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NEWS RELEASE
May 08, 2000


CONTACT: Doug Heller - 310-392-0522 x309

Group Asks AG to Block Quackenbush Threat to Evade Court Order

Calls for Court-Appointed "Special Master" to Oversee Insurance Claims Mishandling, Payments
Responding to a threat made by Insurance Commissioner Quackenbush last Friday after a court ordered assets of one of his foundations frozen, the Foundation for Taxpayer and Consumer Rights (FTCR) today asked the Attorney General to prevent Insurance Commissioner Quackenbush from any further control or use of money "donated" to Quackenbush foundations by insurers in lieu of $316 million in restitution and $3.37 billion in penalties. A statement issued late Friday by the Department of Insurance announced that, in apparent defiance of the Superior Court order, the Department is reviewing options for distributing the assets frozen by the Attorney General "through another vehicle." Click to view the Department of Insurance statement.

Noting that the Quackenbush foundation money could not possibly cover the costs of outstanding claims FTCR, a non-profit, non-partisan organization, asked Mr. Lockyer to seek an expanded court order to bar Quackenbush or his lieutenants from diverting or spending the remaining money. The group further suggested appointment of a "special master" to review the still-secret Department of Insurance Market Conduct Exams, outstanding private litigation and other claims, in order to determine how to best hold insurance companies accountable and ensure policyholders are fully paid.

The group described its request as "extraordinary," but said it was necessary "because Mr. Quackenbush cannot be entrusted with the responsibility to resolve a scandal of his own making."
###
Click here to view the Department of Insurance statement.
The Letter to the Attorney General follows.
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May 8, 2000

The Honorable Bill Lockyer
Attorney General
State of California
1300 I Street #1730
Sacramento, CA 94244

By facsimile 916-327-7154 and U.S. Mail

Re: Commissioner Quackenbush's Effort to Evade Court Order

Dear Attorney General Lockyer:

Shortly after the Superior Court issued its decision late last Friday afternoon in support of your application to freeze the assets of one of Insurance Commissioner Chuck Quackenbush's non-profit organizations (the California Research and Assistance Fund - CRAF), a spokesperson for the Department of Insurance -- which has previously asserted it has no control over any of the entities -- issued a statement stating that it would seek to direct payments apparently owed to the CRAF by 21st Century Insurance Company "through another vehicle" controlled by Mr. Quackenbush in an apparent attempt to circumvent the court's ruling. (Statement attached).

We are writing to urge you to take further action to prevent additional improper expenditures of these funds and insure generally that the Commissioner's mandatory duties under California law are met.

All Funds Obtained Pursuant to Purported Settlements of the Market Conduct Examinations Should Be Frozen

1. According to the California Legislative Counsel, Mr. Quackenbush's creation of CRAF and other non-profit foundations contravene state and possibly federal laws.

According to Mr. Quackenbush's career lawyers and investigators, State Farm, 21st Century and Allstate engaged in severe claims mishandling practices in their handling of Northridge earthquake claims, in violation of state laws. The agency staff produced reports on each insurer, known as Market Conduct Exams (MCEs), documenting the extent of the wrongdoing. (A sample of State Farm's claims files revealed that 50% of the claims were mishandled in violation of one or more provisions of state law). The investigators recommended Quackenbush order the insurers to pay a total of $114.7 million in restitution to policyholders and an additional $2.38 billion in fines.

However, Commissioner Quackenbush ignored the investigators' recommendations. Instead, he ordered insurers to make tax-deductible donations to non-profit foundations he would set up. Some observers, including representatives of the insurers, have likened this process to extortion. Certainly, failing to order restitution and fines in furtherance of a scheme to extort money is a violation of another state law. Absent the Market Conduct Examinations which Mr. Quackenbush has refused to produce, we cannot know whether Quackenbush's explanation -- that the companies had in fact behaved properly -- is true.

