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home / insurance / in the media

Los Angeles Times
Apr 07, 2000

by Virginia Ellis

Quackenbush Let Insurer Avoid State Investigation

State Insurance Commissioner Chuck Quackenbush allowed a major insurer to avoid an investigation of its Northridge earthquake settlements by paying $ 550,000 to a special fund even though his department admitted it had concerns about the company's claim practices.

One day after Quackenbush approved an agreement exempting the Novato-based Fireman's Fund Insurance Co. from a formal state review of its Northridge claims, the company contributed $ 20,000 to the commissioner's political accounts.

As part of the confidential agreement with the company, a copy of which was obtained by The Times, Quackenbush promised to let the insurer conduct its own internal audit and agreed "not to undertake other regulatory actions, including fines or other sanctions relative to Fireman's Fund's Northridge earthquake claims."

Quackenbush also pledged that he would issue a laudatory news release about the company's role in the agreement, and promised not to include Fireman's Fund in media announcements about the Northridge earthquake.

"This is very worrisome for those of us who look at regulatory agencies," said Robert Fellmeth, director of the University of San Diego's Center for Public Interest Law. "The fact that the agreement is secret, the fact that it is self-policing is of great concern. If self-policing was successful, we wouldn't have a problem in the first place."

Both Deputy Insurance Commissioner Dan Edwards and a spokesman for the company said there was no connection between the timing of the political contribution and the signing of the agreement. John Kozero, Fireman's public relations director, said the company decided in February 1999 to donate to the commissioner's political fund, although it did not make the contribution until May 14, 1999, one day after the signing of the agreement.

"Fireman's Fund has for years regularly donated to a wide variety of political campaigns for both Republicans and Democrats," Kozero said. "There was no connection other than coincidental between our donation and the Northridge regulatory action."

Edwards acknowledged that Fireman's was one of six companies that had prompted the most consumer complaints about handling of Northridge earthquake claims. But he said that because the company generated fewer complaints than the other five insurers, the commissioner felt it was more appropriate to require Fireman's to conduct its own review and submit it to the department for further auditing.

"We frankly didn't think an entire market conduct examination was in order," Edwards said. "We did force them to go back and review all their files and submit that review to us. We feel we have done a great consumer service, and it's remarkable that we are being criticized for it."

Fireman's paid out more than $ 200 million in claims as a result of the Northridge quake, according to company and state officials.

Quackenbush, who is prevented by term limits from seeking reelection, has been under fire recently for his failure to take strict enforcement action against big insurers over their handling of claims resulting from the January 1994 Northridge quake.

Confidential reviews by the state Department of Insurance of the settlement practices of 20th Century Insurance, State Farm and Allstate found repeated examples of unfair claims handling. The reports prompted recommendations from the commissioner's legal team that he levy hundreds of millions of dollars in fines against the companies. Instead, he reached agreements that allowed the companies to contribute to a nonprofit research foundation.

Senate Insurance Committee Chairwoman Jackie Speier (D-Daly City) later discovered that $ 3 million of the foundation's funds were spent on television public-service spots that featured the commissioner and were aired in November in Los Angeles, San Francisco and San Diego.

Quackenbush's agreement with Fireman's Fund differed from his actions with the other companies in that he allowed the insurer to avoid outside examination of its earthquake claims practices by paying into the fund. It is unusual for the commissioner to require a corrective payment by a company without first examining its claims behavior.

It is also a departure from normal procedure to allow a company to perform a self-examination rather than subject it to state scrutiny.

"The state has to do the job, not the company," said Douglas Heller of the Prop. 103 Enforcement Project, a watchdog group that monitors implementation of a 1988 insurance reform initiative. "You don't let them do it themselves. There's no credibility to that. There's no accountability. Auditing an audit? Come on."

Kozero said the company completed its audit in August and submitted it to Quackenbush's department. He said a separate telephone survey of customers, also required by the agreement, was conducted by an independent company and completed in December.

He said the audit found that of the 3,315 Northridge claims handled by the company, only 25 were candidates for reconsideration. The audit was conducted, he said, by 15 top-level managers and company adjusters, each with a minimum of 10 years' experience.

Even though there was no formal finding of company wrongdoing, Kozero said, Fireman's agreed to contribute to the special nonprofit fund because an educational effort was needed for the public to better understand the dynamics of earthquakes.

So far, the fund managers say, it has primarily paid for the television spots. A script of an ad that ran in Los Angeles says, "I'm Chuck Quackenbush. . . . We can't prevent earthquakes, but we can prepare for them. For more information on how to prepare yourself and protect your loved ones, call this number."

Fellmeth asked: "How do you educate people by telling them to call a number? It's something that could be on 'Saturday Night Live' as a satire."

Mark Savage, managing attorney for Public Advocates, a legal group that represents poor consumers, said the decision to handle the Northridge claims issues in secret left policyholders no means by which to air their complaints other than telephone calls to a Department of Insurance 800 number.

"Usually you have a public process where people intervene when they think their interest is affected," he said. "The normal course would be to understand the actual harm that occurred before deciding the appropriate settlement."

But Edwards said consumer complaints about Fireman's that were phoned in to the department followed a definite pattern. Most of them, he said, dealt with the company's decision to impose a one-year limitation on claims.

He said Quackenbush had vigorously objected to the limitation and had informed all companies that he considered it illegal. By directing Fireman's to review its claims, Edwards said, the commissioner believed that it would be easy to spot those instances in which the company had improperly imposed the limitation.

"If you find a crack in your foundation five years later, Chuck Quackenbush will support you in pursuing the company and reopening that claim," he said. "Our main concern with Fireman's Fund is that the customer should have a longer statute of
limitations."


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