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home / insurance / in the media

San Francisco Examiner
Jun 12, 2000

by Robert Salladay

Secret audits rip insurance firms

SACRAMENTO -- Insurance companies repeatedly low-balled claims and misled victims after the Northridge earthquake, confidential audits released Monday show, but Insurance Commissioner Chuck Quackenbush allowed the companies to donate to foundations that benefited him politically instead of paying hefty fines.

"This is fairly damning stuff," state Senate President pro tem John Burton, D-San Francisco, said after a committee hearing Monday where the audits were released. "It indicates a pattern and practice of bad faith by insurance carriers who may or may not have been patrons of the commissioner's political campaign."

Quackenbush is facing a hostile Legislature and talk of impeachment for his conduct after the 1994 Northridge earthquake. The two-term commissioner pressured insurance companies to donate $12million to special nonprofit foundations instead of paying large misconduct fines, but so far the money has gone to TV commercials featuring Quackenbush and to community groups linked to him.

Now the insurance companies are coming under fire. A special Senate committee on Monday release so-called "market conduct reports" of how the major insurance companies treated consumers after the Northridge quake.

The audits are key to determining if Quackenbush coddled insurance companies after the quake. Quackenbush has said the audits showed mostly technical violations by the insurance companies, but he has refused to go into detail about the reports, citing confidentiality laws.

Quackenbush's auditors wrote the reports, but the insurance commissioner shelved the audits, declined to issue fines against the companies, and then pressured the companies to donate to his foundations instead, state Sen. Martha Escutia, D-Montebello, said Monday.

"Quackenbush's alibi falls apart" with the release of the reports, said Doug Heller with the Foundation for Taxpayer and Consumer Rights, the leading critic of the insurance industry and Quackenbush.

The reports released Monday show:

Department of Insurance auditors found repeated instances where companies "grossly understated" the value of property and sometimes didn't count whole rooms that were damaged in the quake, Escutia said.

20th Century Insurance and 21st Century Insurance had the highest number of state insurance law violations, Burton said, with an average of two citations for every claim. Forty-eight percent of State Farm Insurance claims had possible violations, followed by Farmers Insurance with 45 percent, and Allstate with 25 percent, Burton said.

According to the reports, insurance companies also failed to explain why claims were being reduced, failed to send claim payments within the required 30 days, misstated the statute of limitations for filing claims, issued claims that were too low, and failed to respond to letters or phone calls from consumers within the required 15 days.

The reports showed numerous technical violations as well, including the failure to record proper dates on forms and even signatures in some cases.

Escutia, chairwoman of the Senate subcommittee looking at insurance company practices, essentially broke state law Monday by releasing the reports. The audits are required to be kept confidential unless the insurance commissioner agrees to release them.

Quackenbush repeatedly has declined to release the reports, but Escutia said she had a right to release them as part of her research on possible misconduct at the Insurance Department. She called for a change in state law that would require the audits, or at least executive summaries of them, to be routinely released to the public as they are in other states.

An attorney for State Farm Insurance, James M. Mattesich, said he was "surprised and dismayed" that the committee released "unrebutted, preliminary market conduct reports that should be kept confidential."

Mattesich said he was prepared to testify before Escutia's committee Monday, but was denied when he approached the dais. State Farm, he said, would research its legal options now that the reports have been released to the public or perhaps release its own 50-page rebuttal to the audits.

The company paid out $3.5 billion on 117,000 insurance claims after the Northridge quake and "acted in good faith throughout the Northridge claims process," Mattesich said.

Quackenbush's office did not have immediate comment Monday about the release of the reports.

Burton said conduct by insurance companies after Northridge shows a pattern of misconduct that has implications beyond the 1994 disaster. He said he would be willing to subpoena insurance company executives to question them on their actions and their relationship to Quackenbush.

"It seems to me all the attention has been brought on the Department of Insurance, which I think is proper," Burton said. "But the insurance companies have contractual duties to the people who buy their policies and clearly they have not done their duty."

When asked if he thought insurance companies got off easy, Burton feigned deep thought and said: "One might say that. Yeah, of course. Giving money to foundations makes it tax-exempt and giving a fine comes out of the shareholders' pockets."

"From the day he filed for office, I don't think anyone thought 'Quack' was going to be hard on the insurance industry," Burton continued. "But I don't think anyone knew how bad it was going to get."

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