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home / insurance / in the media

Los Angeles Times
Mar 26, 2000

by Virginia Ellis

Donations to Quackenbush Paid Wife's Campaign Debts

Finance: Funds came from insurers with business before commissioner. The actions are legal, but some decry them
SACRAMENTO -- Insurance Commissioner Chuck Quackenbush collected tens of thousands of dollars in political contributions from insurance companies with business before him and used it to repay his wife for personal loans she made to her failed state Senate campaign.

Political finance records show the biggest contribution came from Fremont Compensation Insurance Co., a troubled company that was aided by a Quackenbush recommendation to raise rates. The company put $93,350 into his political bank account nine days after he proposed an 18.4% increase in workers' compensation rates.

Allstate Insurance Co., a subject of a highly critical state Department of Insurance review for the handling of Northridge earthquake claims, donated $50,000 to the commissioner. The donation came six months after Quackenbush decided not to fine Allstate for unfair claims practices related to the quake. Instead, Quackenbush ordered the company to contribute money to an educational foundation established at that time under his direction.

After reviewing the commissioner's 1999 political finance reports, Assembly Insurance Committee Chairman Jack Scott (D-Altadena) said he would convene hearings to investigate the department's regulatory practices.

"I'm very alarmed that there appears to be more than a coincidental relationship between the commissioner's enforcement actions," Scott said in an interview last week, "and the stream of money that flowed into his campaign coffers."

The contributions to Quackenbush, an elected official who holds final regulatory power over the state's insurance companies, came during the last six months of 1999 from these and dozens of other companies he regulates.

According to one major insurance company, Quackenbush not only accepted contributions from insurers but also solicited them. The money was given to him at a time when it was not needed for a reelection campaign, since state law bars him from seeking a third term.

Through a spokesman, Quackenbush said that he keeps his political business separate from his regulatory operations and that one does not influence the other.

"There is absolutely no nexus at all between the business of the California Department of Insurance and the commissioner's political operation, including campaign fund-raising," said Deputy Commissioner Dan Edwards. "That is not only with respect to Fremont but with any company and any business the department conducts."

Edwards said that it is legal in California to transfer funds from one campaign to another and that although the commissioner cannot run for reelection, it is appropriate for him to continue to raise political money because he may seek another office.

The propriety of accepting contributions under those circumstances from companies he regulates is complicated by the fact that $100,000 was transferred to his wife, Chris, to help retire thousands of dollars in personal loans she made to her 1998 state Senate campaign.

Unlike laws in most other states, current California law puts no limits on political contributions. In addition, a candidate who receives donations from one source can legally transfer that money to another campaign fund without the permission of the donor. It is a relatively common practice for politicians to move funds around, but it is unusual for an officeholder to transfer money to his wife.

A spokesman for Allstate said that the company had been asked by Quackenbush to make a contribution but that there was no connection between its donation and Insurance Department decisions. He said Quackenbush's decision not to fine Allstate for its handling of Northridge earthquake claims was made months before the company gave its contribution.

"Allstate has a long history of responding favorably to requests for funding from politicians where we feel that the candidates are inclined to support pro-competitive positions and seem to have the interests of our policyholders in mind," said company spokesman Peter Debreceny.

Tony Miller, a former California secretary of state whose duties included enforcing some campaign-finance laws, said the Quackenbushes' behavior demonstrates the weakness of the state's ethics laws and the lack of enforcement of those that do exist. He said Proposition 208, a political reform initiative overwhelmingly approved by voters in 1996 and prevented from taking effect by a pending legal challenge, would have made Quackenbush's actions illegal. The measure would prohibit transfers from one campaign to another and would set limits on contributions.

Miller said he will ask for an investigation by the Fair Political Practices Commission of possible violations of a state law that prohibits any official of an agency from accepting a contribution of $250 or more from any party "while a proceeding involving a license, permit or other entitlement . . . is pending before the agency."

"Mr. Quackenbush is a poster child for why we need campaign finance reform," Miller said.

In 1997, the commission fined Quackenbush $50,000 for violations of political laws during his 1994 campaign. An audit found that he had failed to disclose thousands of dollars in political donations.

In the last six months of 1999, Quackenbush, a Republican, collected $245,000 in political contributions, records filed at the secretary of state's office show.

