David Evans /Bloomberg Magazine & Brian Naylor / National Public Radio – 2010-09-14 22:37:06
http://www.bloomberg.com/news/2010-09-14/veterans-agency-arranged-secret-deal-with-prudential-over-soldier-benefits.html
Veterans Agency Made Secret Deal Over Benefits
David Evans /Bloomberg Magazine
(September 14, 2010) — The US Department of Veterans Affairs failed to inform 6 million soldiers and their families of an agreement enabling Prudential Financial Inc. to withhold lump-sum payments of life insurance benefits for survivors of fallen service members, according to records made public through a Freedom of Information request.
The amendment to Prudential’s contract is the first document to show how VA officials sanctioned a payment practice that has spurred investigations by lawmakers and regulators. Since 1999, Prudential has used so-called retained-asset accounts, which allow the company to withhold lump-sum payments due to survivors and earn investment income on the money for itself.
The Sept. 1, 2009, amendment to Prudential’s contract with the VA ratified another unpublicized deal that had been struck between the insurer and the government 10 years earlier — one that was never put into writing, Bloomberg Markets magazine reports in its November issue. This verbal agreement in 1999 provoked concern among top insurance officials of the agency, the documents released in the FOIA request show.
For a decade, until the contract was formally changed, Prudential wasn’t fulfilling its obligations to survivors of fallen service members, says Brendan Bridgeland, an insurance lawyer who runs the non-profit Center for Insurance Research in Cambridge, Massachusetts.
‘Violated Terms’
It’s very clear they violated the original terms of the contract,” says Bridgeland, who is retained by the National Association of Insurance Commissioners to represent consumers.
“Every veteran I’ve spoken with is appalled at the brazen war profiteering by Prudential,” says Paul Sullivan, who served in the 1991 Gulf War as an Army cavalry scout and is now executive director of Veterans for Common Sense, a nonprofit advocacy group based in Washington. “Now vets are upset at the VA’s inability to stop Prudential’s bad behavior.”
That the VA allowed Prudential to issue retained-asset accounts for 10 years while the contract required lump-sum payouts is “more evidence that the VA was asleep at the wheel for a decade,” says Sullivan, who was a project manager and analyst at the VA from 2000 to 2006.
“When grieving families check the box that they want a lump sum, they should get it. We remain disappointed and irate at the VA’s failure to provide advocacy for veterans,” he says.
State and US Probes
Since July 28, when Bloomberg Markets first reported that Prudential sent checkbooks instead of checks to survivors requesting lump-sum payouts, state and federal officials have demanded the retained-asset system be investigated and reformed. The VA itself launched a probe of its life insurance program the day the first story was published.
The next day, New York Attorney General Andrew Cuomo launched what he called a “major fraud investigation” of Prudential and other life insurers over their use of retained-asset accounts. Since then, Cuomo’s office has issued subpoenas to Prudential and at least 12 more insurance companies.
The insurance departments in Georgia and New York have also opened probes. The US House Oversight and Reform Committee plans to hold hearings into Prudential’s use of retained-asset accounts to pay money owed to fallen soldiers’ survivors.
‘News to Me’
US Secretary of Defense Robert Gates — 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.”
As a result of the VA probe, the agency announced today that it will change its insurance program, allowing survivors to request and receive lump-sum checks.
Under Prudential’s original 1965 contract with the VA and a 2007 revised contract — both of which were released as part of the FOIA response — the insurer is required to send lump-sum payouts to survivors requesting them. The contract covers 6 million active service members, their families and veterans.
The checkbooks Prudential sends to survivors are tied to what the insurer calls its Alliance Account. The checkbooks are made up of drafts, or IOUs, and aren’t insured by the Federal Deposit Insurance Corp. Prudential invests the survivors’ money in its general corporate account, where it can earn the insurer as much as eight times as much as it currently pays in interest to beneficiaries.
