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home / insurance / in the media

Sacramento Bee
Jun 25, 2000

by Patrick Hoge

Probed firms donated to Quackenbush: His department says funds didn't affect enforcement action

Insurance Commissioner Chuck Quackenbush has taken campaign contributions at least nine times from companies that were either under investigation or facing enforcement actions by his department, The Bee has found.

Among the most recent contributors were three insurance companies accused of mishandling claims after the Northridge earthquake. The companies gave to Quackenbush's campaign while they faced sanctions from the department or immediately after reaching settlements, according to records of department activity and campaign finance reports.

Taking such campaign donations is illegal for some government officials under the state's Political Reform Act. The act prohibits contributions of more than $250 made 12 months before or three months after certain officials take action on a matter involving the contributor.

Quackenbush has maintained the law does not apply to his position. But The Bee has learned that Fair Political Practices Commission lawyers believed it did when they investigated Quackenbush for similar activity in 1996. Violations can be prosecuted administratively by the FPPC with penalties ranging up to $2,000 per offense or criminally as a misdemeanor with higher fines and potential jail time.

The Bee examined the insurance commissioner's fund-raising and enforcement activity in the wake of allegations that Quackenbush used money his department obtained from insurance companies accused of wrongdoing to further his own political goals.

Two legislative committees and Attorney General Bill Lockyer are now investigating the ways in which the settlement money was handled -- and whether consumers lost out in the process.

The issue of campaign donations has not surfaced during recent legislative hearings scrutinizing Quackenbush's handling of the money. Quackenbush is now scheduled to testify under oath at a hearing of the Assembly Insurance Committee on Thursday.

Department of Insurance spokesman Scott Edelen insisted that "there is no nexus whatsoever between the commissioner's political life and the goings-on and enforcement actions of the Department of Insurance."

Insurers said they were not seeking special regulatory treatment by contributing to Quackenbush.

"It's not linked to any legislation or regulatory actions," said 21st Century spokesman Ric Hill, noting that his company regularly donates to a wide array of politicians of different party affiliations. "That's part of a regular program of looking to support state government and candidates who are likely to be elected to office who need support and who ask for it."

Insurance companies have been especially generous to the political campaigns of Quackenbush and his wife, Chris Quackenbush. Chuck Quackenbush has taken more than $6 million from them since 1994, while his wife took $129,200 in her unsuccessful Senate bid in 1998 -- more than 18 percent of all her contributions.

Former acting Secretary of State Tony Miller has filed two complaints this year with the FPPC asking the commission to investigate some of those contributions. One complaint involves donations from several insurance companies facing potential enforcement actions. The other deals with numerous non-enforcement actions Quackenbush took, including approval of rate increases, either after or just before receiving contributions from affected companies.

Quackenbush attorney Chuck Bell said the central question is whether "there was some kind of conduct in relation to the donation, whether he (Quackenbush) offered some kind of official action in exchange for a campaign contribution.

"We're confident that there was nothing of that sort involved here," Bell said.

An FPPC spokeswoman said current commission officials would not comment about Miller's complaints. But Darryl East, former chief of the FPPC enforcement division, says he believes the law does apply to Quackenbush. That means he cannot take an official action within a certain time frame, regardless of whether he promised to act in exchange for the money, East said.

Recent testimony before the Assembly Insurance Committee suggests that Quackenbush was involved in decisions affecting contributors to his campaign.

For example, former Quackenbush chief of staff William W. Palmer testified that Quackenbush approved settlement agreements, which were brought to him by the deputy commissioners who negotiated them. Two deputy commissioners said they took agreements to Palmer for approval.

Just approving an agreement would constitute an official act, East said.

In the spring of 1999, for example, Quackenbush met with executives of 20th Century (now 21st Century) Insurance Co. during settlement negotiations and urged them to reach an agreement, according to testimony from company negotiator Michael Cassanego.

The same evening, Palmer dined in a restaurant with Cassanego and company President and Chief Executive Officer William J. Mellick. At the end of the meal, Cassanego testified, Palmer called Quackenbush by cellular telephone to say that he had reached a tentative agreement with the company.

Quackenbush took a $10,000 contribution from 20th Century on Dec. 30, 1998, and $5,000 on Sept. 22, 1999.

20th Century was investigated for alleged claims-handling violations from July 26, 1998, until Sept. 1, 1998, after which the department and the company entered settlement negotiations. Rather than seek large fines, Quackenbush's staff negotiated for a smaller sum to be given to a department-created nonprofit foundation. Mellick on April 21, 1999, signed an agreement to pay $6 million into the controversial California Research and Assistance Fund, as well as a $100,000 fine.

Six days later, Quackenbush issued a press release in which he said that as a result of the agreement he was taking two major actions:

First, Quackenbush said he was allowing 20th Century to re-enter the state's homeowners market, from which it had been excluded since June 9, 1994, because its reserves against catastrophic losses were depleted following the Northridge earthquake.

