Associated Press

Accused of mishandling Northridge earthquake claims, executives from a half-dozen insurance companies were summoned to the Insurance Department’s headquarters, ushered into an office one-by-one and offered a choice.

They could donate to a new fund called the California Research and Assistance Fund set up by the department.

Or they could face huge penalties – hundreds of millions of dollars worth – proposed by the department’s staff for claims-handing violations stemming from the 1994 Northridge earthquake in Los Angeles.

Drafts of press releases targeting the companies were placed on the desk during the meetings. In at least one case, they were pinned to a wall.

“They were told, ‘You cooperate”‘ an insurance industry source familiar with the meetings told The Associated Press. Several of the meetings were conducted by then-Chief Deputy Insurance Commissioner William Palmer, the source said.

“One (executive) would walk in, and Palmer would throw down two press releases – one that he said would be sent out if they contributed, the other if they didn’t. One by one, they got mad and walked out,” said the source, an insurance executive whose account was confirmed by two other sources. All spoke on condition of anonymity.

Palmer’s boss, Insurance Commissioner Charles Quackenbush, did not attend the meetings, the sources said.

Ultimately, the insurers decided to avoid the penalties and gave a total of $11.6 million to the fund, tax-deductible donations for education, consumer assistance and earthquake research.

According to a fund lawyer, CRAF’s only expenditure has been $3 million for public service ads featuring Quackenbush, a Republican re-elected in 1998.

The Los Angeles Times reported today that the fund also donated $500,000 to the Greater Sacramento Urban League after Quackenbush joined the organization’s board of directors. Meantime, the league has no official business related to earthquakes, which have never been a serious threat in Sacramento.

The fund is now under investigation by Attorney General Bill Lockyer and lawmakers.

Several insurers who gave to the California Research and Assistance Fund contributed to the commissioner’s campaign last year, including $50,000 from Allstate, $5,000 from 21st Century and $20,000 from Fireman’s Fund.

Quackenbush‘s campaign collected at least $340,000 from insurance interests in 1999. Quackenbush transferred at least $175,000 from his campaign to his wife’s failed state Senate campaign.

Such candidate-to-candidate transfers are legal, but critics said it showed why the state needs tougher campaign finance laws.

The Assembly Insurance Committee plans to investigate the timing of the donations.

Insurers and Quackenbush aides have said there is no connection between campaign contributions and Insurance Department decisions.

In addition to the California Research and Assistance Fund, a second entity, the California Insurance Education Fund, has also attracted investigators’ interest, but it was unclear to what extent that fund – whose board includes several prominent politicians – was being examined.

Consumer advocate Harvey Rosenfield, who wrote a 1988 insurance initiative that cut rates and made the commissioner’s post an elected one, said any payments by the insurers should have been made to the state treasury – not to CRAF, a nonprofit foundation.

“The insurance commissioner does not have the authority to order or agree to payments to nonprofit foundations as a substitute for payments to the state treasury,” said Rosenfield, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights.

Quackenbush spokesman Dan Edwards said the fund’s creation was within the authority of the commissioner, who has broad powers to punish insurers for misconduct, levy fines and decide penalties.

“We did something creative, but it’s not unprecedented, and it’s better for consumers,” Edwards said. Quackenbush wanted to get money for consumers quickly rather than spend years caught up in costly litigation, he said.

The potential fines, stemming from department studies of companies’ conduct called marketing exams, were enormous. They included $2.38 billion for State Farm, $819 million for 21st Century and $172 million for Allstate.

The commissioner’s office acknowledged that Palmer and others acted forcefully, presenting maximum penalties to intimidate the executives, while knowing it was unlikely the office would win figures that high.

“It was very aggressive,” Edwards said. “They extrapolated the worst-case scenario for every problem we identified, including willful violations. They were broad and grand extrapolations.”

The numbers were “presented in our first meeting with companies for shock value,” said department spokesman Scott Edelen.

Insurers said the penalties proposed were unjustified.

“We undertook a file-by-file review and we found rather remarkable flaws and inconsistencies in the examiner’s report. In fact, their preliminary findings were completely wrong,” said State Farm spokesman Bill Sirola.

Said Jim Dudas of Allstate: “We were objecting to a fine of any type.”

Sirola said his company gave to the fund because it thought the goals were good ones.

Dudas said officials told his company that CRAF was “a humanitarian and educational fund.” Dudas also said that negotiations over potential fines were completed prior to discussions over contributions to the fund.

Publicly, other companies involved in the fund offered similar views, adding that the fund’s goals were laudable.

But privately, two companies said they felt pressured to donate to the fund and that other executives offered similar views after their meetings.

The commissioner’s staff described the fund as an education, seismic-research and consumer-assistance program, using the insurers’ payments to help people with claims and to finance quake damage studies.

“The easiest thing he (Quackenbush) could have done would have been to say to a company, ‘OK, you owe a billion dollars,”‘ Edwards said. “But that could have bankrupted the company or just forced it into the courts for years.”

CRAF, formed a year ago by Palmer, is headed by Ron Weekley, who is affiliated with a local group called Community Connections, and Eric Givens of Los Angeles.

Weekley, the president of the fund, and Givens, its secretary-treasurer, were approved by Quackenbush, who had ultimate authority over the fund’s setup, according to a letter of agreement between the department and Woodland Hills-based 21st Century Insurance Co., which gave $6 milllion to the fund.

The letter also noted that Quackenbush had authority over the appointment of a fund manager, a key figure in CRAF’s operation, with the “full authority to receive and approve applications for assistance, contract with third-party adjusters, appraisers and other professional or administrative assistance as may be necessary for the administration of the fund.”

Weekley and Palmer, who signed CRAF’s April 24, 1999, incorporation papers on file with the state’s Registry of Charitable Trusts, did not respond to messages left at their homes Friday by The Associated Press seeking comment on the fund.

As of late Friday, none of the fund’s officers were listed in public records, although CRAF had been in existence for nearly a year. Nor were any financial transactions recorded.

Anthon Cannon, a Los Angeles lawyer representing the fund, wrote in a March 29 letter to the Senate Insurance Committee that CRAF had paid $3 million to finance public service announcements.

Those ads aired last November in San Diego, San Francisco and Los Angeles. They show Quackenbush discussing quake dangers and urging viewers to call an 800-number for more information.

The fund has a Web site that offers general quake-safety tips to children and parents.