“INSURANCEGATE”: Consumer Group Requests Criminal Investigation of Insurance Commissioner Quackenbush

Published on

$3.37 Billion in Fines Reduced to $10 Million in Tax-Deductible Donations

Consumer advocates today asked California Attorney General Bill Lockyer to investigate charges that Insurance Commissioner Chuck Quackenbush shielded State Farm and two other insurance companies from $3.37 billion of dollars in fines — the largest ever assessed against insurance companies in the United States — in exchange for $10.75 million in contributions to non-profit organizations and to his own political committees.

In a formal request issued today, the Foundation for Taxpayer and Consumer Rights stated that Mr. Quackenbush appears to have violated a number of state laws. It urged the Attorney General to seize documents and interview all relevant California Department of Insurance (CDI) staff to determine whether the misconduct involved criminal wrongdoing.

FTCR’s action is the latest in the “Insurancegate” scandal which began last week with a Los Angeles Times report that insurers had made donations which ultimately repaid Quackenbush family political loans. Yesterday’s Times story, by Virginia Ellis, revealed that the insurers were given an extraordinary reprieve from Commissioner Quackenbush after his own Department of Insurance found extensive violations of state law by State Farm, Allstate and 20th Century in their handling of the Northridge earthquake in 1994.

“The Los Angeles Times story documents numerous violations of state law. Depending upon information not presently available, other laws may have been broken as well. An immediate investigation is necessary,” said Doug Heller, consumer advocate with FTCR.

Also in this news release:

  • The CDI Investigation Reveals Massive Wrongdoing by Insurers in Northridge
  • Table Charting Flow of Money
  • Funneling of Fines into Foundations Probably Illegal
  • Taxpayers and Possibly Policyholders Paid for Insurer Donations
  • Controversy Has Surrounded Quackenbush Since Elected
  • Similar Misconduct Forced Bill Honig from Office, Led to Conviction

CDI Investigation Reveals Massive Wrongdoing by Insurers in Northridge

According to the Los Angeles Times, The California Department of Insurance found the three companies to have violated numerous insurance claims handling laws in the processing of Northridge earthquake claims.

Company Actual number of affected policyholders* Size of Sample Examination* % of Files with citations* Extrapolated estimate of policyholders defrauded by insurer CDI recommended repayment fund for policyholders* CDI recommended fines against company*
State Farm 117,000 825 Nearly 50% Approxi-mately 57,000 $114. 7 Million $2.38 Billion
Allstate Not reported 808 24% Presumed to be thousands $73.7 Million $172 Million
20th Century 46,000 431 75% 34,500 $44.2 Million $819 Million

*Source: Los Angeles Times 4/2/00

Under state law, the Insurance Commissioner has the primary responsibility of policing insurance companies. These reports appear to document illegal business practices of denying, delaying and low-balling insurance settlements. California Insurance Code Section 790.03 bars insurance companies from a range of unfair claims practices, including undervaluing settlements and not informing policyholders of their entitlements under the insurance policy.

“The extraordinary findings indicate that these insurers cheat policyholders as a matter of business. They apparently do it often and without regard for the law,” said Heller. “The Commissioner’s lack of enforcement cost policyholders hundreds of millions of dollars in claims that companies should have paid. These companies should have their licenses revoked, but, instead, Commissioner Quackenbush allowed them to pay three hundred times less than was recommended without ever admitting company wrongdoing.”

Last year, FTCR released internal State Farm documents illustrating that the company trains its claims personnel to delay and deny insurance settlements as a way to make the company more profitable. The series of documents, from State Farm‘s Negotiating Skills Leader Guide, is available from FTCR.

The Flow of Insurance Money

In lieu of $3.37 billion in fines and hundreds of millions of dollars
of restitution payments to earthquake victims, State Farm, Allstate and 20th Century (now 21st Century) paid a combined $10.75 Million dollars into what appears to be a Quackenbush-controlled non-profit organization. The foundation may have paid for political advertisements featuring Commissioner Quackenbush, a practice which FTCR believes is illegal. Allstate and 20th Century also added $55,000 in campaign contributions to Chuck Quackenbush.

Company Expenditure Date Paid To: Use of Money
State Farm $2 Million Donation 4/21/99 “California Research and Assitance Fund” Allegedly used to pay for Quackenbush advertisements
20th Century $6.75 Million Donation 4/21/99 “California Research and Assistance Fund”
Allstate $2 Million Donation 7/9/99 “Safety and Education Fund”
20th Century $100,000 fine 4/21/99 Dept. of Insurance This money should go to the State General Fund; SEC filings by the company do not reflect payment of the fine
Allstate $50,000 Campaign contribution 11/30/99 Chuck Quackenbush Committee ID #970821 Quackenbush transferred $175,000 from these and other insurance company donations to retire debts from his wife’s (Chris Quackenbush) failed State Senate campaign in 1998. At least $79,000 was then transferred the Quackenbush family to pay off personal loans made previously made to the campaign.
20th Century $5,000 Campaign contribution 9/22/99 Chuck Quackenbush Committee ID #970821

$175,000 in contributions to Commissioner Quackenbush‘s political campaign committee were transferred to his wife’s campaign committee, some of which then repaid his wife for personal loans made by the Quackenbushes to her failed campaign for state senate in 1998.