Second, the release quoted Quackenbush as saying, "I am supporting authorization of 20th Century as a new entrant into the California Earthquake Authority."

The press release also said the 20th Century settlement fulfilled his "goal" of ensuring "that Northridge earthquake victims are made financially whole." None of that money was given to consumers. Instead, a Sacramento Superior Court judge froze the foundation's assets after revelations that it spent more than $3 million on insurance outreach advertising featuring Quackenbush.

The question of whether Quackenbush took any action affecting a contributor was the central question of a 1996 FPPC investigation of a complaint made by Harvey Rosenfeld, an insurance industry watchdog.

Rosenfeld accused Quackenbush of abruptly halting a long-running probe of Surety Co. of the Pacific, a major campaign contributor that hired former Gov. George Deukmejian to lobby on its behalf. Quackenbush had taken $1,000 from the company.

The FPPC in 1998 declined to pursue the case after determining that no harm was done to the public because the company was eventually fined $1 million, and because of Quackenbush's "lack of clear knowledge or participation" in the enforcement action. Quackenbush told investigators that he did not know of the campaign contribution law until the complaint was filed.

Nevertheless, former FPPC official East said he concluded that the insurance commissioner's post -- created by voters in 1988 -- had never been added to a law exempting statewide officials and state constitutional officers from the rules banning certain contributions.

"We concluded that he was not within that (exemption) statute," East said. "That's why we conducted the investigation."

Indeed, after the investigation, Sen. Bruce McPherson, R-Santa Cruz, carried an omnibus bill on political reform with a provision that would have specifically exempted the insurance commissioner from the statute, as are the state's constitutional officers. McPherson did not pursue the bill and it was never approved.

Nevertheless, Quackenbush continued his fund raising from companies that his department was investigating.

For example, Quackenbush took $25,000 from the First American Title Co. on Oct. 23, 1998. On Oct. 13, 1999, the company signed a settlement in which it agreed to pay $2.5 million. Of that money, $1.25 million went into the California Research and Assistance Fund.

The Department of Insurance had begun investigating First American Title for misconduct in May of 1998. The company signed a second agreement with a payment of $844,000 on Jan. 27 of this year.

"These are clear, cold violations of the Political Reform Act. It's a total disregard for the law," said Miller, who recently requested criminal investigations of such donations by the attorney general and the Sacramento County District Attorney's Office.

One of the cases Miller asked to be investigated criminally involves two affiliated companies that have been accused by federal investigators in the past of defrauding young military personnel around the world by misrepresenting life insurance policies as investments.

The companies -- American Fidelity Life Insurance Co. of Pensacola, Fla., and Trans World Assurance Co. of San Mateo -- have been under investigation by Quackenbush's department since July 29, 1998, according to court records in the state of Washington.

Quackenbush took a $20,000 contribution from American Fidelity on Feb. 9 of this year, and $25,000 from Trans World Assurance Co. of San Mateo on Oct. 15, 1998.

The first donation came six months after the U.S. attorney's office in Tacoma, Wash., notified the Quackenbush administration that it had filed a civil lawsuit against the two companies, and one month after the Florida Department of Insurance filed its own charges.

On Feb. 17 of this year, the two companies settled the Florida case by paying $2.4 million and agreeing to provide restitution to Florida residents who purchased policies between 1980 and 1999. The settlement refers to the companies' failure to distribute buyers' guides to customers.

In the Washington state case, a special investigator for the Department of Defense testified that he uncovered a pattern of deceptive and potentially criminal practices at numerous military bases from Beale Air Force Base in Marysville to the East Coast, South Korea and Japan.

The two sides in Washington reached a settlement in December 1998 with the companies agreeing, among other things, to offer refunds to more than 200 customers; provide information "correctly describing" their "flexible dollar builder" products as life insurance policies; and prohibit their agents from pitching policies to enlisted personnel in group meetings.

Despite the agreement, in June 1999 several Bay Area Coast Guard employees filed a class-action lawsuit against the two companies.

Officials with American Fidelity and Trans World Assurance said the lawsuit's claims have no merit.

The California Insurance Department has taken no action against the two companies.

"We weren't expecting any special favors," Trans World executive Charles Royals said of his company's donation to Quackenbush. "We wanted to be part of the political process. We thought Mr. Quackenbush was doing a good job up to that point."

Quackenbush's wife, a candidate for the state Senate in 1998, also received money from at least three companies with enforcement actions pending at the department. Four companies that contributed to the earthquake foundation, and a fifth that donated to another department-sanctioned foundation, gave directly to her campaign.

Miller said the state Political Reform Act does not bar such contributions to Chris Quackenbush, but he finds them "unseemly."

Asked about such donations recently, Chris Quackenbush said simply, "I have no idea who has business before the department," nor does she consult with her husband before soliciting donations. She defended her practice of raising money from insurers, saying they have a right to participate in the political process.

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