In re Prudential Ins. Co. of America Sales Prac.

Decision Date10 May 1996
Docket NumberMDL No. 1061.,Civil Action No. 95-4704.
Citation975 F.Supp. 584
CourtU.S. District Court — District of New Jersey

WOLIN, District Judge.

Before the Court is a motion under Federal Rule of Civil Procedure 12(b)(6) by defendants The Prudential Insurance Company of America ("Prudential"), Arthur F. Ryan and Donald G. Southwell (together the "individual defendants") to dismiss the consolidated amended complaint of the putative national class (the "complaint") in this MDL proceeding.1 The parties argued the motion before this Court on April 16, 1996. For the reasons set forth herein, the motion will be granted in part and denied in part.


As plaintiffs' counsel stated at oral argument, the document which the Court must evaluate to decide this motion is a "relatively bare-bones complaint" (Transcript p. 37) which was drafted under a tight deadline. No doubt, plaintiffs' counsel risked pleading in "bare-bones" style mindful that the Court would dismiss deficient claims, if any, without prejudice. Plaintiffs were correct; however, the Court warned plaintiffs' counsel at oral argument, and reiterates the admonition here, that its next Rule 12(b)(6) dismissal of claims pleaded herein will be with prejudice.

The Court has found much of the complaint to be deficient, and will dismiss several of plaintiffs' claims without prejudice. On the other hand, the standard for dismissal under Rule 12(b)(6) is a high one, and the Court has allowed several claims to go forward despite considerable doubt as to their ultimate merits. In sum, this opinion will likely not be the final word in framing the issues ultimately to be resolved in this case. Plaintiffs may successfully replead some of their claims, and Prudential may prevail on some its arguments at the summary judgment stage.


This is a well-publicized putative class action which charges one of the largest mutual insurance companies in this country with various improper insurance sales practices. This legal problem is apparently not unique to Prudential; numerous other mutual insurance companies face similar allegations in other courts. In this action, plaintiffs claim Prudential churned their accounts in several manners, sold insurance products which it mischaracterized as other types of investment plans, and took unauthorized loans against cash values they had amassed in their insurance policies. The complaint defines "churning" as a term "commonly used in the life insurance industry to describe the act of removing, through misrepresentations and omissions, the cash value, including dividends, from an existing life insurance policy or annuity (either by lapse of that policy or annuity or by borrowing therefrom) and then using that cash value to acquire a new life insurance policy" and states that churning "normally results in" a financial detriment to the policyholder, while the selling agent earns a large commission and Prudential reaps administrative fees. (¶¶ 30-31)

Many of the putative class plaintiffs purchased variable appreciable life insurance policies ("VAL policies"), during the proposed class period of January 1, 1980 to the present.3 Plaintiffs claim Prudential, through its sales and marketing materials and presentations, mischaracterized the VAL policies as other types of investment plans rather than as insurance.

The putative class asserts that Prudential engaged in a widespread scheme to target relatively unsophisticated consumers — particularly those who had entered or were about to enter retirement and/or had amassed large cash reserves in existing insurance policies — and convince them to purchase new insurance products, often representing that the customers could pay for them with income streams from insurance policies they already owned. In actuality, plaintiffs allege, Prudential knew that these representations were false and that these customers would likely have to satisfy their premium obligations out of cash values, rather than earnings, from their prior policies. To support these allegations, plaintiffs contend that Prudential provided its agents with forms known as Ordinary Policy Status Records and Debt Ordinary Policy Status Records, which provided information on individual policyholders' accumulated cash values in Prudential policies.

