A dispute between two large financial services companies has left 5,000 New York borrowers, including a number in Western New York, without credit life insurance on their loans.
Prudential Insurance Co. of America has canceled a group credit life policy on second mortgages written by Associates Financial Services Co., a Dallas-based lender that has three offices in Buffalo's suburbs.
Prudential and Associates are blaming each other for the cancellation. Meanwhile, Associates has not found another carrier to pick up the policies when they expire Friday.
Although Associates customers can get refunds of unearned premiums they paid, some are not happy with the cancellation.
Eugene Kennedy, 68, of Buffalo, said it will be very difficult for him to get a life insurance policy to cover the $30,000 balance of his loan, which will not be paid off until the year 2001.
"The worst part is we paid for this and even though we will get some money back, that's no consolation for us," he said. "If I drop dead tomorrow, my wife can't pay this loan off."
Credit life policies, often sold with loans, promise to pay off the loan's balance if the borrower dies.
Associates began notifying its customers last month that the group policy was canceled and that it was looking for another carrier to pick up the coverage. As of this week, no other carrier had been found, said Fred Stern, an Associates spokesman.
Associates has told customers the refund of their premiums will be credited to their loan accounts, which will reduce the amount of payments they make on their loans but will leave their premiums unchanged.
If customers want a cash refund instead, they must go to an Associates office to request it, Stern said.
Prudential has received dozens of calls from Associates borrowers who are not happy with the cancellation or the method being used by Associates to make refunds.
"People are upset because they would prefer to have the money in their pockets so that they can shop around and get replacement coverage," said Kevin Heine, a Prudential spokesman.
The cancellation of a group credit life contract is unusual for the company, and it intends to remain in this line of business, he said.
Besides canceling 5,000 contracts in New York, it also canceled insurance coverage for about 3,000 Associates customers in several other states, he said.
Under Prudential's contract with Associates, it was able to end coverage if rates allowed by law or regulation prove to be inadequate, or if Associates failed to comply with terms of the contract, he said.
Both of those events took place, he said.
New York has the most restrictive regulations of credit life premiums of any state. "We have lost several million dollars on this book of business and that loss could grow in the future," Heine said.
Also, Associates was responsible for a number of administrative roles in selling the policies, including enrolling members, calculating charges correctly, collecting and remitting premiums, processing refunds, and keeping proper records of debtors' loans, he said.
"All of these things come into play when determining whether they fulfilled their obligations," Heine said. "We had certain audits done that determined that certain things weren't complied with.
"This is not a situation that developed overnight. We have been working with Associates for three years to work through some of the problems we have experienced."
Associates disputed Prudential's claims and said its sole reason for canceling the coverage was that it wasn't profitable.
"Prudential canceled the contract because it wasn't profitable, because the premiums allowed under New York law weren't profitable," Stern said. "For Prudential to claim otherwise is just plain wrong. They have left a lot of customers high and dry and we are deeply disturbed about that."