The Department of Veterans Affairs failed to inform 6 million soldiers and their families of an agreement enabling Prudential Financial Inc. to withhold lump-sum payments of life insurance benefits for survivors of fallen service members, according to records made public through a Freedom of Information Act request.
The amendment to Prudential's contract is the first document to show how VA officials sanctioned a payment practice that has spurred investigations by lawmakers and regulators. Since 1999, Prudential has used so-called retained-asset accounts, which allow the company to withhold lump-sum payments due to survivors and earn investment income on the money for itself.
The Sept. 1, 2009, amendment to Prudential's contract with the VA ratified the deal that had been struck between the insurer and the government 10 years earlier — one that was never put into writing.
For a decade, until the contract was formally changed, Prudential wasn't fulfilling its obligations to survivors of fallen service members, said Brendan Bridgeland, an insurance lawyer who runs the nonprofit Center for Insurance Research in Cambridge, Mass.
"It's very clear they violated the original terms of the contract," said Bridgeland, who is retained by the National Association of Insurance Commissioners to represent consumers.
"Every veteran I've spoken with is appalled at the brazen war profiteering by Prudential," said Paul Sullivan, who served in the 1991 Persian Gulf War as an Army cavalry scout and is now executive director of Veterans for Common Sense, a nonprofit advocacy group based in Washington.
That the VA allowed Prudential to issue retained-asset accounts for 10 years while the contract required lump-sum payouts is "more evidence that the VA was asleep at the wheel for a decade," said Sullivan, who was a project manager and analyst at the VA from 2000 to 2006.
Since July 28, when Bloomberg News first reported that Prudential sent checkbooks instead of checks to survivors requesting lump-sum payouts, state and federal officials have demanded the retained-asset system be investigated and reformed.
The VA also launched an inquiry of its life insurance program. As a result, the department announced Tuesday 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, 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.
Prudential held $662 million of survivors' money in its corporate general account as of June 30, according to information provided by the VA.
Prudential spokesman Bob DeFillippo said his company is following the terms of its agreement with the VA. DeFillippo declined to comment on whether Prudential was in compliance with its contract between 1999 and September 2009 or to answer other questions.
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.
VA 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," he said.