Additionally, plaintiffs allege, Prudential management provided its agents with standardized sales presentations, policy illustrations and other marketing materials which set forth, among other things, misleading information about the cost and value of the products they were selling. Specifically, plaintiffs charge that Prudential marketing materials (1) misrepresented the risks and potential benefits of paying for new insurance with the income stream from existing policies; (2) failed to disclose that the payment plans the company offered involved a high degree of risk that cash values of prior policies would be depleted to pay premiums on newer policies; (3) mischaracterized the insurance as an investment or savings account, pension maximization or retirement plan, college tuition funding plan, mutual fund or other investment or savings vehicle, and failed to disclose its lack of suitability to fulfill the objectives typically offered by such investment plans; and/or (4) failed to disclose that they were based upon inflated dividend scales, values, assumptions and interest rate projections which Prudential must have known to be false or unrealistic because they were inconsistent with Prudential's own internal forecasts and projections.

Plaintiffs contend that "[t]he false information given to each policyholder was virtually the same because Prudential agents were trained to present the same false information, and to conceal the same type of information from, plaintiffs and other Class members" (¶ 43); that Prudential provided its agents with computer hardware and software which helped to standardize their sales presentations, and that Prudential disseminated sales presentations which it required its agents to commit to memory. (¶ 46) Plaintiffs claim that "[a]lthough dividend disclosure forms were purportedly required to be given to prospective policy purchasers explaining the potential instability of Prudential's dividend, this was not done." (¶ 47) Plaintiffs also allege that Prudential provided its agents nationwide with "disbursement request forms" which, when signed by a policyholder in blank, allow Prudential agents to manipulate the funds generated by consumers' policies in various ways; for example, this would allow a Prudential agent to take out a loan against one policy to pay the premium on another without notifying the policyholder. (¶¶ 38-39)

Finally, plaintiffs allege that, without informing them, Prudential subjected customers who purchased dividend-participating policies within the class period to an additional risk arising out of the fact that, at the beginning of the class period, the company had created a new class of dividend participating policies which, unlike earlier policies, "did not enjoy the benefit of a cushion created by the pooling of premium proceeds with proceeds from all other policies invested over many years." (¶¶ 49-51)

The complaint asserts nine causes of action against Prudential and the two individual defendants. During and shortly after oral argument, however, plaintiffs agreed to withdraw all claims against the individual defendants as well as their claim for breach of contract against Prudential. Accordingly, the Court will dismiss without prejudice all of plaintiffs' claims against defendants Arthur F. Ryan and Donald G. Southwell, as well as plaintiffs' Third Cause of Action for breach of contract.4

Plaintiffs allege a multitude of allegedly fraudulent insurance sales practices; various class members may have fallen prey to one or more among them. The five named plaintiffs whose claims are at issue on this motion, for example, raise different combinations of issues and claims. The Court will summarize them briefly:

Nicholson's Claims

Plaintiff Carol Nicholson ("Nicholson") is the executrix of the estate of her husband, who died in 1994. Nicholson alleges that a Prudential agent contacted the couple in 1986 and told them Mr. Nicholson needed additional insurance. She claims her husband agreed to purchase the new insurance after Prudential advised him that he could acquire an additional policy with no out-of-pocket expense because earnings from policies they already owned would cover the premiums on the new policy, and that these payments could occur automatically if he signed certain forms in blank. (¶¶ 63-66) She claims they relied on the agent's representations because he "had greater knowledge and experience in life insurance products and purported to act in their best interests." (¶ 74)

The complaint asserts that "[a]t various times after purchasing" the new policy, the Nicholsons "received notices from Prudential which they did not understand, and which were inconsistent with the representations made by (their agent), including notices about policy loans and the lapse of the [new policy]." (¶ 68) However, Nicholson claims Prudential told them to ignore the notices and assured them that Prudential would "resolve" the issue. (¶¶ 69-70) It was only after Mr. Nicholson's death in 1994, Nicholson claims, that she discovered that earnings and dividends on the original policies were not sufficient to pay all of the premiums on the new policy and that Prudential had authorized loans against the original policies which had considerably diminished these policies' values. (¶ 72)

Dorfner's Claims

Plaintiff Martin Dorfner ("Dorfner") asserts that ...

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