Insurer pays $206-million over race-based pricing

American General reaches a settlement on claims it overcharged black customers for "burial insurance.''

By JEFF HARRINGTON and JULIE HAUSERMAN

© St. Petersburg Times, published June 22, 2000

TALLAHASSEE -- Bessie Jones, 71, came to Florida's Department of Insurance on Wednesday to get her slice of justice for an embarrassing episode in racial discrimination that silently survived for decades.

"I'm grateful to God today that it's all coming out and that someone may benefit from this," Jones told a crowd of reporters at a news conference.

The object of her scorn, life insurance giant American General Corp., on Wednesday agreed to dole out $206-million to settle claims that it overcharged millions of people who bought a low-value form of life insurance coverage known as "burial insurance."

About half of the buyers were black customers charged more in premiums than whites using decades-old, race-based formulas that were never phased out. Among them is Jones, a Sarasota resident who used money she earned washing clothes to buy at least a dozen policies for herself and relatives.

Jones became a customer of insurance company Independent Life, now part of American General, more than 40 years ago. She had no knowledge of a systemic practice at the time to charge customers based on two rate books: one for whites and one, that charged more, for blacks.

The sale of race-based policies was halted in the 1960s through civil-rights laws. But some insurers, like American General, kept using the formulas in collecting premiums as policies continued into the 1980s and 1990s.

About 9.1-million policyholders are eligible for some relief under the national settlement, which was negotiated in Florida by state regulators. About 4.9-million of those policyholders paid premiums according to the old discriminatory formulas.

Out of those, 1.1-million policies are still active, and 185,000 of the policyholders live in Florida.

American General has agreed to reimburse an average of $150 to about 100,000 customers who were still paying race-based premiums when American General took over their policies as early as 1982. Meanwhile, millions of policyholders will receive higher death benefits for paying more in premiums than their policies are worth.

In addition to $206-million worth of refunds, increased coverage and rate cuts, American General will pay a $7.5-million fine to regulators, split based on the number of affected policyholders in each state. Florida, with 16 percent of the policies, will receive the most money.

The Nashville, Tenn.-based insurer also plans to contribute $2-million to the National Association for the Advancement of Colored People.

The deal must be approved by states representing two-thirds of affected policyholders.

In Bessie Jones' case, she says she was exploited for decades by insurance agents of American General predecessor companies. They came to her house every week to collect for her burial insurance policies, sometimes 90 cents a week, sometimes $9.57 a month.

She never knew the companies charged her a higher premium because she is black, nor that she paid far more in premiums than some of the policies were worth.

Florida Insurance Commissioner Bill Nelson stood by Jones as he announced details of the landmark settlement.

"We are here today on behalf of Bessie Jones and the millions of others like Miss Jones across the country who were taken advantage of," Nelson said. "Nobody knew that if their skin was black they were paying up to 33 percent more in premiums . . . It is incomprehensible that this practice occurred until just a few days ago."

American General executives, who have expressed embarrassment to discover that the old formulas were still being used, said Wednesday they were eager to move quickly to "correct an unfortunate historical practice."

The company is taking a second-quarter after-tax charge of $175-million, or 68 cents per share, to help pay the settlement.

The payout for individual policyholders will include cash benefits, increased death benefits, and reduced premiums. Cash refunds will include 6 percent interest compounded over the years.

The deal also resolves a class-action lawsuit against American General alleging discrimination and sales abuse. A federal judge in Nashville gave preliminary approval to the settlement Wednesday. Carl Santillo, American General's executive vice president of operations, said he expects final approval by year-end.

Meanwhile, the company's agreement with regulators will be used as a model as Florida regulators ratchet up a probe into four other insurers that have sold burial insurance policies throughout the South. The companies: United Insurance Co. of America, Monumental Life Insurance Co., Liberty National Life Insurance Co. and Life Insurance Co. of Georgia.

"(As for) the other four companies that I still have under investigation, I want to give them a clear message that you must fully address this matter, including making restitution to the public," Nelson said. "If you delay and obfuscate, it will only cost you more."

American General, the second-largest publicly traded life insurer in the country, has not sold a burial insurance policy in 20 years. The affected Florida policies were written by two companies that American General acquired in the 1980s: Gulf Life of Jacksonville and Independent Life of Jacksonville.

Both companies had deep ties to a post-World War II era that American General wanted to forget -- a time when insurance agents preyed on poor, uneducated blacks in the rural South by selling them cheap burial insurance policies.

Typically, the policies had a payout of $550 or $1,000, intended to cover the cost of a cemetery plot.

With premiums as little as 25 cents a week, payments were affordable. The catch was that people had to keep paying indefinitely to keep the coverage, even though the payoff was a relative pittance.

Nelson, a Democrat in his final year as insurance commissioner, has been stymied for three years in trying to persuade the Republican-run Legislature to ban the sale of burial insurance, also known as "industrial life" insurance.

So he turned his attention directly to the industry last October, issuing subpoenas to five insurers that hold most of the burial insurance policies. His initial plan was to document how people paid hundreds or thousands of dollars more in premiums than policies paid out.

As they began receiving paperwork from the insurers, state regulators were startled to discover that race-based formulas were still being used.

In April, Nelson's office filed a cease-and-desist order against American General, targeted first as the largest provider of burial policies.

Two weeks ago, the National Association of Insurance Commissioners agreed to give Florida the lead role in negotiating a national settlement with American General and others.

On Wednesday, Nelson was joined by several insurance commissioners from other Southern states.

"It's just reprehensible what has happened," said Georgia Insurance Commissioner John Oxendine. "This shows that the system works. Getting 50 states and the District of Columbia together to talk in one voice wasn't easy."

The association of insurance commissioners expects to recommend a series of reforms for the low-value life insurance industry by early next year.

American General has set up a toll-free phone line of (800) 681-4944 for inquiries.

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