Prudential Financial Settles Death Master File Case; Damages Could Reach Millions

Prudential Financial Inc. has entered into a multistate settlement after an audit of the company determined some of its subsidiaries had not made payments to many life insurance beneficiaries, despite the fact that the policyholders had been dead for years. Prudential's settlement marks the latest life insurance company to be hit by the national probe into how companies are using the Social Security Administration's Death Master File, which lists the name of every Social Security number holder who has died.

Insurance regulators have been investigating why life insurers allegedly use the Death Master File to cut off annuity payments once a contract holder dies but aren't using the same information to determine if any death benefit payments are due under life insurance policies, annuity contracts, or retained asset accounts. To date, 35 states have coordinated with the National Association of Insurance Commissioners on investigations into whether industrywide practices have resulted in insurers knowing about policyholders' deaths while still continuing to draw-down premium costs from their accounts until the cash reserves were diminished entirely.

Regulators have estimated that as a result of those allegedly improper payment practices, the combined damages across the affected states may exceed $1 billion (BestWire, May 24, 2011).

In California, one of the 20 states involved in the investigation, Prudential Financial and its subsidiaries may have to pay as much as $20 million to the families of deceased life insurance policyholders as a result of an audit conducted by Verus Financial, the company hired by states to investigate whether life insurers may owe money to beneficiaries.

More than 1,000 Prudential policies have been identified as being held for individuals in California who have been dead for more than 15 years, California Controller John Chiang said in a statement. The average cash value of the policies is about $2,000.

As a result of the settlement, the company must restore the full value of the affected accounts; comply with state unclaimed property laws and cooperate with efforts to reunite millions of dollars in death benefits and matured annuities with their owners or their heirs; and pay the beneficiaries three percent compounded interest on the value of the held amounts from the date of the owner’s death or January 1, 1995, whichever is later.

In addition to Prudential Financial, the settlement also affects Prudential Insurance Company of America, Pruco Life Insurance Company, Pruco Life Insurance Company of New Jersey, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corp., formerly known as America Skandia Life Assurance Corp.

Other states signing the settlement are: Colorado, District of Columbia, Idaho, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Montana, Nebraska, North Dakota, Oregon, Pennsylvania, South Dakota, Tennessee, Utah, Vermont, Washington and Wisconsin.

The settlement does not require Prudential Financial to admit wrongdoing. Efforts to reach a spokeswoman for the company were not successful.

California and Florida have been at the forefront of the national investigation, issuing subpoenas to MetLife and Nationwide Life Insurance Co. that required company representatives to detail their policies regarding the Death Master File (Best's News Service, May 20, 2011). Connecticut'sDepartment of Insurance has also sent inquiries to some of the larger life insurance writers in that state that seek information about Death Master File policies, but responding to those inquiries has been voluntary.

John Hancock Life Insurance Co. has already reached a settlement with 23 states in the investigation that requires the company to pay out millions in restitution and to implement significant changes to its payment policies (Best's News Service, May 18, 2011).

In December, the New York Financial Services Department announced that life insurers in the state paid out $52.6 million following a similar Death Master File investigation. More than 8,000 beneficiaries received payments as a result of the investigation (Best's News Service, Dec. 5, 2011).

(By Jeff Jeffrey, Washington Correspondent: [email protected])