Brother Against Brother

Members say Lutheran groups abused their trust to sell insurance

For several years, say Glenn and Nedra Hawkins, self-described “dyed-in the-wool”

Lutherans from North Manchester, Ind., they yielded to persistent advice from agents with the nonprofit Aid Association for Lutherans to “upgrade” their life-insurance policies.

The Hawkinses are among two dozen Lutherans who are suing the Aid Association for Lutherans, or a similar organization called Lutheran Brotherhood, because they say that the agents deceived them and that the policies didn’t pan out in the way the agents said they would, costing Mr. and Mrs. Hawkins money and forcing them, in their retirement years, to dig into their small savings.

“We trusted them because we’ve been Lutherans all our lives, and here we have a Lutheran fraternal insurance company that’s nonprofit and supposed to be good,” said Mr. Hawkins, 75, whose son has been a Lutheran pastor for 20 years. “It was inconceivable to me that a fraternal nonprofit organization would do this to us.”

The lawsuits filed by the Hawkinses and others against the two tax-exempt organizations that sold them life-insurance policies over the past two decades have caused some people to question whether Lutheran churches go too far in helping the pair of fraternal benefit societies market their financial products. Some churches have allowed the groups to distribute literature, send representatives to speak to congregants, and garner publicity for charitable gifts made to Lutheran causes.

Aid Association for Lutherans, in Appleton, Wis., and Lutheran Brotherhood, in Minneapolis, adamantly deny any wrongdoing and say they did not abuse the trust of Lutherans in selling them policies. And they say that their relationships with Lutheran churches are sound, ethical, and thriving.

The lawsuits take on extra importance because what they seek is certification by courts as “class action” suits before they go to trial. That would mean that other Lutherans who held, or were beneficiaries of, similar policies would be eligible for compensation if the two benefit societies were eventually found guilty of wrongdoing. It would also put pressure on the benefit societies to reach an out-of-court settlement, even without acknowledging being at fault. It could turn the lawsuits into a massive legal battle with millions of dollars at stake.

In recent years, several for-profit life insurance companies were accused of deceptive practices in lawsuits filed by holders of policies that were similar to those held by the Lutherans. Those companies, including the Metropolitan Life Insurance Company, decided to pay hundreds of millions of dollars in out-of-court settlements.

The pair of Lutheran benefit groups are exempt from federal income tax under Section 501(c)(8) of the Internal Revenue Code as fraternal benefit societies. The organizations are allowed to sell life insurance and other financial products only to Lutherans and their families, and they are completely separate from Lutheran churches, which are tax-exempt charities under Section 501(c)(3) of the code.

Optimistic Projections

The lawsuits against Aid Association for Lutherans and Lutheran Brotherhood accuse the benefit societies of misleading policyholders — who are considered members of the organizations — about the performance of their policies and of relying on overly optimistic projections about the interest rates that money invested in their policies would earn without disclosing the possibility that the projected performance might not work out. The lawsuits say that many of the policies were sold in the 1980’s when high interest rates threatened to drive people’s money away from life insurance and toward better-performing investments.

Some lawsuits allege that agents for the societies falsely claimed that the invested premiums would perform so well that the premium costs would be covered and thus would “vanish” after several years, which would be good for people who were planning their retirements.

Other court filings charge that agents for the two societies “churned” some life insurance policies by getting people to needlessly take the cash value out of their old policies to buy new ones. Those replacements depleted the cash value of policies, the suits said, and generated large commissions for the agents and societies that were not disclosed to the policyholders.

The result, according to several suits, is that many Lutheran policyholders now find themselves having to pay unexpected premiums on expensive policies, and don’t have the retirement assets that they expected because the cash value has been eaten up by high premiums.

Among those filing suits are a Lutheran pastor from suburban Minneapolis and a religion writer from the Twin Cities who is a former Lutheran clergyman.

Mr. Hawkins said he prayed before taking legal action because he felt bad about suing. He acted, he said, “because we’ve been harmed, and there are so many others out there just like us. We can do something to stop this wrongdoing and get things squared away.”

Mr. and Mrs. Hawkins and others are also fighting a decision by Aid Association for Lutherans in 1999 to amend its bylaws to say that policyholders could no longer sue the organization in court, would have to resolve complaints through binding arbitration, and would not be allowed to lead or join any class-action dispute against the group. Lawyers for the Hawkinses say this move by the benefit society violates their clients’ constitutional rights to a jury trial and is clearly aimed at blocking the case.

Strong Denial of Wrongdoing

Representatives of Aid Association for Lutherans and Lutheran Brotherhood decline to discuss the specifics of each policyholder’s suit against their organizations. But they vigorously deny any wrongdoing and say that very few people have complained about these policies. They say their organizations have not misled customers, or promised that premiums would vanish over time, or “churned” policies, or withheld information at the time of sale.

