1997 Credibility Audit of The California Department of Insurance
By Consumers Union on Thursday, January 1st, 1998
1997 Credibility Audit of the California Department of Insurance
A Review Of CDI Press Releases, Quotes, Public Statements, And Education Campaigns
A report by Robin Kane
West Coast Office
This report provides a credibility audit of 1997 news releases, public statements, and education efforts by the California Department of Insurance (CDI).
Consumers Union conducted this review because we noticed a number of inaccuracies or misinformation from CDI during the past year. Additionally, news reporters and consumers frequently contacted us to assess the validity of claims made by CDI, sometimes expressing doubt that they could believe what they received from CDI. We then decided to review CDI news releases and public statements during the past year and document those instances where the agency provided information in a misleading manner.
A review of 1997 news releases and public statements by CDI shows a disturbing number of instances of misinformation. On several occasions, CDI statements contained misleading, inaccurate, false or incomplete information.
The CDI oversees a multi-billion dollar industry. Virtually all Californians are impacted by the availability, cost, and coverage of insurance and the companies that provide it. In fact, California law requires drivers to purchase auto insurance, and no bank will make a home loan without the purchase of homeowners insurance. Consumers should be able to rely on the CDI.
This report summarizes major instances of misinformation from CDI.
THE MILLION-DOLLAR "EDUCATION" CAMPAIGN
The CDI & Commissioner Chuck Quackenbush defend new TV ads, financed with public money, as consumer outreach.
Others view the ads as thinly veiled political campaign commercials that confuse rather than inform consumers.
Commissioner Chuck Quackenbush launched a million-dollar advertising campaign in December in which he is featured announcing, "Billions of dollars are available to be returned to California consumers." In this 30-second spot, Quackenbush touts his actions on behalf of consumers, saying, "This money is there because my department vigorously enforced consumer protection laws." Quackenbush vaguely describes the money deriving from "auto insurance rebates, liquidated assets of bankrupt insurance companies, class action settlements and restitution awards." The ads direct viewers to call the CDI consumer hot lines to "get the money you are entitled to."
In another commercial, Quackenbush announces that his department has "cracked down on insurance companies that have ripped off unsuspecting consumers." He encourages viewers to "review retail credit agreements to see if you were billed for insurance you didn’t know you bought." He adds that, "If you were persuaded to exchange a paid up life insurance policy for a policy you couldn’t afford, you may be entitled to a refund."
Insurance companies, besieged with calls from consumers inquiring about the money, said initially that they did not know about the money referred to in the ads. Quackenbush said the ads referred to Prop. 103 auto insurance rebates and settlement money from enforcement actions against the remaining estates of insolvent insurance companies. However, other CDI officials contradicted the amount and accessibility of the money for consumers. When pressed, CDI officials admitted that most Prop. 103 rebates have already been paid and that the amount remaining, if any, (to be paid by State Farm) is tied up in litigation. The claims to insolvent insurance companies, CDI officials later admitted, were mostly impossible to recover since the period for making those claims had ended.
CAMPAIGN CONTRIBUTION CONTRADICTION
Commissioner Quackenbush has regularly argued that his actions are not influenced by the fact that insurance companies primarily financed his election.
However, he claimed such contributions could, in fact, lead to a conflict of interest for another politician the Attorney General.
He subsequently apologized for that claim, and said that his office’s comments on the matter were "inaccurate."
Commissioner Quackenbush briefly became zealous in the battle to keep campaign contributions from influencing policy decisions. However, he applied this new belief not to himself, but to fellow elected official Dan Lungren, the state attorney general.
Then Commissioner Quackenbush apologized, and said, "statements emanating from my office were inaccurate."
The scuffle between the two Republicans began when Commissioner Chuck Quackenbush was in a heated court battle involving the Golden Eagle Insurance Company. Originally, the Attorney General served as Quackenbush’s attorney in the matter, but then withdrew. Quackenbush then hired six private law firms to handle the case, racking up more than $5 million in bills. Meanwhile, the Sacramento Bee discovered that while Lungren was representing Quackenbush against Golden Eagle, the firm and its former owner contributed $10,000 to Lungren in support of his gubernatorial campaign.
Quackenbush then said in a court motion that Lungren’s acceptance of that money was "a clear and undeniable breach of the professional rules by which he is bound."
