Quackenbush Image Haunts Race for Insurance Watchdog Candidates Hone in on Issues of Honesty, Caring For Consumers
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home / insurance / in the media

Modesto Bee
Mar 03, 2002

by John Hill, Bee Capitol Bureau

Quackenbush Image Haunts Race for Insurance Watchdog Candidates Hone in on Issues of Honesty, Caring For Consumers

SACRAMENTO: The shadow being cast on the California insurance commissioner race comes from halfway across the Pacific Ocean.

Hawaii is the new home of disgraced former Insurance Commissioner Chuck Quackenbush, who resigned under duress in 2000 after a series of revelations about his cozy relationship with the insurance industry.

Despite his distance, Quackenbush and his legacy are never far from the debate over who should become the next insurance commissioner, overseeing an $80 billion industry. The commissioner runs the state Department of Insurance, which makes sure insurance companies are solvent, takes over delinquent ones, investigates consumer complaints and approves insurance rates.

INSURANCE DOLLARS FIGURE IN RACE

Assemblyman Tom Calderon, D-Montebello, is skewered by his opponents and consumer advocates for relying heavily on contributions from insurance companies, as Quackenbush did.
But the lawmaker from East Los Angeles touts his role in exposing and toppling Quackenbush, saying he has the ethical fortitude to accept industry money.

John Garamendi, who became the state's first elected insurance commissioner in 1991, says he wants to return to his old office to repair the damage done to his consumer protection initiatives by Quackenbush.

But his opponents link him to the disgraced commissioner, saying his political ambitions clouded his judgment in a high-profile takeover of a failing company.

Former Assemblyman Tom Umberg touts a code of conduct to prevent Quackenbush-type lapses, but takes heat from opponents for relying on contributions from consumer attorneys, who also have an interest in what the commissioner does.

And Quackenbush presents a dilemma for the Republican candidates -- how to embrace a GOP platform while trying to distance themselves from a once-rising Republican star who sullied the reputation of the office.

"If people look at the records and not the party labels, I'm going to win," said Gary Mendoza, a business lawyer running for the Republican nomination in Tuesday's primary.

It's a crowded field. The Republican primary includes Mendoza, a lawyer and former state corporations commissioner; Wes Bannister, who ran against Garamendi in 1990; and Stefan Stitch, an insurance auditor.

In the Democratic primary, Calderon, Garamendi and Umberg face Bill Winslow, a lawyer and insurance consultant.

Then there are the minor party candidates: American Independent, Steve Klein; Green, David Sheidlower; Libertarian, Dale Ogden; and Natural Law, Raul Calderon Jr.

Three of the Democrats -- Umberg, Calderon and Garamendi -- have far outstripped other candidates in fund raising, with each well on his way to collecting more than $2 million.

The winner will take over a department struggling to get out from under an ethical cloud.

Quackenbush resigned in 2000 after a series of revelations about his treatment of insurance companies found to have mishandled claims from the 1994 Northridge earthquake.

The staff recommended more than $3 billion in fines. But Quackenbush instead ordered the companies to pay about $13 million to foundations he set up. Some of that money was used to pay Quackenbush's political consultants to produce television advertisements featuring the commissioner.

One upshot of the Quackenbush scandal was an attempt to prohibit contributions to the insurance commissioner from those regulated by the department. But the efforts failed.

Among the Democrats, Umberg and Garamendi have pledged to not take money from the industry, and Calderon has not. About half the $1.6 million Calderon has raised is from insurance sources, according to an analysis by the Foundation for Taxpayer & Consumer Rights, which sponsored the initiative that made the insurance commissioner an elected office.

"I said from the beginning that I would take help from wherever I could get it," Calderon, 47, said during a recent debate. Calderon said that he can't count on family money, as he says his main opponents do. And all politicians, to some extent, rely on raising money from people with vested interests, he said.

"You really have to have your own ethics guide you," Calderon said. And he said that in his role as chairman of the Assembly Insurance Committee, he has been impartial. "Have I been overly friendly to the industry?" he asked. "I don't think my record shows that."

He cites a bill he introduced last year, AB 5, that would prohibit companies from using credit histories to determine car insurance rates. "They're not happy about that," Calderon said.

Calderon also likes to point out that Umberg gets much of his campaign money from consumer attorneys, who also have a strong interest in the actions of the insurance commissioner.

Umberg says that it's natural to seek contributions from lawyers, being one himself. And he draws a distinction between money from consumer attorneys and the insurance industry, which is subject to direct regulatory control by the commissioner.

"They basically have no appeal," he said. "You're it." Umberg said he would run an open department, releasing as much information about settlements and investigations as possible.

Garamendi, a one-time fixture in Capitol politics, has his own ethical fires to contain. As insurance commissioner in 1991, he seized and sold Executive Life Insurance Co. The company was invested heavily in junk bonds and thought to be in danger of failure. Garamendi oversaw the sale of the junk bond portfolio and the life insurance business. The junk bonds, despite their sordid reputation after the downfall of Michael Milken, were on the verge of increasing in value. But the profits -- in the billions -- went not to the policyholders and annuitants of the troubled company, but to the French investors who made the deal with Garamendi.

Garamendi is not a subject of the various investigations of the matter. But his opponents allege that he was, at the very least, blinded by political ambition. Garamendi, after one term as insurance commissioner, ran for governor in 1994, losing in the primary to Kathleen Brown.

COURT-CLEARED DEAL LOST PROFITS

Calderon said that Garamendi's advisers told him to sell off the bonds piecemeal, attracting more bidders and a better price. But Garamendi wanted it done before he filed for governor, Calderon said. "Consumers suffered because Garamendi made a political decision," he said.

Garamendi's defense goes like this: The value of the junk bond portfolio was established by an open bidding process overseen by a court. About 92 percent of policyholders got back 100 percent of their investments, although at less than the expected interest rate. And a plan he proposed to cover large policyholders and annuitants was rejected by the court.

"They are understandably upset, but we did everything we could to provide them with 100 percent," he said.

The bonds were sold together, he said, not to speed up the deal to meet his political timeline, but to avoid cherry-picking.

"I think they see this as an attack point," he said of his opponents. "I see it as a positive, in which we took a very sick company and put it back on its feet." Other, less contentious issues also have surfaced.

Consumer advocates say the new commissioner will have to hold the line on rising insurance rates.

The department has failed to use its regulatory authority to force insurance companies to provide the benefits they promise, said John Metz, a consumer advocate.

The insurance industry is dealing with soaring costs of medical care and vehicle repairs, said Jerry Davies, a spokesman for the Personal Insurance Federation of California, an industry trade group.

Several of the candidates talk about the need to beef up the department's investigative and consumer complaint sections, bolster the workers' compensation industry and crack down on fraud.

In the end, though, the successful candidate could well be the one who convinces voters he is the least like Quackenbush.



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