The scandal over Prudential’s use of retained-asset accounts to pay life insurance proceeds to beneficiaries of deceased service members has now reached the Department of Veterans Affairs. David Evans of Bloomberg.com reported on Monday that in 1999, Prudential reached a verbal agreement with the VA that permitted Prudential to amend its original contract with the VA from 1965, and use retained-asset accounts to pay life insurance proceeds to beneficiaries of deceased service members. The 1965 contract, as well as a revised version in 2007, had required Prudential to make lump-sum payments to those beneficiaries who requested them. 

The amendment was finally memorialized on September 24, 2009, and was made retroactive to September 1, 2009, not 1999, when the parties first reached their verbal agreement. But both the 1965 contract and the 2009 amendment required Prudential to adhere to the original terms of the contract until 2009.

The unorthodox way that the VA and Prudential amended their contract — which provided a huge windfall to Prudential in the form of interest that it earned on the proceeds that it retained — does not help Prudential in defending against the class-action lawsuit recently filed in Massachusetts or in responding to the federal and state investigations into retained-asset accounts. Evans included the following quote in his story: 

U.S. Secretary of Defense Robert Gates — whose department includes the VA and who was in office when the 2009 agreement was signed — said when the VA started its probe that he had been unaware that survivors were being sent retained-asset accounts.

“Until today I actually believed that the families of our fallen heroes got a check for the full amount of their benefits,” Gates said at the time. “This came as news to me.”

At this point, the critical legal issue seems to be that the VA and Prudential agreed to amend their contract in 1999, but did not memorialize the amendment until 2009, then made the amendment retroactive only a few days, and not back to 1999. There is also language in both the 1965 and 2007 contracts that requires any changes to be made in writing. That would mean that the amendment permitting the use of retained-asset accounts was not valid, if at all, until 2009, so that before then, Prudential was improperly retaining the life-insurance proceeds and earning interest on them, rather than paying them out in lump sums to the beneficiaries.