Bond Income
Prudential held $662 million of survivors’ money in its corporate general account as of June 30, according to information provided by the VA. Prudential’s general account earned 4.2 percent in 2009, mostly from bond investments, according to regulatory filings. The company has paid survivors holding Alliance Accounts 0.5 percent in 2010.
Families that were supposed to receive lump-sum payments under the terms of the contract before it was amended in 2009 may be able to successfully sue Prudential for lost interest, insurance lawyer Bridgeland says.
“Survivors would have a very strong claim for interest earned by Prudential on their money,” he says.
Prudential spokesman Bob DeFillippo says his company is following the terms of its agreement with the VA.
“Prudential is in compliance with its contract with the Department of Veterans’ Affairs,” he says.
DeFillippo declined to comment on whether Prudential was in compliance with its contract between 1999 and September 2009 or to answer any other questions. Prudential chairman and Chief Executive Officer John Strangfeld declined to comment for this story.
Useful Service
In July, DeFillippo said Prudential’s retained-asset account was a useful service for bereaved relatives of soldiers. “For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” he said. Survivors can withdraw some or all of their money at any time, he said.
Veterans Affairs Chief of Staff John Gingrich says the agency approved use of the Alliance Account because it wanted to help survivors.
“We needed to give an option to individuals that allowed them more flexibility and time to react to the tragic family situation,” Gingrich says.
Verbal Agreement
VA spokeswoman Katie Roberts declined to say when Veterans Affairs Secretary Eric Shinseki, who was appointed by President Barack Obama in January 2009, learned of the existence of the 1999 verbal agreement and the 2009 amendment. She also declined to make Shinseki available for comment.
The VA official who verbally agreed in 1999 to allow Prudential to change the terms of the 1965 contract and begin offering retained-asset accounts was Thomas Lastowka, the VA’s director for insurance, according to Dennis Foley, a VA attorney. Prudential began sending Alliance Account kits to soldiers’ beneficiaries in June 1999.
Foley says the VA and Prudential would have been better off if they had put their 1999 agreement in writing.
“Could that have been done better?” Foley asks. “Probably. Best practice would have been to legally memorialize it at the time.”
Foley says the 1999 changes to the 1965 contract were valid, even if they weren’t in writing, because they were made by mutual agreement by people empowered to make such decisions.
“It was changed by somebody who was authorized to change it,” he says.
Contract Terms
The language of both the 1965 contract and the 2009 amendment make clear that Newark, New Jersey-based Prudential was required to adhere to the original terms until 2009, regardless of any handshake agreements in 1999, insurance lawyer Bridgeland says.
The 1965 contract says any alterations must be made in writing.
“No change in the Group Policy shall be valid unless evidenced by an amendment thereto,” it says. “No Agent is authorized to alter or amend the Group Policy.”
The VA and Prudential signed a revised contract in 2007, saying it was “amended in its entirety.” That contract, with the exact same words as the 1965 agreement, required that Prudential pay survivors with lump sums.
The 2007 revision included the same procedures in the 1965 agreement requiring any changes be made in writing. It contained no mention of the retained-asset system, or of the verbal agreement struck in 1999.
2009 Amendment
It wasn’t until Sept. 24, 2009, that the changes agreed to by VA official Lastowka and Prudential in 1999 were put into writing. The 2009 amendment allowing Prudential to hold onto death benefit payouts was made retroactive to Sept. 1, 2009, not back to 1999.
By putting in writing a change that was verbally adopted 10 years earlier, the VA is effectively trying to backdate the amendment, says Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, who wrote ‘Stempel on Insurance Contracts’ (Aspen Publishers, 2009).
“They’re trying to reinvent history,” Stempel says. “You really can’t do that. This is a blatant giveaway by the VA with nothing for the agency or the people in uniform.”
Nine of every 10 survivors ask Prudential for lump-sum payments, the VA says. Prudential sends those families “checkbooks” instead of checks.
‘Disasters Do Happen’
Documents released in the FOIA request show some signs of concern within the VA after Prudential proposed the retained-asset accounts in 1998. Lastowka, the official who allowed Prudential to introduce the Alliance Accounts, said that the insurer’s “checkbook” system wasn’t protected by the FDIC.
