Message #9143

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The insurance departments in Georgia and New York have also opened probes. The U.S. House Oversight and Reform Committee plans to hold hearings into Prudential’s use of retained-asset accounts to pay money owed to fallen soldiers’ survivors.

‘News to Me’

U.S. Secretary of Defense Robert Gates -- who was in office when the 2009 agreement was signed -- said when the VA started its probe that he had been unaware that survivors were being sent retained-asset accounts.

“Until today I actually believed that the families of our fallen heroes got a check for the full amount of their benefits,” Gates said at the time. “This came as news to me.”

As a result of the VA probe, the agency announced today that it will change its insurance program, allowing survivors to request and receive lump-sum checks.
Under Prudential’s original 1965 contract with the VA and a 2007 revised contract -- both of which were released as part of the FOIA response -- the insurer is required to send lump-sum payouts to survivors requesting them. The contract covers 6 million active service members, their families and veterans.

The checkbooks Prudential sends to survivors are tied to what the insurer calls its Alliance Account. The checkbooks are made up of drafts, or IOUs, and aren’t insured by the Federal Deposit Insurance Corp. Prudential invests the survivors’ money in its general corporate account, where it can earn the insurer as much as eight times as much as it currently pays in interest to beneficiaries.

Bond Income
Prudential held $662 million of survivors’ money in its corporate general account as of June 30, according to information provided by the VA. Prudential’s general account earned 4.2 percent in 2009, mostly from bond investments, according to regulatory filings. The company has paid survivors holding Alliance Accounts 0.5 percent in 2010.
Families that were supposed to receive lump-sum payments under the terms of the contract before it was amended in 2009 may be able to successfully sue Prudential for lost interest, insurance lawyer Bridgeland says.
“Survivors would have a very strong claim for interest earned by Prudential on their money,” he says.
Prudential spokesman Bob DeFillippo says his company is following the terms of its agreement with the VA.
“Prudential is in compliance with its contract with the Department of Veterans’ Affairs,” he says.
DeFillippo declined to comment on whether Prudential was in compliance with its contract between 1999 and September 2009 or to answer any other questions. Prudential chairman and Chief Executive Officer John Strangfeld declined to comment for this story.
Useful Service
In July, DeFillippo said Prudential’s retained-asset account was a useful service for bereaved relatives of soldiers. “For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle,” he said. Survivors can withdraw some or all of their money at any time, he said.
Veterans Affairs Chief of Staff John Gingrich says the agency approved use of the Alliance Account because it wanted to help survivors.
“We needed to give an option to individuals that allowed them more flexibility and time to react to the tragic family situation,” Gingrich says.
Verbal Agreement
VA spokeswoman Katie Roberts declined to say when Veterans Affairs Secretary Eric Shinseki, who was appointed by President Barack Obama in January 2009, learned of the existence of the 1999 verbal agreement and the 2009 amendment. She also declined to make Shinseki available for comment.
The VA official who verbally agreed in 1999 to allow Prudential to change the terms of the 1965 contract and begin offering retained-asset accounts was Thomas Lastowka, the VA’s director for insurance, according to Dennis Foley, a VA attorney. Prudential began sending Alliance Account kits to soldiers’ beneficiaries in June 1999.