Of that amount, $216,000 came from insurance interests, including insurance companies, lawyers who represent them and insurance company employees and officers. Among other firms that contributed were Metropolitan Life, $20,000; Progressive Insurance, $10,000; and the Woodland Hills-based 21st Century Insurance Co., $5,000.

Quackenbush collected contributions from insurance interests throughout 1999 and transferred $175,000 to his wife's campaign accounts to repay her for personal loans. Insurance interests also contributed to Chris Quackenbush's campaign against state Sen. Deborah Ortiz (D-Sacramento), who defeated her in the November 1998 election.

"What's happening is the insurance industry has been funding the Quackenbushes' family political aspirations, and what they've done is paid off the Quackenbush family debts," said Harvey Rosenfield, a consumer activist who wrote Proposition 103, an insurance reform measure. "It may be legal, but it's certainly the kind of legal institutional corruption that gives politics a bad name."

Chuck Quackenbush is only the second elected insurance commissioner to serve in California. Proposition 103, approved by voters in 1988, converted the insurance commissioner's office from an appointed to an elective position in 1990. The first elected commissioner, John Garamendi, a Democrat, ran for office on a platform that he would not accept contributions from insurance interests he regulated.

Quackenbush did not make a similar declaration when he first ran for office in 1994 and again in 1998. The $93,350 he received from Fremont in November 1999 was one of the largest donations received that year by any political figure in California.

The Glendale-based Fremont, a major carrier of workers' compensation coverage that suffered from the cutthroat competition that followed a legislative decision to deregulate rates, stood to benefit from the commissioner's rate-increase recommendation. After reporting a net loss in 1999, its credit rating was downgraded by A.M. Best Co. and Duff & Phelps Credit Rating Co.

In previous years, Quackenbush had resisted advice from the Workers' Compensation Insurance Rating Bureau, a nonprofit agency that analyzes workers' comp data, that substantial rate boosts were needed.

But on Nov. 2, 1999, Quackenbush recommended an average rate hike of 18.4%, a move that Smart's California Workers' Comp Bulletin, a highly regarded trade publication, said "gave insurers the pretext they needed to boost rates without having to wait for a competitor to make the first move." Nine days later, on Nov. 11, Fremont made its contribution to the commissioner. On Nov. 30 the firm filed a 23.6% rate increase.

Smart's Bulletin said that Quackenbush not only recommended a substantial rate increase but that his department also actively pushed companies to boost rates. Consumer representatives had argued that the increase should have only been 9%.

"The pressure the California Department of Insurance applied on companies to boost rates . . . broke the logjam that had prevented rate increases despite a widespread consensus . . . that rates were trending far too low," wrote Smart's.

Edwards said the commissioner's action was based solely on his concern for the stability of the workers' compensation system, which had shown "troubling signals and trends over time." He said an in-depth financial analysis by the department had clearly indicated the need for substantial rate increases.

Sal Bianco, vice president for governmental affairs at Fremont, said the company's contribution was unrelated to the rate increase recommendation, although the firm had strongly supported Quackenbush's action as necessary to prevent insolvency in the workers' compensation insurance market. He said the donation was a reflection of the company's feeling that Quackenbush "has done a good job trying to deal with all sorts of insurance problems in the state."

Another large contributor that benefited from Quackenbush's actions was the Illinois-based Allstate, one of several insurance carriers whose handling of Northridge earthquake claims was examined by the state Department of Insurance.

Amy Bach, a lawyer for United Policyholders, a nonprofit organization established to educate the public on insurance issues and consumers' rights, said the Insurance Department's confidential survey--called a market conduct examination--found numerous violations of state laws governing the payment of claims. But instead of levying tens of millions of dollars in fines against Allstate, she said, Quackenbush reached the settlement agreement, which called for the insurer to contribute $2 million to an educational foundation.

Edwards said the commissioner considered the contribution to the foundation to be the same as a fine and felt it was more appropriate because the money would be used to educate the public on earthquake safety and preparedness. He said earthquake victims who felt their claims had not been properly handled could also apply for compensation from the foundation.

"These are all enforcement actions specifically under the authority of the commissioner," he said. "We assessed this . . . based on the degree of the infraction."

But Rosenfield said he could find nothing in the insurance code that gave the commissioner authority to set up a foundation in lieu of fines. He said state law specifically requires that fines be deposited in the state's general fund.

"It's like they stuck a couple of rabbit ears on a dog and they're calling it a bunny," he said. "Instead of punishing the companies for their conduct, they got off with a kiss from the commissioner."



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