“Disasters do happen,” wrote Lastowka, in an e-mail dated June 9, 1999, to Stephen Wurtz, the agency’s deputy assistant director for insurance.
Lastowka said in his e-mail that the lack of FDIC coverage could backfire on survivors.
“Who is responsible if Alliance goes belly up?” Lastowka asked. “I think we have to also be prepared to defend the use of the Alliance Account.”
Lastowka also asked whether Prudential had adequately disclosed to survivors that the Alliance Accounts weren’t covered by FDIC insurance. “Did Pru alert us to the non-FDIC fact?” he wrote to Wurtz. “Or was it in small print as the notice to beneficiaries?”
Documents turned over by the VA didn’t include a response from Wurtz.
‘Aware of Issues’
Lastowka says his e-mail shows the decision to allow Alliance Accounts was carefully considered.
“This e-mail demonstrates simply that the VA’s Insurance program was aware of issues that might be raised as we implemented the payment method and that we should be prepared to respond to inquiries,” Lastowka says. “We were confident that we were making a decision which would benefit survivors.”
The FOIA documents show that on June 10, 1998, Prudential gave a presentation to the VA. It included 10 pages of key points, saying the Alliance Accounts would benefit survivors because they would provide safety, flexibility in how and when to use their money, competitive interest rates and customer service.
In fine print, at the bottom of one of the pages, was this caveat: “Funds in the Alliance Account are direct obligations of The Prudential Insurance Company of America and are not insured by the Federal Deposit Insurance Corporation.”
Sheila Bair
Twelve years later, the issue of the lack of FDIC protection in retained-asset accounts flared anew.
FDIC Chairman Sheila Bair said in August that consumers could incorrectly conclude that retained-asset accounts were insured by the FDIC.
“The insurance company must take care to avoid implying in any way that these accounts are in fact FDIC-insured,” she wrote in an Aug. 5 letter to state insurance regulators.
Some families of veterans have taken their complaints to court. Five survivors filed a federal fraud lawsuit in Boston on Aug. 30 against Prudential claiming the insurer has earned as much as $500 million in profits by improperly keeping beneficiaries’ money instead of paying it out in a lump sum.
The suit, Lucey vs. Prudential Insurance Co. of America, says the insurer fraudulently claims to beneficiaries that the Alliance Account is a lump sum.
‘This Ruse’
“Initiation of this ruse does not constitute payment of anything to anyone,” the suit says. “The Alliance Account is merely a bookkeeping device used by Prudential to hold on to beneficiaries’ money.”
Prudential hasn’t yet filed a response in court. Spokesman DeFillippo says he can’t comment on the case.
“It is important to note that several federal judges have rejected claims against accounts like our Alliance Account, concluding that beneficiaries are in virtually the same position they would be in had the insurer sent them a check,” DeFillippo says. He cited the dismissal of a case against MetLife Inc. on Sept. 10.
Insurance contract professor Stempel says that regardless of the outcome of that lawsuit, it’s clear that Prudential and the VA wrongly manipulated a federal contract at the expense of military members and their relatives. “At a minimum, survivors ought to be made whole with their missed interest,” he says. “The VA really seems to have had the best interests of the insurance company at heart, instead of those of the soldiers and their families.”
To contact the reporter on this story: David Evans in Los Angeles atdavidevans@bloomberg.net.
Posted in accordance with Title 17, Section 107, US Code, for noncommercial, educational purposes.
House Panel Investigates Military Death Benefits
Brian Naylor / NPR
WASHINGTON (September 12, 2010) — A House panel has launched an investigation into claims that insurance companies are taking advantage of the families of service members killed in Iraq and Afghanistan with the way they handle death benefits.
The House Oversight and Government Reform Committee has asked Prudential Insurance, which contracts with the Department of Veterans Affairs to provide life insurance for members of the armed forces, for some answers about what are known as retained asset accounts.
