Quackenbush Threatens to Suspend Prudential

California Insurance Commissioner Chuck Quackenbush threatened Thursday to suspend Prudential Insurance Co.’s license to do business in the state unless the giant insurer significantly improves the reimbursement offered to life insurance customers it allegedly defrauded.

If the threat were carried out, a suspension would prevent the nation’s largest insurance company from selling any new insurance policies in the state.

That would be a significant blow to the company, which already faces formal action by Florida authorities to lift its license in that state. Prudential also faces investigationsaround the country of its life insurance sales practices as well as numerous instances of destruction of evidence sought by regulators and lawyers for policyholders.

In a written statement, Prudential said it was “surprised and disappointed” by Quackenbush’s announcement, and said “we will vigorously resist any attempt to suspend our license in California.”

Prudential confirmed that California is one of the states in which it has the largest number of policies in force. But a spokesman said he couldn’t immediately confirm whether California is among the top three states in terms of sales.

Prudential has said that about 750,000 Californians would be covered by a proposed settlement of a nationwide class-action lawsuit alleging fraud in its life insurance sales. A spokesman for the Insurance Department said the suspension would allow Prudential to continue serving all existing customers.

The suspension threat marks an unusually harsh move by Quackenbush, who since his election in 1994 has been consistently criticized by consumer groups for taking few strong actions against the insurance industry.

In a telephone interview with The Times on Thursday, Quackenbush confirmed that, although his department has been receiving large numbers of customer complaints about Prudential since the late 1980s, the agency only this week began an investigation that could provide the necessary legal backup for disciplinary action. At least four other large states have had independent investigations underway for some time.

“We are deadly serious about making sure that every consumer in California is fully compensated, with interest,” Quackenbush said. But he abruptly terminated a telephone interview after declining to answer any questions about the scale of resources he will allocate to the inquiry, including the number of investigators assigned. He said it would be inappropriate to disclose such details.

Behind Quackenbush’s move is his dissatisfaction with the terms of the proposed class-action settlement, which he argues places too heavy a burden on customers to produce the documentary proof that they were defrauded. Because of that and other hurdles, customer advocates contend the settlement will make it difficult for many to recover their full losses.

Several states, including California, have asked the federal judge overseeing the case to overturn the settlement and are also pursuing separate negotiations with the company. Quackenbush said he took his action because negotiations with the company for a more favorable settlement for California customers broke down.

U.S. District Judge Alfred M. Wolin of Newark, N.J., is due to rule on the fairness of the class-action settlement after a Feb. 24 hearing.

Under California law, the insurance commissioner can move to revoke the company’s license, but the company could request an administrative hearing at which the state would have to provide evidence supporting its decision. The company could then appeal an adverse ruling to state court.

From 1982 through 1995, Prudential is alleged to have used deceptive practices in life insurance sales, including persuading customers to use money from paid-up life insurance policies to buy much larger policies with the false promise that it wouldn’t cost them anything.

So far, only California and Florida have threatened to lift Prudential’s license in connection with the controversy, and it wasn’t clear if any other states will follow suit. In Virginia, one of the five states that haven’t approved the class-action settlement, a spokesman for the state insurance department said it was close to reaching a separate settlement, although he declined to give details.

The Massachusetts insurance department said it is continuing its investigation and hasn’t yet discussed whether to consider lifting the company’s license. In Texas, another of the states objecting to the settlement, a spokesman for the insurance department said the state’s investigation was continuing but added: “We’re very concerned because it seems like every day there is a new revelation about document destruction.”

California’s action came as Massachusetts announced Thursday that investigators conducting a sweep of four Prudential offices in that state had turned up new evidence of document shredding and forgery of customer signatures. Prudential’s disclosure in December that its Cambridge, Mass., office had shredded records from customer files led to a $1-million fine imposed Jan. 6 by Judge Wolin, who is overseeing the class action.

The judge this week also appointed an outside “special master” to investigate other allegations of evidence destruction and withholding of a key document from regulators.

Charlie Harak, a Massachusetts assistant attorney general, said state insurance department investigators had found “confirmation of allegations of agent forgery of policyholder signatures” on forms that enabled Prudential to withdraw money from customers’ life insurance policies.

“It appears that these were neither isolated nor random incidents,” he said, adding that his office is investigating further to determine if criminal charges might be warranted.

Prudential spokesman Robert DeFillippo said the company hadn’t been notified of what Massachusetts found in the sweep, but said, “We’re cooperating fully with their investigation.”