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May 02, 2000

Quackenbush Scandal Update

by Harvey Rosenfield and Doug Heller
In recent weeks, a torrent of brazen misconduct by Insurance Commissioner Quackenbush has been uncovered by the news media. Last Thursday, a State Assembly hearing recounted much of this scandal, though Mr. Quackenbush refused to provide the reports, prepared by his career staff, which indicated massive mishandling of policyholder claims by insurance companies. He also refused to allow agency staff who prepared those investigations to appear before the committee. The bipartisan questioning was tough -- and revealed inconsistencies and misrepresentations in Mr. Quackenbush's statements -- but provided no facts beyond what the newspapers had already reported.

Yesterday, several legislators issued press releases calling for legislation to require that all fines, penalties and funds paid by insurance companies be made available to victims of unfair insurance claims practices. Other lawmakers want to return the office to an appointed position.

Our concern here is that the Legislature is badly missing the point.

The Legislature's duty is clear: to determine whether Mr. Quackenbush has engaged in "misconduct in office" and thus should be removed from office under Article IV of the California Constitution. Legislators should focus on the very serious allegations of conflict-of-interest violations, self-dealing and extortion.

Indeed, given that the newspapers have reported conduct which, if true, is illegal on its face, one must ask why no one in Sacramento has even raised the issue of whether Mr. Quackenbush should remain in office. One look at the letters to the editor page, or a listen to talk radio, vividly illustrates the disconnect between how the elected officials in Sacramento are handling the scandal and what the people are saying. Most folks cannot understand why Mr. Quackenbush is still in office.

So we have to ask the question: exactly what are our elected officials in Sacramento waiting for? How much more evidence of corruption is necessary before they take action?

This is not to say that the Legislature should not take a broader look at issues raised by this scandal. Specifically:

Given the $3 billion in fines CDI staff wished to assess insurance companies for their mishandling of Northridge claims, new consumer protection laws seem to be needed to force insurers to investigate and pay claims promptly and fully. People shouldn't have to hire a lawyer to get their claims paid.

Regulators should not be permitted to solicit campaign contributions from the companies they regulate. (State law already bans this practice when insurers are involved in ongoing proceedings before the Commissioner, but Quackenbush ignored even this conflict-of-interest prohibition).

The Legislature can create the Insurance Policyholder Association to act as an independent watchdog to hold the industry and the DOI accountable to consumers by enacting SB 1738 now pending in the Senate Appropriations Committee.

But the proposal to direct the proceeds of fines to policyholders is misguided. Claims should be paid to policyholders independent of any fines. Fines are punishment, and should be based on the amount needed to discourage the insurer from engaging in misconduct in the future. These penalties should be used for increased enforcement of insurance laws and increased services to consumers with insurance problems or other insurance-related needs. If this money went to policyholders, they could end up with either too little or too much (likely, the former). More important, figuring out how much a policyholder should get is a job for the insurance company or, if necessary, the courts. Not for a regulator (who doesn't have the staff or resources to do it anyhow).

Nor does it make sense to make the office appointed again: when democracy fails -- as it so obviously has in this case -- the answer is not to get rid of democracy. When a thug steals your wallet, the answer isn't to prohibit people from carrying wallets. It's to prosecute the thief.

Finally, people say this scandal proves we need campaign reform. That seems obvious. But even the best campaign laws can be broken by a politician willing to take the chance that he won't get caught, or that if he is caught, no one will care. When laws are violated, the solution is for the appropriate state authorities to take the proper action -- investigation, removal from office, prosecution.

What the Legislature should do immediately:

(1) Subpoena the testimony of Mr. Quackenbush and his upper management under oath to determine the veracity of statements they made in the last hearing which were vague and contradicted other evidence.
(2) Subpoena present and former career staff members from the Department of Insurance (CDI) who have been involved in the market conduct exams and the foundations to which Mr. Quackenbush has directed settlement funds.
(3) They should also subpoena the staff reports (known as market conduct exams), which Mr. Quackenbush has thus far kept from the public, recently denying a public records act request made by the Foundation for Taxpayer and Consumer Rights (FTCR) as well as refusing to comply with the initial request for the documents by Mr. Scott's committee.

We can and should talk more about necessary reforms. Right now, however, we need enforcement of the laws already on the books.

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