Quackenbush then reversed course on the campaign contribution matter, apologizing to Lungren. "I have concluded that statements emanating from my office were inaccurate," he wrote in a letter to Lungren. "I personally regret any statements that may have impugned your integrity and reputation "
When asked to identify what Quackenbush found "inaccurate" in statements coming from his office, CDI Press Secretary Dana Spurrier said she didn’t know. She said Quackenbush and Lungren "sat down and resolved everything to their mutual satisfaction." However, Lungren’s spokesman said the truce was arranged by staff, and that the two officials never met or spoke about the issue.
Quackenbush’s attack and then apology to Lungren on the acceptance of campaign contributions continued Quackenbush’s contradictions on the issue. Early in his 1994 race, Quackenbush said he wouldn’t accept industry contributions because of the apparent conflict. However, Quackenbush has received more than $6 million in industry contributions since his election as Insurance Commissioner.
LESS ZIP IN AUTO RATES?
Commissioner Quackenbush announced in October that new regulations would "de-emphasize" ZIP Code as a factor in auto insurance premiums for California drivers.
The new plans approved by Quackenbush, however, continue to prioritize ZIP Code as the number one factor in determining auto insurance premiums.
On October 1, Commissioner Quackenbush announced that new auto insurance rating plans went into effect. He said in a press release that these would require insurance companies "to de-emphasize territorial factors, such as where a driver lives, and consider a person’s driving record, annual mileage and years of driving experience as the principal criteria." This led to the following press accounts:
- "Following nine years of legislative and legal duels, California auto insurance companies this week will begin de-emphasizing where a driver lives and place more weight on a driver’s safety record, the annual number of miles driven and years of motoring experience."
- "Insurance Commissioner Chuck Quackenbush said drivers could save as much as 10 percent under new regulations that require insurers to first consider a driver’s safety record when setting premiums The new ratings plan requires insurers to consider a driver’s safety record, annual mileage and years of driving experience before any other factor."
- "Less Zip in Auto Rates These territorial ratings will be de-emphasized under the new rules."
The truth differed from these statements, however. In fact, territory or ZIP Code remains the primary factor in auto insurance rates under the new regulations. The insurers acknowledged that fact, in direct contradiction to CDI announcements.
According to Brian Sullivan of the Auto Insurance Report industry newsletter, Quackenbush’s regulations permitted insurers to use a statistical trick to comply with a major requirement of Proposition 103. That initiative requires that optional factors, including ZIP Code, are less influential in setting premiums than three mandatory factors safety record, annual mileage, and years of driving experience. Under the new plans, however, insurance companies average all the optional factors together and ensure that this single "average" is lower than any one of the mandatory factors. Because some of these optional factors are so minimal and bring the average down significantly, insurers can continue to allow ZIP Code to be the predominant factor in determining a customer’s premium.
When questioned about this statistical maneuver, Quackenbush spokeswoman Dana Spurrier said, "It is absolutely not true that the Commissioner is allowing a loophole."
Insurance companies acknowledged during hearings and to the press that the new plans approved by Quackenbush included this averaging method. Therefore, industry officials acknowledged, the plans do not actually make ZIP Code less important in insurance rates than the three mandatory factors as defined in Prop. 103.
WHO BANNED THE UNINSURED MOTORIST SURCHARGE?
Twice in 1997, the CDI issued press releases announcing that courts upheld "Quackenbush’s ban on the uninsured motorist surcharge."
Neither public statement acknowledged that the Commissioner had initially permitted the surcharge and defended it in court, then banned it under court order after losing lawsuits brought by consumer groups.
Many auto insurance companies levied a surcharge on premiums for legally-required auto insurance when the applicants had previously driven without insurance. Consumers Union and other consumer groups viewed this as poor public policy, because the added expense would serve as a barrier to many applicants and thus keep people uninsured. In addition, Consumers Union argued that Proposition 103 expressly prohibits using lack of prior insurance as a factor for increasing rates. Here’s what happened:
- In June 1996, Consumers Union challenged these surcharges and asked CDI for a hearing.
- In August 1996, Commissioner Quackenbush rejected that request and then approved a 40% surcharge by the Southern California Auto Club.
