The country's oldest veterans service organization is intervening in a class-action lawsuit that accuses Prudential Insurance Co. of America of profiting by withholding lump-sum payments to the families of fallen troops.
The Veterans of Foreign Wars is demanding that Prudential make public all records related to its handling of the government's Service Group Life Insurance and Veterans Group Life Insurance programs.
The suit, filed with the U.S. District Court in Springfield, Mass., alleges that the company collected interest from unpaid life-insurance benefits by encouraging beneficiaries to leave the money in so-called Alliance Accounts rather than taking lump-sum payments. By investing the money, Prudential made hundreds of millions of dollars, according to the complaint.
"SGLI was created by Congress to provide special protection to military families. It was not created to enrich an insurance company that concocts a scheme to hold onto those families' money while purporting to provide them access to it," VFW National Commander John E. Hamilton said in a statement.
Hamilton also criticized Prudential for a motion for dismissal that, if approved by the judge, would require the families of deceased troops and veterans to prove they "would have used the money to make more interest than what Prudential paid out."
"If Prudential broke the law and made a profit, it should not be allowed to keep that profit," he said.
Bob DeFillippo, a spokesman for Prudential Financial Inc., said in a telephone interview that the company cannot comment on the case because of the pending litigation.
The VA has said that in 2009 -- the year before the lawsuit was filed -- Prudential held insurance policies for about 6 million servicemembers and veterans, collecting about $1 billion in premiums.
The lawsuit claims that Prudential made $850 million or more from the interest it earned on the accounts. Over the years, the company has reportedly earned interest in excess of 3 percent on the Alliance Accounts, while paying a fraction of a percent to the families.
A verbal agreement between Prudential and the Department of Veterans Affairs in 1999 permitted the insurance giant to hold the money in interest-bearing checking accounts that the survivors could draw on starting in 2009. The company began using the accounts immediately.
But the agreement was never put in writing, possibly making the so-called retained asset accounts illegal, according to Rep. Steve Buyer, R-Ind., who in 2010 argued against a bill to codify the practice until hearings and investigations into the matter were complete.
The VA and Congress moved quickly to pass the legislation that year, after Bloomberg News broke the news that Prudential was profiting from the death benefits owed to the families of fallen servicemembers.
Thomas Lastowka, then the VA's director for insurance, made the verbal agreement with someone at Prudential, a government attorney told the financial news service. Lastowka now serves as director of the Philadelphia VA Regional Office and Insurance Center.
Based on previous interviews and court documents, Prudential maintains the Alliance Accounts were set up to help survivors' families during what would be a difficult time in their lives -- dealing with the loss of a family member.
The company also said that families are told from the start that they can write a check on the entire amount at any time. But with accounts, survivors earn interest ranging from 0.5 to 1.5 percent and draw on the funds as needed while deciding what to do next.
Prudential maintains that the families aren't entitled to damages because the company paid them as much interest as they were likely to have earned if they were given a single lump-sum payment and invested it in a regular savings or checking account.
"They are basically saying … these people would never have made more money than the interest we gave them because they're not sophisticated" about investing, said Cristobal Bonifaz, the Massachusetts lawyer representing the survivors.
Michael von Loewenfeldt, a San Francisco attorney also representing the families, said Prudential's argument -- that the survivors wouldn't have earned more if they deposited the full amount into their own accounts -- misses the point.
"They don't have a right to take the money," he said. "If I notice that my neighbor has a car they never use and I decide to use it as a cab service -- I put gas in it, I keep it clean -- can I say 'what difference does it make [that it's not my car]? They weren’t using it?'"
The VFW's action comes as both sides in the lawsuit await a ruling on Prudential's motion to dismiss the case. Hamilton, the group's national commander, said the company shouldn't object to the full record being made public if there's nothing to hide.
"Prudential has actively tried to seal documents about its conduct from the public record, and has opposed efforts to unseal those records," he said.