Funneling of Fines into Foundations Probably Illegal
The money contributed to the Foundations as a result of the CDI settlements clearly are meant to serve as fines against the insurers. “I can certify to you that these are very significant fines,” CDI spokesman, Dan Edwards told the Los Angeles Times. This directly conflicts with California Insurance Code §12975.7, which specifies that “all moneys received by the commissioner in fines and penalties” must go to the state treasury.

News releases and other records previously issued by Commissioner Quackenbush indicate that major insurers agreed to make relatively modest donations to one or more non-profit foundations as “settlement” of the agency’s confidential investigations into the companies conduct. The table below is based on the Times story and material previously issued by the CDI:

Company Disposition Recommended by DOI Staff Disposition by Quackenbush Actual Expenditure by Company
State Farm $2.38 Billion in fines;$114.7 Million to a policyholder fund Final Order finds State Farm acted in good faith in Northridge claims $2,000,000 to foundation.
$5,000 “costs” to DOI.
Allstate $172 Million in fines; $73.7 Million to a policyholder fund Northridge created “extraordinary circumstances” for Allstate $2,000,000 to foundation
20th Century $819 Million in fines; $44.2 Million to a policyholder fund Allowed to resume selling homeowners insurance; MCE found “alleged deficiencies in claims files reviewed” $6,550,000 to foundation.
$200,000 for “public education”
$100,000 fine
Farmer’s Unknown; requested by FTCR Unknown $1,000,000 to foundation
$2,500 “costs” to DOI
Fireman’s Fund Unknown; requested by FTCR Unknown; requested by FTCR $550,000 to foundation

Little information about the non-profit foundations is available; however, it appears that the foundations were established and are controlled by the Commissioner.

Taxpayers and Possibly Policyholders Paid for Insurer Donations

The costs of these foundation payments can be passed onto taxpayers by allowing the companies to write-off these expenses. According to SEC filings, for example, 20th Century, wrote off the contribution to the foundation as a pre-tax charge — an “underwriting expense” (see Form 10-Q for 20TH CENTURY INDUSTRIES filed on Aug 13 1999 filed with the Securities and Exchange Commissioner). Furthermore, while regulations (CDI Accounting Statement 84-1) bar insurance companies from passing the costs of fines and penalties onto consumers, the structure of these settlements may allow the companies to include the donations in their insurance rates, according to FTCR.

“Instead of paying enormous fines to the state, State Farm, Allstate and 20th Century paid a tax-deductible pittance to a Quackenbush-established foundation,” said Heller. “Not only are the victims of the earthquake cheated, but, it appears that Commissioner Quackenbush is willing to make taxpayers and other homeowners the victims once again of these companies’ foul play.”

Controversy Has Surrounded Quackenbush Since Elected

Commissioner Quackenbush has been the subject of criticism since he first ran for the office in 1994. During that campaign he received $2.1 million from insurance industry sources. Since 1994, advocates have challenged his obeisance to the insurance industry as he allowed, for example, almost one insurance rate increase every day in his first three years in office. Other criticisms of his tenure include:

  • Supporting the California Earthquake Authority (CEA) after the Northridge quake. The CEA, according to consumer advocates, bailed out insurance companies while forcing homeowners to pay twice as much premium for half as much earthquake coverage.
  • permitting insurers to continue using ZIP code-based auto insurance rates despite a Superior Court ruling, which he has appealed, that ruled his ratemaking regulations are illegal under Proposition 103;
  • slashing departmental staff for key consumer functions within the department, such as the complaints division;
  • he was also investigated for misconduct after accepting a campaign contribution from Surety Company of the Pacific while the company was under investigation for misconduct. The FPPC absolved Quackenbush of this charge due to insufficient evidence.

Quackenbush swears off insurance industry contributions, then accepts hundreds of thousands from companies

In May of 1998, InsuranceWeek and others reported that Commissioner Quackenbush had decided to no longer accept campaign constributions from insurance companies(InsuranceWeek, 5/25/98). During 1999, however, Quackenbush rasied over $390,000 from insurance industry sources.

Quackenbush, whose final term as Insurance Commissioner expires in 2002, has recently come under fire for accepting contributions from companies that had regulatory matters before the Commissioner. In November 1999, a financially troubled worker’s compensation insurer, Fremont Compensation, gave Quackenbush $93,350 less than two weeks after he recommended a major rate increase in worker’s comp rates.

Similar Misconduct Forced Bill Honig from Office, Led to Conviction

State law (Government Code 1090) bars officials from being “financial interested in any contract made by them in their official capacity.” In 1991, California’s Superintendent for Public Instruction, Bill Honig, was investigated and eventually convicted of breaking conflict of interest laws, in a case also involving the funneling of money into a non-profit. Attorney General Dan Lungren raided the family home of Honig in October 1991 and seized evidence that Honig’s wife’s non-profit organization was the beneficiary of a series of education-related grants that the Superintendent distributed. As a result of the Honig case, the Courts have interpreted the phrase “financially interested” broadly.


The letter to Attorney General Bill Lockyer is available here.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

Latest Videos

Latest Articles

In The News

Latest Report

Subscribe to our newsletter

To be updated with all the latest news, press releases and special reports.

More articles