“A.A.L. denies all the allegations that are contained in those complaints,” said David Westmark, assistant general counsel for the Aid Association for Lutherans, who added that the policies at issue have performed well. “The fact that some of our members felt they needed to sue A.A.L. makes me very sad. If they had a concern, we would have been more than happy to work with them.”

Mr. Westmark said that the “dispute resolution program” that his organization began last year is a “fast and fair and efficient method of resolving member disputes” using independent mediators paid by the organization itself. “Had they gone through the program, I’m fairly confident that these things would already be resolved rather than sitting waiting for the court,” he said.

Deborah Ely-Lawrence, a spokeswoman for Lutheran Brotherhood, said that allegations that her organization engaged in fraudulent sales practices over the past 20 years were “preposterous” and that the society “regrets that any member would ever be so unhappy that he or she would choose legal action. We have a long-standing practice of working with our customers.”

Ms. Ely-Lawrence added: “Each insurance-product sale is unique — it’s tailored to the client and his or her needs. No two contracts are the same. The only thing that’s the same are the ‘cookie cutter’ lawsuits these legal firms are cranking out.”

In fact, both beneficiary societies charge that the litigation has essentially been drummed up by lawyers looking for a big monetary payoff in a hoped-for settlement like the ones with for-profit insurance companies.

“These cases are being cranked out by well-financed law firms trying to capitalize on insurance companies,” said Ms. Ely-Lawrence.

Testing Legal Waters

The law firm of James, Hoyer, Newcomer & Smiljanich, of Tampa, Fla., represents, or helps represent, all of the people suing the Lutheran societies. In the 1990’s, the firm brought the first sales-fraud case against a major for-profit insurance company and was a big player in similar suits.

Said Victoria Fimea, a lawyer for the American Council of Life Insurers, which counts both Aid Association for Lutherans and Lutheran Brotherhood as members: “In many ways, plaintiffs’ attorneys are like entrepreneurs. They’ll test theories, and when something hits the jackpot, then that sort of case becomes very appealing to bring against all members of a particular industry. That’s what’s happened in life insurance.”

But Joseph Belth, professor emeritus of insurance at Indiana University, said that “the greedy-lawyer argument is always a convenient scapegoat.” In the 1980’s, he said, “customers were not adequately informed of the various risks” in some kinds of policies by many insurance agents representing all kinds of providers.

Some Lutherans who are suing the two benefit societies are particularly disappointed by their experiences because they expected more from nonprofit groups dedicated to helping those of the same faith.

Some say that Lutheran churches are wrong to give what amounts to an implicit blessing to the societies as trustworthy institutions, and that many churchgoers do not realize that the churches and societies are entirely separate entities.

Aid Association for Lutherans and Lutheran Brotherhood also get the attention of churchgoers when they take the many millions of dollars that they would have paid in federal taxes, were they not exempt, and funnel those funds to Lutheran institutions in various ways, such as helping churches, seminaries, and disaster-relief efforts.

Mr. Belth, of Indiana University, said he thought it was “outrageous” that Lutheran churches allow the two fraternal benefit societies to drum up business within their walls by publicizing their charitable work. “I just don’t think that they have any business mixing the insurance operation in that fashion” with their mission, he said.

Publicizing Gifts

The Rev. Curtis H. Miller, bishop of the Western Iowa Synod of the Evangelical Lutheran Church in America, praises both beneficiary societies as having made big contributions to Lutherans. But he said he was concerned about the way the societies often publicize their charitable gifts.

“The way they give it away sometimes makes it feel like it’s part of their advertising budget,” said Bishop Miller. “Part of their expectation is that it will be noted that Lutheran Brotherhood or Aid Association for Lutherans gave this gift for this or that. They never let the right hand not know what the left hand is doing.”

But others say that the critics and skeptics are wrong.

Anthony Snyder, an official of the National Fraternal Congress of America, a membership group of 88 benefit societies that includes both Lutheran societies, said that churches should not be condemned for giving information to their members.

“I would equate the fraternals with any other group that can in some way benefit a church’s members,” Mr. Snyder said. “If the church sees a benefit in it for their members, then they are going to publicize it, and people shouldn’t criticize a fraternal group for taking advantage of what’s there.”

Ms. Ely-Lawrence of Lutheran Brotherhood said, “While we support Lutheran organizations, we are not part of any church. We work hard to make sure our members know this distinction.”

And Stephen Wuerger, media relations manager for Aid Association for Lutherans, said his organization is scrupulous about soliciting only where it is welcomed. “There are Lutheran congregations with pastors who do not want us to have any of our sales materials out, or want our representatives to speak,” he said, “and we oblige that.”