For class-action attorneys, the insurance industry has been a mother lode. In recent years, these lawyers have been successful in getting insurers to ante up to settle charges that they have engaged in misleading sales practices. Insurance giants such as Metropolitan Life Insurance Co. and Prudential Insurance Co. have agreed to settle for many millions of dollars (table).
The latest such action, though, targets not an insurer but a brokerage house: PaineWebber Inc. That isn't surprising, given that Wall Street has been moving into annuities and variable and universal life insurance. According to the complaint, which was filed on Sept. 9, the plaintiff, Robert L. Moore of Palm Beach County, Fla., received a call from his PaineWebber broker in 1989 extolling a new retirement "investment" called the Provider. It offered high interest payments and tax deferral. And Moore was told it could replace his existing individual retirement account.
HIGH COST? It was an offer Moore couldn't refuse. Beginning that year, Moore made his first annual "deposit," as it was called, of $2,000. Not until years later, Moore claimed, did he find out that this high-performing IRA alternative was a universal life insurance policy. Much of his investment was spent on commissions and administrative fees. The "deposits," he learned, were insurance premiums.
His suit in the Southern District Court of New York, which seeks $250 million in damages for himself and other unnamed buyers of the product, alleges that PaineWebber brokers misled Moore and others into believing that the Provider was a retirement investment, not a life insurance policy. In all states, misrepresentation and false advertising of insurance is against the law. Moore and his attorneys declined to comment.
If the allegations hold up, PaineWebber could have an expensive problem on its hands. In 1994, Met Life agreed to fines and restitution of nearly $70 million for selling a group of Florida nurses insurance under the guise of a retirement program. And on Sept. 24, Prudential agreed to pay at least $410 million to settle lawsuits claiming it used misleading sales practices to get policyholders to buy more expensive insurance. "If there's a significant number of policyholders out there, it could be a major problem for PaineWebber," says Claude Lilly, a professor of risk management and insurance at Florida State University and a former assistant deputy insurance commissioner for the state of Georgia.
"WITHOUT MERIT." A PaineWebber spokesman says: "The allegations in the complaint are completely without merit, and we intend to fight them vigorously. The Met Life matter is substantially different than the allegations made in the complaint." PaineWebber argues that Moore had to fill out an application for life insurance that included a questionnaire about his health. "The named plaintiff clearly understood he was buying insurance and still holds the policy," says the spokesman.
PaineWebber began selling the Provider in 1989. According to Securities Week, the marketing support was substantial, including the purchase of 800,000 customer leads, a direct-mail campaign of 1 million pieces, and a television commercial featuring Joseph J. Grano, now the president of PaineWebber. The complaint says brokers "were instructed not to disclose that the Provider was an insurance policy." After the Provider's underwriter, First Capital Life Insurance Co., went under, PaineWebber renamed it the Builder. The firm says the product was not a big seller: Total sales were about 7,200 policies. It was discontinued in 1993.
With Wall Street moving into insurance, some plaintiff attorneys foresee a lucrative business opportunity in the securities industry. Says Ronald K. Parry, who has represented numerous policyholders against life insurance companies as an attorney with the Covington (Ky.) firm of Arnzen, Parry & Wentz: "There will be a lot more of these cases before it is all over." That will depend on whether sales practices at brokerage houses have been as lax as those at many insurers.