Judge Refuses to Block Prudential Insurance Case

Prudential Insurance Co. of America cannot dismiss a lawsuit that accuses it of misappropriating hundreds of millions of dollars worth of life insurance benefits from fallen members of the U.S. military, a federal judge ruled.  

U.S. District Court Judge Michael A. Ponsor ruled that the company's arguments were not sufficient to justify dismissal of the case, which case involves two federally subsidized life insurance programs for active duty military and veterans. Eligible members are insured up to $400,000. Prudential has been one of the carriers providing the coverage since 1965.

The dispute revolves around how payment is made to the beneficiaries when an insured service member or veteran dies – in a lump sum or in 36 monthly payments.

Prudential had traditionally mailed a lump sum check to the beneficiaries of any military member or veteran who had chosen that option. But in June 1999, it adopted a new system, in which the death benefit was paid into a so-called Alliance Account. Beneficiaries received an account book, similar to a check book, and could withdraw funds from the interest-bearing account whenever they wished.

The plaintiffs in the case contend that the Alliance Account is not in accordance with the contract under which Prudential provides the insurance coverage. Their suit argues that “giving a beneficiary access to an Alliance Account is not equivalent to mailing a check to the beneficiary.”

The suit argues that grief-stricken beneficiaries will often not seek an immediate pay-out of the lump sum and that Prudential meanwhile makes money on the funds left in the account. That's because, even though the Alliance Account earns interest, it is “only a fraction of the interest” that Prudential earns.

Prudential argued that the Alliance Account was essentially the same thing as a lump sum payment and moved for dismissal of the suit.

But Judge Ponsor cited a previous, similar case in which a court against UNUM Life Insurance Co., saying that “the difference between delivery of a check and a checkbook is the difference between retaining or divesting possession” of the funds.

“A lump sum payment by check (which actually transfers the funds to the beneficiary) is simply not the same as a lump-sum payment by checkbook (which allows the insurance company to retain the funds and earn interest on them,” Judge Ponsor wrote.