- In October 1996, Consumers Union and the Southern Christian Leadership Conference of Greater Los Angeles filed a lawsuit against Commissioner Quackenbush, seeking reversal of the Commissioner’s decision. Commissioner Quackenbush and his staff defended the surcharge in court.
- In December 1996, the judge in the case issued an oral ruling in favor of Consumers Union, ordering an end to the surcharge. Quackenbush’s spokeswoman Dana Spurrier bemoaned the court ruling, saying, "This decision will certainly be a major burden on the ability of many companies to file their rate applications pursuant to the new auto regulations."
- In January 1997, due to the December court ruling, Commissioner Quackenbush issued a bulletin informing insurers that the surcharges could no longer be used in future rate filings. He did not demand that the companies immediately halt their use of the surcharge, however.
- In February 1997, the judge issued his written order that said Quackenbush’s "use and approval" of the surcharge was contrary to the Insurance Code. It ordered Quackenbush "not to approve" the surcharge in determining rates and premiums and to notify all insurers that the surcharge could no longer be used as a factor.
CDI immediately issued a press release completely misrepresenting the CDI’s positions and actions. The release was titled, "Court Upholds Commissioner Quackenbush’s Ban On Uninsured Motorist Surcharge."
Quackenbush is quoted as saying, "We’re delighted with Judge Cahill’s recent decision on the surcharge issue. It echoes our goal to get uninsured motorists into the system Uninsured motorists who previously did not have auto insurance due to purely economic reasons should not be charged more when they want to comply with the law."
In March, CDI Deputy Commissioner Ken Gibson said in a press release, "Commissioner Quackenbush has had the courage to ban the uninsured motorist surcharge "
In fact, it was the lawsuits by CU/SCLC and the Prop. 103 Enforcement Project and the judge’s ruling that overturned the Commissioner’s approval of the surcharge. The judge ruled that the surcharge contradicted the Insurance Code. When consumer groups pushed for the surcharge to be dropped immediately, Commissioner Quackenbush disagreed, and allowed companies to continue using the surcharge. This led to a further legal battle.
In May 1997, the judge denied a motion by Consumers Union and other groups to immediately enforce the ruling to ban the surcharge. That decision permitted Commissioner Quackenbush to continue to allow the surcharge and phase it out in the future.
The CDI then issued another release titled, "Court Rules Again In Favor Of Commissioner Quackenbush’s Ban On The Uninsured Motorist Surcharge." In it Commissioner Quackenbush said, "We are pleased that Judge William Cahill issued a ruling today that clearly shows the Department of Insurance has done everything possible to get uninsured motorists into the system."
THE HARD-HITTING AUDIT
A state audit of the CDI issued in March severely criticized the department under Commissioner Quackenbush.
The CDI blamed the negative findings on previous administrations and did not respond to specific questions about audit findings posed during a legislative oversight hearing.
A six-month state audit of the CDI found that the department had "significant deficiencies" in its fiscal management. Because of the department’s practices, "the department increases the risk that unfair insurance practices will go undetected and cause continuing harm to insurance consumers." The report concluded that, "Because the department has these financial and management shortcomings, we are concerned that the department has limited effectiveness in meeting the public’s need for protection from unlawful or unfair practices by insurance companies." The critical audit found that the CDI under Commissioner Quackenbush:
- Maintained a backlog of 5000 unresolved consumer complaints;
- Failed to adequately track its own fees and assessments;
- Delayed providing budget information to administrators;
- Improperly shifted millions of dollars between budget categories, "in an apparent move to avoid the appearance that they were spending too much money," according to a National Underwriter story;
- Delayed sending invoices and did not properly maintain accounts receivable, thereby forfeiting possibly $4.7 million in fees;
- Granted rate increases that were too high in more than 100 cases and rate decreases that were too low in more than 100 other cases.
Commissioner Quackenbush was unavailable for comment when the audit was released on March 13. The CDI responded with a press release headlined, "State Auditor Report Released Today. Department of Insurance Continues Corrective Action." The release dismissed most of the audit’s criticisms as stemming from previous administrations. "The auditor’s issues, for the most part, surround concerns based on long-standing Department practices that began years ago under previous administrations," the release quotes Mark Lowder, a CDI Deputy Commissioner. Quackenbush’s Chief Deputy Ken Gibson said, "Much of what is discussed in here has to do with conditions that we found absolutely shameful when we took over in January 1995."