The Practice
Death benefits for service members’ families — up to $400,000 — are supposed to be available in a lump sum.
But in retained asset accounts, rather than paying out death claims all at once, the insurance companies keep the funds in an account, and give beneficiaries so-called checkbooks to access the money. The companies pay the beneficiaries a small amount of interest for the money they’re holding — usually 1 percent or less — while the companies themselves invest the money and earn a much higher return, often around 4 or 5 percent.
The practice is fairly common in the insurance industry. The companies say these accounts are a convenient service at a time of emotional duress, and give grieving families one less issue to deal with.
An investigation by Bloomberg Markets magazine determined there are as many as 1 million such accounts, containing some $28 billion.
Family Reaction
But critics say insurance companies are taking advantage of people with these policies at a time of great emotional strain, especially families of service members killed in action. Mark Umbrell, whose son, an Army ranger, was killed in Iraq in 2007, says he was skeptical about the benefits from the beginning.
“I thought we were going to get a check from the government for $400,000. And when I read into this, I remember my wife and I having a conversation that this is a scam, this insurance company or this bank — they’re stealing money,” he says.
Now, beneficiaries can take the checkbook, write out a check for the entire amount due to them, and put it in the bank.
That’s what Umbrell did. But he doesn’t think much of the practice, especially because on the death benefit form, he requested the money be paid in one lump sum to begin with.
And a lot of people try to use these checkbooks as if they are actual bank checks, which they are not, and are surprised and embarrassed when stores won’t accept them, or find it takes more than a week for a bank to clear the drafts. Stories like these outrage Joe Davis with the Veterans of Foreign Wars in Washington.
“To make money off of dead soldiers — you don’t do that,” Davis says. “That’s just not right. And just because they are doing this to all beneficiaries across the nation doesn’t make this any less egregious.”
The VA issued a statement saying it is investigating the policies, but declined NPR’s request for an interview. The VA this week sent a letter to family members, ensuring them that their funds are safe. Prudential says it’s working with the VA to address concerns.
Paul Graham, a senior vice president with the American Council of Life Insurers, the industry’s trade group, says the industry has had “positive feedback from beneficiaries that have liked these accounts, but we certainly are open to reviewing any problems that have occurred.”
Government Inquiry
The House Oversight and Government Reform Committee on Wednesday sent a letter to Prudential outlining more than two dozen questions it wants the company to answer, including how much Prudential earns on the money held in the accounts, and how much interest it pays beneficiaries on that money. Several other members of Congress have also questioned the accounts, as well as at least two state attorneys general.
The Federal Deposit Insurance Corp. now says it also has concerns about whether the insurance companies are properly informing beneficiaries that the money held in the retained asset accounts is not FDIC-insured. The benefits are protected by state insurance funds, but not to the full $400,000 amount.
Cindy Lohman, a Maryland nurse whose son was killed by a roadside bomb in Afghanistan, received a letter this week from the VA, along with other military families, assuring that her money held in the retained asset accounts is safe.
She hopes something comes of all this. She calls herself “a firm believer in the military as a family, and I still continue to be part of that greater family, even though my son has died. We’ve worked for the military for a number of years. I’m hoping that they’re sincere about looking at it and improving the process for the families.”
Life Insurance Firms Profit From Death Benefits
National Public Radio
(July 28, 2010) — Life insurance companies delay issuing death benefits owed to families of service members and others by promising to hold the money in safekeeping, an investigation by Bloomberg Markets magazine found. Senior writer David Evans and Cindy Lohman, whose son was killed in Afghanistan, discuss the findings with NPR’s Robert Siegel. Below is a preview of Evans’ September 2010 magazine article. Read a transcript of the interview.
Millions of Americans are being duped by life insurance companies that have figured out a way to hold onto death benefits owed to families. MetLife and Prudential lead the way in making hundreds of millions of dollars in secret profits every year on money that belongs to relatives of those who die, an investigation by Bloomberg Markets magazine found. Among the people being tricked are parents and spouses of US soldiers killed in battle in Iraq and Afghanistan.
