prudential], as Administrator of the SGLI and VGLI programs, paid 1,125,569,521 in death claims for members and their families, and added $191,423,248 to [Prudential]’s reserves.

And not surprisingly, there are millions of potential class members: 

42. The number of persons in the class makes joiner of all members impracticable. The VA reports that, in 2009 alone, there were 2,371,000 members covered by SGLI as well as 3,133,000 spouses and children and that [Prudential] paid, on death claims under SGLI, $921,967,073. VA reports that in 2009 alone there were 432,000 insureds and that [Prudential] paid, through VGLI, death claims totaling $206, 602,448. VA finally reports that [Prudential] paid $86,625,000 in 2009 under the TSDGLI program.

Stay tuned.


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Comments (6) Read through and enter the discussion with the form at the end
Ali Akbari - July 31, 2010 2:05 PM

I fail to understand what is the cause of concern when death claim proceeds are left with the insurance comapany in a so called interest earning money market account.

Assume the $400,000 claim was awarded in a lump sum. There would be a loss of interest for the time period while the check remains uncashed. Privacy would be compromised while it is deposited elsewhere. FDIC protection is only for a limited amount. Interest earned elsewhere may be zero such as with many checking accounts today. Ofcourse if one can earn higher interest rate ( it will be difficult to beat guaranteed 3% interest rate paid by a large company referred to in the article) just like any other asset one can reinvest elsehere without any penalty. Most other non insurance organizations (Banks etc) do not readily provide easy to fill out beneficiary designations where as the insurance companies do, thus protecting the bneficiaries from expensive probate expenses.

The fact the insurance company may earn a higher rate than what they pay on retained asset account should not surprise anyone because that's what the business is all about. Banks only source of income is to earn higher amount on clients asset than what they pay the client for decade (for centuries may be !!) no objection there!! even though recently they made a mess of it despite FDIC!!!
A valid objection on retained asset arrangement would be high pressure tactics that may be potentially used by insurance Co agents to sell other products to grieveing families. If the beneficiary safety was of paramount concern the article should have addressed this objection.

Jeffrey V. Mehalic - July 31, 2010 2:17 PM

I think the objection is, in part, that the insurance company has no business holding on to the benefits in the first place. The benefits belong to the beneficiary, so once the insurance company approves the claim, the benefits should be paid in their entirety to the beneficiary.

But by using this "checkbook" in place of a lump sum, which the beneficiary never asked for in the first place, the insurance company is able to take advantage of the delay it creates in paying the benefits to earn a substantial return at the expense, quite literally, of the beneficiary.

terry mckenna - August 1, 2010 7:24 AM

this story contains within it the notion that it is shocking that financial companies may earn more than they pay. my saving accounts pay meager interest, yet my bank uses my money to make loans all with a far greater interest than my account reflects.

had the person received a lump sum check, and placed it a genuine checking account with another bank that bank too would earn more on the funds than it paid out in interest.

i agree that prudential should have offered a lump sum cash option, but the matter hardly represents gross abuse.

Drewfus - August 13, 2010 6:25 AM

I am very disturbed by the way this story is being reported, and the cast of doubt being placed on many fine companies. I work for one of the insurance companies mentioned here. Over the last 11 years, I have personally delivered death benefit claims to many families during a very difficult time in their lives. I have never had a beneficiary tell me I am offering them too much money, nor at any time have clients complained the draft accounts to be inconvenient. While banks have been paying less than 1% on savings accounts over the past year and a half, we have been paying 3% interest consistently. The beneficiaries I have counseled have been told to take their time making decisions during these emotional times. I suggest that they use the draft accounts to pay funeral homes, medical bills, and other final expenses. I urge them that once the immediate needs are cared for, then take the time to make an informed choice and write a draft for the balance to themselves to do whatever they feel is in their family’s best interest. The documentation we use to process the death benefit claim is very clear about how these accounts work, and the other alternatives they can choose. Again, this is for their convenience, not the profits of the company. In addition to the settlement account, the client is also offered a lump sum check option, a lifetime installment payment option, and a time period certain payment option. Overwhelmingly, families choose the draft account because claims are paid very quickly (often in less than 3 days) and it is easy for them to manage the resources. While I always feel sorrow for the family and the loss of a loved one, especially for a fallen patriot who gave the ultimate sacrifice so we all can enjoy the freedoms we have, I am honored to be involved in a noble profession. When others are offering their support, food, and condolences, I am offering peace of mind, financial security, and real cash in times of need. It is my hope any investigation proves these points and that politics do not get in the way of my ability to keep the promises I make to my clients. Respectfully. Andy

Another JackieO - November 22, 2010 7:27 PM

Yes, it is true that banks will earn interest on accounts held by it's members. The members also pay taxes on these accounts. In comparison, a life insurance policy is not taxed because of the unethical gain on the governments part to cash in on the death of a loved one. The same notion can be held for that a insurance agency taking advantage of the funds when delaying payment to the rightful beneficiary.

Class action litigation - February 17, 2011 12:15 PM

This is about morals and ethics when it comes down to it. All these problems are rooted in the unhealthy levels of greed within some financial companies. Short gain and long-term loss seems to be acceptable and leaves those with the lest worst of

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