However, one news story on the issue stated, "The audit, however, clearly identifies questionable actions and missed opportunities that occurred on Quackenbush’s watch over the past two year."
A later release from CDI stated that, "A recent State Auditor Report clearly shows that the Department of Insurance is much improved compared with past reports under previous Commissioners. There are still problems but progress is being made." However, the audit’s scope was not to compare the current CDI administration with previous administrations, but instead to assess the ability of the department to perform its functions.
The Legislature held an oversight hearing on the CDI’s performance on March 19. Prior to the hearing, CDI officials distributed a press release that included this sub-title: "Legislative Oversight Hearing Unveils New Numbers Showing Department of Insurance ‘Much Improved.’" At the hearing, only CDI officials described the department as "much improved."
Quackenbush and his spokespeople have repeatedly attacked the mechanism that helps fund consumer groups that participate in public hearings and make a substantial contribution on behalf of California insurance customers.
In these attacks, Quackenbush and his staff have not offered full information on the "intervenor" process, and have sometimes misinformed reporters on the issue.
Some of the recent statements by CDI officials:
- CDI spokeswoman Lisa Acheson said that consumer advocate Harvey Rosenfield "wrote Prop. 103 to make money for himself. The intervenor process was set up in such a way that it allows consumer groups to take part in administrative hearings as intervenors, and they have taken full advantage of that. Harvey Rosenfield is making money by criticizing the good work for consumers that Commissioner Quackenbush has been doing."
- Commissioner Quackenbush said about the intervenor program, "There’s not much you can say when the public votes for it. It’s the law. He [Rosenfield] is able to intervene at will."
In fact, Commissioner Quackenbush decides if intervenors’ participation benefits the public, and he authorizes any payments made to intervenors.
Proposition 103, passed by voters in 1988, authorizes individuals and organizations such as Consumers Union to receive compensation if they participate in public hearings on insurance rates and policies and offer a "substantial contribution" to the results of those hearings. Commissioner Quackenbush’s regulations define such a contribution in the following way: "The intervenor’s participation resulted in more relevant, credible, and non-frivolous information being available to the Commissioner to make his or her decision " Quackenbush has the authority to adopt regulations to implement the law. To intervene, an organization or individual must take the following actions:
- File a Request to Hold a Hearing. [The Commissioner can and does reject requests.]
- File a Petition to Intervene, outlining the petitioner’s interest and issues to be raised. [An administrative law judge rules on this.]
- If the intervenor will seek compensation, they must file a Notice of Intent to Seek Compensation, with an itemized budget and outline of work to be conducted.
- The group must also request and receive a continuous Eligibility to Request Compensation. [The Insurance Commissioner rules on this.]
- After the hearing, an intervenor must file a Request for Award of Compensation, with billing records, expense receipts, and description of the "substantial contribution" citing to the hearing’s record. [The Commissioner rules on these requests and can disallow expenses.]
This extensive process has limited the number of intervenors seeking compensation to only a dozen since 1988. Insurance companies can protest the funding requests and billing rates of intervenors, but they must provide their own costs and billing rates. None have done so.
The CDI and insurance companies frequently complain about the cost of the intervenor program, citing the $4.3 million paid to the dozen groups since 1988. Consumers Union has received $300,000 under the program since 1988.
CDI officials do not frequently acknowledge the rate savings won by some of these consumer groups. For example, in recent CEA rate hearings requested by Consumers Union, the organization’s testimony led to a rate cut that saves policyholders more than $50 million a year.
Many of these instances of misinformation would be disturbing on their own. Taken together, in the course of a single year, they represent a disturbing trend.
The CDI fails this credibility audit of its 1997 communications with the public. It is not naïve to request that information from the CDI be honest and forthcoming. That is, in fact, its obligation.
The insurance marketplace is a confusing one. Misinformation from the CDI adds to that confusion, and increases the public’s disbelief in government.
Pundits frequently report that the public has a growing distrust towards its own government. Misleading or not fully accurate communication from a government agency such as CDI only fuels that distrust. No one, including government watchdogs and the media, should become accustomed to such actions by a government agency. Public agencies particularly one empowered to protect consumers must be a source of reliable, truthful information.
Consumers Union urges the CDI to make a New Year’s Resolution to improve the credibility of its communications with those California consumers the agency is obligated to serve.