Gyroscopic Investing

So if an insurance company doesn't pay you or moves the proceeds to a literal segregated account, but keeps it in their general fund as a bookkeeping liability earning 5%-6% interest while paying you only .5% to 1.5% interest only on demand and screwing you out of $20K-$30K, is it ethical profiteering?  Yessir, according to the judge in the class action lawsuit.  I'm only surprised he is not in the corrupt Southern District of New York, but MA is still pretty bad (insurance companies homeland).  I like how he washes his hands by referring to the court instead of himself.  Talk about a lack of judicial engagement.

[quote=http://www.law.com/sites/articles/2014/ ... -benefits/]
Prudential to Settle Class Action Over Veterans' Death Benefits

Prudential Insurance Co. has agreed to donate more than $20 million to veterans’ charities, and pay $8 million to survivors of veterans and service members who died, to settle a class action that alleged the insurance giant profited by not paying lump sum death benefits to the families.

On Aug. 5, U.S. District Judge Michael Ponsor of the District of Massachusetts approved the preliminary settlement in the hotly contested consolidated case In Re: Prudential, which also includes awards of about $10 million for plaintiffs’ attorneys and $10,000 each for 10 class representatives. Each primary beneficiary would receive about $125, the order estimates.

At issue were “Alliance Accounts,”? called retained asset accounts by the insurance industry, which Prudential encouraged the beneficiaries of Servicemembers Group Life Insurance (SGLI) and Veterans Group Life Insurance (VGLI) policies to use to park the tax-free, six-figure benefits most of the families receive.

Instead of a lump sum, Prudential gave survivors a checkbook that could be used to draw down the funds from the interest-bearing account at any time. Prudential contends the accounts—which are not federally insured, but may be by state guaranty funds—give the survivors breathing space while making decisions on what to do with the money.

But plaintiffs see a more malign motive: Prudential can invest the money for a higher return than the company pays in interest for the cash in the accounts. The families contend in their complaint that the alliance accounts earned about 0.5 percent to 1.5 percent interest, while Prudential has reaped as much as 6 percent, for a total of $850 million or more profit by playing the spread.

The complaint, which counts more than 60,000 military life insurance beneficiaries as potential class members, alleges Prudential engaged in fraud, breach of fiduciary duty and unjust enrichment. Originally filed in 2011, it seeks restitution of foregone interest, monetary damages and a piece of Prudential’s profits.

Prudential contends not only that its conduct was lawful and authorized by the Department of Veterans Affairs, but also that the beneficiaries suffered no damages because they always had full access to their funds and thus were not harmed in any way.

Judge Ponsor agreed. In a Nov. 22, 2013 order, he announced his intention to grant most of Prudential’s motion for summary judgment, finding the plaintiffs had suffered no actual injury and were not entitled to recover monetary damages. That ruling spurred settlement discussions.

In his Aug. 5 order, the judge let the class members know they would be lucky to get the $125 award, which pales next to the millions the deal would provide for charities and plaintiffs’ counsel.

“Cash relief of $125 per beneficiary is undeniably an excellent result in a case in which the court itself questioned whether the SGLI beneficiaries sustained any damages at all,”? Ponsor wrote.

Goodwin Procter LLP, Choate Hall & Stewart LLP and Debevoise & Plimpton represent Prudential. The plaintiffs are represented by The Daniel D. King Law Firm, PLLC; Law Offices Of Cristobal Bonifaz; Bonnett Fairbourn, Friedman & Balint, P.C.; Scott & Scott LLP; Kerr & Wagstaffe LLP; and Archuleta, Alsaffar & Higginbotham.[/quote]

I would use the check as toilet paper and mail it to Prudential.  Is that considered a terrorist activity these days? 

Wouldn't a bank have done essentially the same thing if the Veterans took the lump sum payment and put it in a savings account?

madbean wrote: Wouldn't a bank have done essentially the same thing if the Veterans took the lump sum payment and put it in a savings account?

Don't know about the rates at the time, but insurance companies are different than banks.  They're not supposed to arbitrage like they did here on lump sum payouts.  You should be entitled to what they are earning in the general fund if they are keeping YOUR MONEY there instead of in a legally separate account as it should have been (or paid out to you).  I really don't understand how omission equates to lack of damages.  You are worse off not being paid the full amount owed.  It's like the Koch brothers stealing oil from Native Americans by intentionally underestimating the volume withdrawn.  Were the Native Americans literally damaged when they didn't know about it?  The government later said yes.