Survivors of service men and women are told they’ll get a $400,000 life insurance payout. They don’t. Instead, Prudential — which has a government contract to provide life insurance for military families — keeps their money.
Families are surprised when they receive what looks like a checkbook. In documents, Prudential promises to hold the money in safekeeping for as long as families would like, saying it will pay them 0.5 percent interest. What Prudential doesn’t disclose is that it is keeping survivors’ money in Prudential’s own corporate investment account, where the company is earning five to 10 times as much as it pays to families. The so-called checks have JPMorgan Chase printed on them, but they cannot be used as regular checks. Instead, they are to be submitted back to Prudential to get any money
But the money isn’t in a bank, and it’s not protected by FDIC insurance. None of these facts are spelled out to the survivors; the details are often hidden in fine print.
Nor are families told that they could earn more than twice as much interest by opening FDIC-insured money market accounts at banks across the country. Families of fallen soldiers say they often don’t want to touch the “checkbooks” because they view them as payments in return for their sacrificed child. As a result, Prudential holds onto the death benefits, often for a year or more.
“I’m shocked,” says Cindy Lohman, a Maryland woman whose son, Ryan, was killed in Afghanistan in 2008. “It’s a betrayal. It saddens me as an American that a company would stoop so low as to make a profit on the death of a soldier.”
Millions of Americans have unwittingly been placed in the same position by their insurance companies. The practice of issuing so-called “checkbooks” to survivors, instead of paying out lump sums, extends well beyond the military.
In the past decade, this tactic has become standard operating procedure in an industry that touches virtually every American: There are more than 300 million active life insurance policies in the US. MetLife alone holds $10 billion in death benefit money that belongs to grieving families. MetLife makes $100 million to $300 million a year by investing, mostly in the bond market, money that belongs to survivors.
Insurance companies say they’re providing their customers with a service. Prudential’s checkbook accounts are helpful to families of soldiers, says company spokesman Bob DeFillippo.
“For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” he says. (Read a statement from Prudential.)
MetLife spokesman Joseph Madden says his company’s customers are very happy with the system.
“The feedback from customers has been overwhelmingly positive,” he says. “We afford beneficiaries security, peace of mind and time to make an informed decision — while earning interest in the interim.” (Read a statement from MetLife.)
How big is the unregulated quasi-banking system operated by insurers? There are now more than a million of these accounts holding more than $28 billion at 130 life insurance companies.
“It’s outrageous that they’re profiting off other people’s grief,” says Mark Umbrell in Doylestown, Pa. His 26-year-old son, Colby, an Army Airborne Ranger who earned a Bronze Star and a Purple Heart, was killed in Iraq in May 2007. Umbrell was among those who got a “checkbook” account. “I think we’re being taken,” he says.
The question for Umbrell, Lohman and a million others with these accounts is whether anyone will hear their cries. State bank regulators say if there are to be any changes, they should be made by their counterparts at state insurance departments. Officials at those state agencies often say they don’t even understand what the insurance industry is doing with these “checkbook” payouts.
Just six states had any rules for retained-asset accounts as of July 2009, according to the National Association of Insurance Commissioners. Arkansas, Colorado, Kansas, Nevada, North Carolina and North Dakota require insurers to disclose fees and interest rates and to tell survivors they may withdraw all of the money by writing a single check. Maryland, which isn’t on the NAIC list, also has rules.
Pennsylvania Insurance Commissioner Joel Ario, whose state has no rules for retained-asset accounts, says he has asked his staff to prepare a regulation forbidding insurance companies from using such accounts as the default method of paying a death.
“It’s flown under the radar,” says insurance law professor and author Jeffrey Stempel. “Regulators have not done their job.”
Until public officials wake up, the bereaved will remain a secret profit center for the life insurance industry.
Posted in accordance with Title 17, Section 107, US Code, for noncommercial, educational purposes.
