Lawsuits Seek To Change Prus Demutualization Plan

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Attorneys have filed a federal class-action lawsuit in Newark, N.J., the home town of Prudential Insurance Company of America, charging the insurers demutualization plan dilutes the stake of longtime policyholders.

The suit, filed by three law firms, alleges that Prudentials plan dilutes the ownership interests of participating policyholders by giving shares to nonparticipating policyholders. Prudential has sold variable policies, which are nonparticipating, through a stock subsidiary, Pruco Life, a company spokesperson says.

The lawsuit was filed on behalf of a policyholder in New York City and another in Yreka, Calif., and seeks court authorization as a class action on behalf of Prudentials approximately 10 million policyholders in the U.S. as of Dec. 15, 2000.

It charges that Prudentials inclusion of nonparticipating policyholders in distribution of stock is unfair to participating policyholders.

“These nonparticipating contract holders have never owned a piece of the rock and should not be allowed now,” the attorneys stated in court papers.

Participating contracts, the suit argues, pay premiums that are usually higher than for nonparticipating contracts, with the understanding that excess premiums be returned to them as dividends. Participating contracts thus give owners vested rights in the company, the attorneys argued in papers filed with the state superior court in Newark.

The suit notes that the demutualization plan also would allocate shares to other nonparticipating contracts, including certain annuities and Prudential HealthCare contracts sold to Aetna in 1999.

The attorneys say they may also file suit later against New Jersey Commissioner of Banking and Insurance Karen Suter if she approves Prudentials plan in its current form.

According to the papers the attorneys filed with the court, Prudential admits that the plan would reduce the total compensation to participating policyholders by 11.8%, with a value estimated at $1 billion.

The attorneys called the provision allowing nonparticipating policyholders to be eligible for share distributions “unprecedented.”

“We believe the plan is fair to policyholders,” counters Prudential spokesman Robert DeFilippo. “New Jersey law allows Prudential to decide wholl be participating. Our position is that allowing those policyholders to do so is absolutely the right thing to do.”

DeFilippo adds that the company will “vigorously” defend against the lawsuit.

In addition to Prudential, the suit names Arthur F. Ryan, chairman, CEO and president of the company, and the members of the board.

The suit was filed by Lite DePalma Greenberg & Rivas, LLC, in Newark; Milberg Weiss Bershad Hynes & Lerach LLP, New York City; and Zell Davis, Jr., an attorney in Singer Island, Fla.

Meanwhile, another attorney representing unhappy policyholders says he is planning to broaden a suit he filed in March in Illinois state court against Prudentials plan and possibly to move it to federal court.

Robert Holstein, of Stern Holstein Zimmerman & Hanson in Chicago, says his firm is planning to add some of the complaints that arose from policyholders and their representatives during New Jerseys recent public hearing on the demutualization plan. The meeting was held in Trenton July 17 and 18 by Commissioner Suter.

Holsteins suit alleges Prudentials plan gives the same weight to new policies as to policies that were paid up years ago.

Holstein says he is considering moving the case to federal court and adding New Jerseys Department of Banking and Insurance to the complaint on the grounds that it held the public hearing after policyholders had started voting on the plan.

Policyholders have until July 31 to vote on the plan, which was mailed to them in June. At least one million policyholders must participate in the vote, and 60% of them must approve it, under the rules established under a demutualization law passed last year by the state legislature.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 6, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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