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Quackenbush Lets the Insurance Companies Off the Hook

In Exchange for Donations to Non-profits He Controls And Campaign Contributions
News releases and other records previously issued by Commissioner Quackenbush indicate that major insurers agreed to make relatively modest donations to one or more non-profit foundations as "settlement" of the agency's confidential Market Conduct investigations. (On April 22, 2000 the Los Angeles Times reported that the state's Legislative Counsel determined that the Commissioner does not have the authority to create foundations in lieu of fining companies.) Additionally, a number of the companies that were let off the hook contributed directly to Mr. Quackenbush: Allstate $50,000 and 20th Century $5,000. Fireman's Fund contributed $20,000 to Quackenbush one day after he excused the company from a Department exam altogether.

The table below, based on published news reports material previously issued by the DOI, shows the fines recommended by Commissioner Quackenbush's own staff as a result of the Market Conduct Exam and the actual expenditure incurred by the company:

Recommended by DOI Staff
Disposition by
Actual Expenditure by Company
$2.38 Billion in fines; $114.7 Million to a policyholder fundFinal Order finds State Farm
acted in good faith in Northridge claims
to foundation. $5,000 "costs" to DOI.
Allstate$172 Million in fines; $73.7 Million to a policyholder fundNorthridge created "extraordinary circumstances" for Allstate$2,000,000 to foundation
20th Century$819 Million in fines; $44.2 Million to a policyholder fundAllowed to resume selling homeowners insurance; MCE found "alleged deficiencies in claims files reviewed" $6,550,000 to foundation. $200,000
for "public education" $100,000 fine
Farmer'sNot examined as part of special agreement with DOI $1,000,000 to foundation
Fireman's FundNot examined as part of special agreement with DOI. Contributed $20,000 to Quackenbush day after agreement was signed. $550,000
to foundation

Insurer Donations Tax Deductible

Among the many differences between the proposed fines and the actual donations is this: insurance companies can treat the foundation payments as tax deductible: in effect, the donations are passed onto taxpayers by allowing the companies to write-off these expenses. According to SEC filings, for example, 20th Century, wrote off the contribution to the foundation as a pre-tax charge -- an "underwriting expense" (see Form 10-Q for 20TH CENTURY INDUSTRIES filed on Aug 13 1999 filed with the Securities and Exchange Commissioner). Furthermore, while regulations (CDI Accounting Statement 84-1) bar insurance companies from passing the costs of fines and penalties onto consumers, the structure of these settlements may allow the companies to include the donations in their insurance rates, according to FTCR.

Commissioner Quackenbush established several private foundations for these contributions, which were ostensibly created to perform research, assistance and education work regarding earthquakes and insurance. Most of the money went to the California Research and Assistance Fund (CRAF). It has been reported that the Farmer's contribution went to the California Insurance Education Project (CIEP). (A third foundation focusing on title insurance was created from exams of title companies and is also under investigation.) The board members of each of these foundations have been subpoenaed.

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