1) Were these payout terms contractually agreed to?

(Methinks, yes.)

2) Is it natural to have different interest terms on a demand-deposit than an investment portfolio?

(IMO, yes.)

3) Could people simply write themselves a check for the money and invest it themselves?

(Methinks, yes.)


Here's what I think happened:

Step 1) People GROSSLY under-insure themselves and their family's to the financial impact of a premature death.

Step 2) Tragic premature death occurs, and survivors run out of money WAY faster than they thought they would.

Step 3) Lawyers seize an opportunity to get people in a rough financial spot to support suing the insurance company involved.


Sorry to sound insensitive.  Being a widow mother is probably one of the most unenviable positions that one can be in.  However, looking at this objectively, short of it seeming a bit odd that Prudential thought it was more appropriate to act as a bank account for these people than simply writing them a check, I don't see much of a problem here.

MachineGhost wrote:

madbean wrote: Wouldn't a bank have done essentially the same thing if the Veterans took the lump sum payment and put it in a savings account?

Don't know about the rates at the time, but insurance companies are different than banks.  They're not supposed to arbitrage like they did here on lump sum payouts.  You should be entitled to what they are earning in the general fund if they are keeping YOUR MONEY there instead of in a legally separate account as it should have been (or paid out to you).  I really don't understand how omission equates to lack of damages.  You are worse off not being paid the full amount owed.  It's like the Koch brothers stealing oil from Native Americans by intentionally underestimating the volume withdrawn.  Were the Native Americans literally damaged when they didn't know about it?  The government later said yes.

It's not really like that at all unless the insurance company actually LIED somewhere in its contract.  Even if they kept the funds in their general fund, 1) granting immediate liquidity to someone puts risks on their shoulders that would justify a lower return, naturally, and 2) the individuals (presumably) had agreed to this AND (presumably) had the ability to write themselves a check for the full amount to do something different with it.

This is an entirely different type of wrong than overtly lying to someone about material contractual terms.

Legal maybe, sleazy beyond belief. Despicable if the circumstance was a young 18-19 year old widow with no financial knowledge. I think a simple change is if an insurance company is going to compete for this contract the government should simply put in the contract that the company when issuing the payout has a fiduciary responsibility to the recipient. That will then turn the company's lawyers on itself because they would have to act in the best interests of the recipient.

moda0306 wrote: This is an entirely different type of wrong than overtly lying to someone about material contractual terms.

You're getting a little hung up on contract terms.  Lets say you were a to-be-veteran having premiums withheld from your pay into this insurance scheme each month for the full 30 (?) years you can be in service.  Do you honestly believe that the contract from 30-years ago stipulated that Prudential may do whatever it bloody well likes with beneficiary payouts now and in the future, and that anyone still had the contract 30-years later, assuming a contract was even given to the veteran in the first place?  And that there was a meeting of the minds and full disclosure?

Whats the point in writing broad, general "cover your ass" clauses so you can screw over beneficiaries however you like?  I'm pretty sure stuff like that doesn't hold up automatically JUST because it is in a written contract.  Motive and behavior matter too. 

I wonder how this sleaze was even discovered.  I'm having trouble picturing it.

And BTW, they sent out monthly or quarterly statements too with the fictitinous interest accruing.  Even though it was not a real account any more than the checkbook was.

I'm confused...  What's unethical about promising a particular rate of return in exchange for the use of money?  Why does it matter how much they were able to earn with the money in the meantime?

Xan wrote: I'm confused...  What's unethical about promising a particular rate of return in exchange for the use of money?  Why does it matter how much they were able to earn with the money in the meantime?

Its not about up to the point of the lump sum payment to beneficiaries; but afterwards in keeping the money on their balance sheet and in their general fund when it was no longer their money legally, arbitraging the profit difference between what they earned and what they were willing to pay "on demand" when "withdrawal" requests came in for nonexistent accounts.  Kbg said the magic word "fidicuiary duty".  There was none.

The emphasis here should be that there was no choice...  the beneficiaries were sent a checkbook to give the illusion their money was placed in a separate bank account that was fully liquid and accessible at anytime.  It looked for all intents and purposes like a money maket savings or mutual fund account.  Very sleazy.

Legal and ethical; two terms with huge differences in meaning. My gut says this was probably within the letter of the law. But I agree that it looks like the company was taking advantage of the families of deceased servicemen and women. I have no business connections with this company and thanks to this post, that is extremely unlikely to ever change.