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home / insurance / in the media

Santa Monica Mirror
Jul 23, 2000

by Douglas Heller, FTCR

The "QuackQuake" is Over, Now the Clean-Up Must Begin

Opinion Editorial
Over six years after the Northridge quake first traumatized L.A., and five, and a half years under Insurance Commissioner Quackenbush, the shaking finally stopped on June 28 when Quackenbush resigned his post as Commissioner. The Legislature's Watergate-like proceedings and the media exposes on the outrageous manner in which he and his executive staff ran the state's Insurance Department left him with no option but to resign ignominiously, still facing a taxpayer lawsuit for theft of state funds and possible criminal and civil charges, currently being investigated by the Attorney General.

Now, however, the clean-up must begin. The duty of appointing the next California Insurance Commissioner belongs to Governor Davis. California policyholders must be protected and their faith in the state regulation of insurance must be restored. For these reasons, it is vital that the interim appointee be an individual who has credentials that are above reproach.

The appointee should have no conflict of interest. Obviously that excludes anybody who has worked for or on behalf of the insurance industry. The candidate, if a sitting legislator, should have neither accepted large sums of campaign contributions from the insurance industry nor voted consistently for the insurance industry's interests. The public deserves and will insist upon a regulator who is committed to protecting the consumers of the state and who could never be labeled an industry partisan.

As Insurance Commissioner, Quackenbush routinely ignored bad behavior by the state's major insurers (his top contributors) and, inevitably, left the policyholders and injured victims unprotected. A recap of his political self-destruction highlights what happens when the state's top cop on the insurance beat is an industry lapdog rather than a consumer watchdog.

Since we learned three months ago that the Insurance Commissioner transferred campaign contributions to his wife's defunct Senate Campaign account and then used the money to pay off his mortgage, a barrage of unseemly activities has been revealed. We found that Quackenbush used regulatory settlement monies to pay for a public relations plan to "increase [his] standing as a leader in California and position himself as a champion for consumers." The funds paid for political polls and advertisements featuring Quackenbush. Additionally, foundations set up with earthquake-related settlements gave $500,000 to the Sacramento Urban League around the same time that the Commissioner was placed on the group's Board of Directors and donated $263,000 to a sports camp attended by his children. Hundreds of thousands more went to other groups that do no work on earthquake and insurance issues.

In early June, State Senator Martha Escutia made public explosive documents that exposed the unfair treatment of Northridge earthquake victims by a number of major insurance companies. These documents, which were formal state audits of State Farm, Allstate, 20th/21st Century and Farmer's Home, clarified what most observers expected and consumer groups pointed out early into the affair: it takes two to tango and Quackenbush's ability to leverage personal benefits from the insurers was a result of the damaging evidence that Department of Insurance staff had compiled about the companies. According to the documents, the insurers low-balled, delayed and misrepresented the settlements of thousands of policyholders in the weeks and months after Northridge. As a result, Quackenbush's staff recommended billions of dollars in fines against the companies and hundreds of millions to be made available for restitution funds to quake victims, still waiting for justice six years later.

Instead of carrying out his regulatory duties, Quackenbush swept these reports under the rug and settled with the companies for a few million dollars to private foundations established by the Commissioner himself. In the case of Farmer's Insurance and Fireman's Fund, he allowed them to pay into the fund in lieu of being examined whatsoever.

Quackenbush publicly claimed that the state did not have sufficient evidence to take serious action against insurance companies. These exams, however, are the smoking guns that expose the insurance companies' bad behavior after the Northridge quake. Insurance companies signed a sweetheart deal when they agreed to make tax-deductible donations to Quackenbush's foundations, because, as these reports show, they had a lot to hide.

The now public reports (which are available at www.consumerwatchdog.org) show that the California Department of Insurance conducted full-scale investigations, in 1997 and 1998, into the companies' behavior. The exams show violations of a variety of claims handling laws and regulations. For example, according to the examination :

State Farm did not properly explain policyholder's benefits, misled policyholders or misrepresented settlements in 37% of the 825 files reviewed;
20th Century offered unacceptably low settlements in 32% of the 431 reviewed;
Allstate reduced settlements based on unnecessary or excessive depreciation of property value in 16% of the 808 files reviewed.

Now that the Commissioner has resigned, the Legislature and the Governor must restore the public's faith in the Department of Insurance, which has been decimated by Quackenbush. The clean-up process must address the findings of these reports and those of the Quackenbush investigations by: 1. Ensuring that Northridge victims are fully paid for unresolved and low-balled claims; 2. Punishing companies for their misbehavior; 3. Passing new consumer protection legislation to prevent this kind of tragedy in the future; 4. Banning contributions from the insurance industry to future Commissioners and candidates for Insurance Commissioner.

In addition to the issues above, the next Commissioner will need to implement a host of rules and regulations that Quackenbush, at the behest of the insurance industry, ignored, dismantled or never developed. As just one example:
Quackenbush and a few major insurers have appealed a Superior Court ruling that threw out Department of Insurance regulations that undermine state law created by the 1988 insurance reform measure, Proposition 103. This law states that auto insurance premiums should be primarily based on a person's driving record rather than where they live. The insurance industry, which has a history of price gouging people in urban communities, and Quackenbush have fought the Court ruling at the expense of good drivers in Los Angeles who pay much more in auto premiums than they should under the law. The next Commissioner can drop this appeal and finally issue regulations which comply with the law.

Whomever Davis picks as the interim Commissioner, he or she must be committed to protecting consumers of the state. Governor Davis must know that the scandal that engulfed Quackenbush is directly related to the coziness between Quackenbush and the insurance industry. To restore the public's confidence, Davis's appointee must, at a minimum, be free of any perceived or actual ties to the insurance industry. Otherwise, consumers are in for a nasty aftershock.
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Douglas Heller is a consumer advocate with the Santa Monica-based Foundation for Taxpayer and Consumer Rights He can be reached by e-mail at doug@consumerwatchdog.org.
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