Quackenbush Overstepped, Counsel Says

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Government: Lawyers For Legislature Say The Commissioner Lacked Authority To Have Insurers Fund Foundations Instead Of Paying Fines After Northridge Quake

Los Angeles Times

Insurance Commissioner Chuck Quackenbush did not have legal authority to compel insurance companies to give money to nonprofit foundations instead of paying fines or other penalties in the wake of the Northridge earthquake, lawyers for the California Legislature concluded in an opinion issued Friday.

The opinion by the office of the legislative counsel, legal advisor to the state Senate and Assembly, is the strongest support yet for allegations that Quackenbush acted improperly. He negotiated with major insurance companies to set up a pair of foundations as an $ 11.5-million settlement for claims violations related to the Northridge quake.

The foundations are at the center of an ongoing investigation by the state attorney general and are the focus of hearings scheduled to begin Thursday in the Assembly.

“It is our conclusion,” said Deputy Legislative Counsel Jeffrey DeLand, “that the authority granted to the commissioner does not include the power to require an insurance company to make a payment to a private foundation.”

In a recent interview with The Times, Quackenbush and his staff described how last year they negotiated with Allstate, State Farm and 20th Century by first threatening them with hundreds of millions of dollars in fines and then persuading the companies to give a much smaller amount to foundations for “education” and “earthquake research.”

State Farm, for example, was told that it faced $ 2.38 billion in fines and $ 114.7 million in repayment penalties. The giant insurer was allowed by the commissioner to settle the matter by making a $ 2-million payment to the California Research and Assistance Fund, set up as an earthquake research, education and relief foundation. The payments were tax-deductible.

At least $ 3 million of the foundation’s money went to producing TV spots featuring Quackenbush, including one in which the commissioner posed in an NBA referee’s outfit with Laker star Shaquille O’Neal. An additional $ 500,000 was donated to the

Sacramento Urban League in a deal arranged by a senior Quackenbush aide working from the commissioner’s offices. A total of $ 450,000 went to political consultants who had worked on Quackenbush election campaigns.

State Farm, at least, is not happy with the way the money has been spent.

“When the fund was first proposed,” State Farm spokesman Bill Sirola said, “it was earmarked as a cooperative effort to providemonies for research into the scientific and engineering methods of determining earthquake damage and public education.”

“We’re all very interested in seeing this develop . . . this entire story,” Sirola added.

The legislative counsel’s opinion was requested by state Sen. Jackie Speier (D-Daly City), chairwoman of the Senate InsuranceCommittee, who said she plans to hold hearings on the Quackenbush matter in mid-May. Quackenbush has agreed to appear Thursday before the Assembly Insurance Committee, headed by Jack Scott (D-Altadena).

“The opinion confirms to me,” Speier said Friday, “that Commissioner Quackenbush has exceeded his authority and that his conduct was a breach of his fiduciary duties to the consumers of the state of California.” Speier said that on Monday she will ask the Senate Rules Committee to subpoena records from Quackenbush‘s office about the foundations.

The money “has evaporated,” Speier said, “and . . . not one dime has gone back to the earthquake victims. This is an absolute slap in the face to consumers.” In the longer term, she said, Quackenbush could be ordered to impose the civil fines originally recommended by his staff.

Quackenbush has defended the foundations, contending that the California Insurance Code and Administrative Procedures Act gives him broad discretion to settle cases against insurance companies.

“Regulatory agencies generally have the same authority to settle a matter as any private litigant would have,” Insurance Commission chief counsel Brian G. Soublet said Friday. “Those agencies have the implied authority to negotiate settlement terms or agreements that may not be expressly stated in a statute.”

Specifically, he cited a 1993 settlement agreement negotiated by Quackenbush‘s predecessor as insurance commissioner, Democrat John Garamendi, with the California Insurance Group in a case involving alleged “redlining” practices. In that agreement, the California Insurance Group pledged to contribute $ 100,000 to a general fund “to be distributed to certified minority, gay and lesbian organizations in San Francisco.”

One of only two Republicans holding statewide elected office, Quackenbush, who has received more than $ 6.4 million in campaign contributions from the insurance industry, contends that the legislative and state Department of Justice probes into his activities are politically motivated.

Critical to the debate over Quackenbush‘s actions is whether the money the commissioner extracted from the insurance companies after Northridge is defined as fines or penalties, as his critics contend, or contributions, as he and his staff lawyers now contend.

Previously, a Quackenbush spokesman described the payments as “very significant fines.” They were included in a list of $ 56.3 million in “monetary penalties on lawbreaking insurance companies” in a March 29 Insurance Department news release. Until recently, the department listed the $ 11.5-million settlement on its Web site as fines in payment for “earthquake claim violations.”

But the official characterization from the department now, Soublet said, is that the payments are “voluntary contributions by the companies to charitable foundations.”

The distinction is important because the insurance code says all fines and penalties collected by the California insurance commissioner are to be “transmitted to the state treasury for deposit in the general fund.” In other words, deposited in the central bank account of the people of California.

Interviews with state lawyers and constitutional scholars suggest little sympathy for Quackenbush‘s contention that the law gives him broad authority on the issue.

Much of the attention in the controversy over Quackenbush‘s conduct has focused on how the two nonprofit foundations he set up have spent the $ 11.5 million. With Friday’s opinion by the legislative counsel, the focus appears to be shifting back to the legality of the foundations themselves.

“Never mind what the donations did,” said Los Angeles consumer advocate Harvey Rosenfield, a specialist on insurance law, “he Quackenbush did not have the authority to collect them. His job is to get the insurance companies to obey the law, repay people if the companies did not obey the law and make them pay a fine if they disobeyed the law consistently. There is no option allowing companies he regulates to make donations to nonprofit foundations that he controls.”

Not addressed by the legislative counsel in Friday’s opinion is the question of whether the insurance commissioner has the right to enter into a settlement agreement in exchange for not pursuing civil penalties against insurers.

“The remaining question,” said one attorney close to the case, “is whether he can agree to call off the dogs in exchange for a remedy that is not in his domain.”

Times staff writer Julie Tamaki contributed to this story.

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