As confirmed by the Legislative Counsel, moreover, Mr. Quackenbush had no authority to create foundations nor to divert fines from the state treasury.

2. The foundations were operated unlawfully.

The litigation filed last week by your office on behalf of the People of California against the CRAF details the misuse of the CRAF money. Of $12 million in insurer donations to CRAF and another foundation, $6 million was spent almost immediately -- and without complying with statutory decision-making formalities -- by the boards of the organizations to benefit Quackenbush personally, among other things paying for $3 million in television ads promoting the commissioner, a $500,000 gift to a Sacramento organization in exchange for a seat on its board, and a gift of $263,000 to a sports camp attended by his children. These and other insurers also gave the Commissioner $250,000 in political contributions, which he used to pay off campaign loans made from his wife's business and from a second mortgage on their home.

3. Monies owed and remaining to be paid to CRAF pursuant to the MCE "settlements" are part of the unlawful scheme and the court's order.

The April 21, 1999 settlement agreement with 21st Century negotiated by Mr. Quackenbush specifies that it is to pay CRAF $6 million. The purpose and intent of the court's order last Friday clearly was to ensure that funds controlled by, or due to CRAF by insurers as part of the settlements of the MCEs arranged by Mr. Quackenbush, should not be spent until there is a full judicial hearing on the merits of your suit to request involuntary dissolution of the CRAF.

Moreover, we are informed that 21st Century was represented by counsel at the hearing last Friday. Thus, they are on notice that their $6 million is intended to be covered by the Friday order.

4. After the court's order, Mr. Quackenbush announced he would seek to divert the 21st Century funds to yet another entity for distribution.

The Commissioner's spokesperson's statement certainly belies his repeated assertions in recent days that he had nothing to do with foundation funds. Indeed, it simply confirms that the Commissioner has used the color of his office to obtain and control money provided by insurance companies.

The threat to direct $6 million due to CRAF to some other entity is simply an effort to evade the court's order. It appears that since Mr. Quackenbush was not named in the lawsuit and thus not directly subject to that court's jurisdiction, he intends to ignore the court order and use his authority as insurance commissioner to divert the funds.

5. It is highly likely that the 21st Century funds will be misused.

In his statement last Friday, Mr. Quackenbush's spokesperson indicated that the Commissioner intends to give the $6 million to Northridge policyholders. In light of the Mr. Quackenbush's actions, we must assume that any additional monies he obtains will also be misspent, notwithstanding the now enormous scrutiny of the Commissioner.

Most important, it is likely that 21st Century and other insurance companies owe their Northridge policyholders much more than $6 million. The CDI investigators put these numbers at over $316 million, not including fines; previous and pending bad faith law suits have collected hundreds of millions of dollars more. Mr. Quackenbush claims his decision to transform these amounts to a total of $12 million in donations is a settlement matter within his discretion; we do not agree. We believe it constitutes a dereliction of duty and may be illegal if it was part of a scheme to benefit himself personally.

In any case, neither Mr. Quackenbush nor CRAF nor any other entity to which he may divert these funds has indicated who will get the $6 million, or how it will be spent.

It may end up in the hands of Mr. Quackenbush's cronies, as has the other half of the money "donated" by insurance companies.

Or it may end up in the pockets of policyholders who do not require it, while those who require substantial assistance get too little or nothing at all.

Moreover, a "giveaway" this week could be used by 21st Century or other insurers as an excuse to deny any further payments owed. In fact, Mr. Quackenbush previously entered into an agreement with Farmers Insurance Group, solely in exchange for a $1,000,000 donation, to permit Farmer's to force its policyholders to waive their right to recovery in exchange for filling out a "claims survey." (Farmers was apparently smart enough not to implement this blatantly unlawful device).

6. Policyholders are entitled to full compensation and due process.

The present scandal illustrates why the creation of foundations to give away money that insurance companies should have paid directly to policyholders in the first place is not only illegal but violates basic due process rights as well as the enabling authority of the Department of Insurance.

Mr. Quackenbush's handling of these settlement monies like a slush fund for his own personal political purposes -- whether to buy the respect of organizations whose constituencies Mr. Quackenbush's official actions have injured, or now to save his political career by demonstrating sudden concern for Northridge policyholders -- is the antithesis of the rule of law that is intended to govern enforcement of insurance contracts and state claims handling laws.

State law authorizes the Department of Insurance to oversee the claims handling practices of insurers through (1) investigations (the MCE process), (2) enforcement of laws, including restitution to policyholders, fines or de-licensure, subject to (3) judicial review. This process, governed by the Administrative Procedures Act and other administrative and judicial rules, provides public scrutiny and due process protections to both policyholders and insurance companies.

Additionally, the judicial branch is directly available to individual claimants. It is the appropriate forum for the adjudication of individual or minor disputes that the Commissioner's agency staff is unable to receive on an informal basis when insurers breach their obligations to policyholders. It is equipped to handle such disputes, and is governed by strict procedures which insure fairness to all.

Through his actions, Mr. Quackenbush has subverted these institutions and the law-based procedures for determining justice. Indeed, his settlements, including the foundations he established, accomplished none of the purposes for which the Department of Insurance and the judicial branch exist. With all the evidence presented to us -- and much remains undisclosed -- there is no evidence that justice was done by Mr. Quackenbush. Instead, the process of policyholder compensation and insurer punishment became a bazaar. Public confidence in the integrity of government process has been deeply impaired as a result.

For these reasons, we respectfully request that as California's chief law enforcement officer, you:

o Seek to expand the court order freezing the assets of CRAF to all foundations established by Mr. Quackenbush.

o Seek a court order enjoining Mr. Quackenbush or other Department of Insurance personnel from ordering the expenditure and/or transfer of any funds from the foundations or insurance companies pursuant to Northridge earthquake settlements with the Department until independent judicial authorities can determine what is best done with these funds.

o Seek a court order appointing a special master to oversee the Commissioner's actions and ensure full compliance with California law.

A Court-Appointed Special Master should review the MCE's, the settlements, private litigation and all surrounding documentation, and determine what additional enforcement actions are necessary

Determining how the remaining foundation funds should be distributed is only one element of the scandal that needs to be addressed. The greater issue is what further monies insurers should be forced to pay, and what other actions ought to be taken against insurance companies to ensure that policyholders are made whole and serious misconduct is punished. To resolve these questions, access to the MCEs, agency staff and judicial records will be necessary.

In light of his role in the circumstances surrounding the MCEs and the creation of CRAF and other Quackenbush foundations, it is clear that Mr. Quackenbush cannot be entrusted with the responsibility to resolve a scandal of his own making.

Given the extraordinary circumstances, we see no choice but to suggest that a "special master" be appointed by the court to investigate the facts in order to advise the Attorney General on how best to spend the relatively minimal foundation funds -- including those ultimately obtained through the lawsuit against CRAF.

A court appointed special master is the most appropriate way to handle this complicated situation:
The Legislature is simply not equipped to resolve individual financial matters.
Because the Department of Insurance is an independent agency, constitutional protections dictate that the Attorney General's office proceed carefully and not usurp the Department's functions.

We wish to emphasize that we are not suggesting that the special master either act as a prosecutor in pursuing the insurance companies, nor become involved in private litigation. Indeed, the Court system -- where many private plaintiffs have initiated and in some cases resolved claims disputes -- is familiar with the issues and experienced in reviewing claims on behalf of large groups of plaintiffs. Instead, the special master should assist your office in determining how foundation funds shall best be deployed. This will require review of the MCE's, requests for assistance made to the DOI, the status of private litigation, and any proposed plans developed by the Foundations for the disposition of the funds.

Thank you for your consideration of our views.

Sincerely,



Harvey Rosenfield Douglas Heller



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