Coastal Insurance in Conservatorship, Will Be Liquidated : Gillespie Says Customers Must Find New Policies Within a Month but Claims Will Be Honored

Coastal Insurance Co., carrier of 200,000 California auto insurance policies, mostly in Los Angeles and Orange counties, has been placed into conservatorship and a court order will be sought for its liquidation, state Insurance Commissioner Roxani Gillespie said Friday.

Coastal’s mainly high-risk customers, often with poor driving records, will have their policies canceled and have to find other insurance within a month, the insurance commissioner said.

But she said claims made under the existing Coastal policies will be paid by the California Insurance Guarantee Assn., a state-guided, insurance industry-administered group that pays claims against insolvent insurers with funds contributed by all auto insurers doing business in the state.

Gillespie, who will be the conservator, said Insurance Department examiners believe that the Van Nuys-based company is insolvent, “$39.8 million negative right now,” and that two-thirds of that amount consists of “an illicit dividend” that Coastal has given to its parent company, Advent Co.

Coastal heavily advertised its policies in Northern and Southern California, winning a little more than 1% of the market by using the slogan “It’s no problem.” It and Advent are chaired by Harry O. Miller, who contributed or loaned a total of $5,249,852 in their assets to the Proposition 101 insurance initiative campaign last year. That initiative, which would have slashed auto insurance rates in exchange for cutting back damage payouts to claimants, won a scant 13% of the vote, faring worse than all of the other insurance initiatives.

Miller, in interviews Friday, attributed Coastal’s insolvency to mounting claims and an adverse environment for the auto insurance business in Los Angeles and Orange counties.

Asked about Gillespie’s claim of an illicit $26-million dividend to the parent company, Miller declared:

“I don’t want to respond . . . . This hits me cold. I have not heard of any such allegation.”

The basic trouble, he declared, is that the auto insurance business “is no longer viable in Los Angeles County, and that condition is spreading to Orange County.”

“I think all the carriers are experiencing serious losses . . . and it’s pretty hard to implement rate increases,” he said.

“A number of simple things need to be done that no one wants to talk about but really are the only way to reduce costs. First, you’d save a very large percentage of the premium dollar if you put a low cap on pain and suffering damages for non-serious accidents. That’s really where we get killed. And second, there ought to be a reasonable collateral source rule, so the insurance industry doesn’t pay twice for the same medical costs.”

Miller said Coastal would have had to double its rates “in the dense urban areas of Los Angeles County” in order to break even.

Gillespie, however, objected to Miller’s attempt to tie Coastal’s problems to the insurance environment in Los Angeles and Orange counties.

“The Coastal record is going to have to stand on its own,” she said in an interview. “Our examination report which has been filed with the Superior Court shows that we disagree with Coastal in the way it shows its assets and liabilities . . . . We have disagreed with places that they have taken their assets and we have increased their liabilities (in the department’s report).”

She said the Insurance Department would hold “conversations with Miller in the months ahead” over its questions about the $26-million dividend to the parent company and about other items.

Gillespie said a court hearing has been set March 6 in Los Angeles on her request that the company be liquidated.

Search for Investor

But Miller said he remains hopeful that a private investor may be found to buy the company and restore its health in the meantime, even though, he said, the passage of Proposition 103 has made obtaining such investors more difficult.

Sources in the insurance industry who asked not to be identified said it was their understanding that Gillespie’s Insurance Department had learned of some of Coastal’s financial problems months ago but held off action while Miller fruitlessly sought new investment capital to buttress the company.

Gillespie noted that Coastal Insurance sold only the minimum liability coverage mandated by state law and that any collision and comprehensive coverage purchased through Coastal was underwritten by United Equitable. That company is not affected by the insolvency declaration and conservatorship and will continue to operate, as will Public Insurance Service and FGS, two agencies that have sold Coastal policies.

Assigned Risk Likely

The insurance commissioner said she believed that most of Coastal’s customers would have to seek new liability coverage through the Assigned Risk system. She suggested that many would have trouble buying it on the regular market since so many Coastal customers have poor driving records.

The Coastal insolvency follows a general 9.6% rate increase earlier in the week by State Farm, the largest seller of auto insurance in the state, and continuing struggles by state officials and the Legislature over what to do about insurance prices. Meanwhile, there was a call Friday for creation of a special blue-ribbon panel to consider the insurance situation in California.

Stanley Zax, immediate past president of the Assn. of California Insurance Companies, the largest insurer lobby in the state, declared:

“Until the governor or the leaders of the Legislature get together and appoint a blue-ribbon commission of independent and knowledgeable parties to analyze and investigate and make recommendations on all aspects of the present auto system and available options, I doubt that the Legislature will either have the knowledge available or the political will to take action to solve the problem.

“The situation is so serious that it requires urgent and nonpartisan analysis and recommendations that can be analyzed and discussed by all.”

Balanced Panel Urged

Commenting on this, Harvey Levine, president of the California Trial Lawyers Assn., said he thought a blue-ribbon panel was “an excellent idea,” but said it should be balanced in its membership among various points of view and have subpoena power to look at insurance company financial records.

Levine questioned what he termed a headlong rush by insurers to stampede the state into legal reforms that would benefit the insurers at the expense of the lawyers before a complete study is undertaken.

Levine and Carmen Gonzalez, a spokeswoman for the Proposition 103 campaign, questioned why Miller had spent so much of his companies’ assets in an initiative campaign while Coastal was losing money, and Gonzalez said she thought it was unfair of Miller to use “the mismanagement of Coastal Insurance Co.” as an excuse for pushing for changes in insurance compensation practices.

Miller said he had no response to this. “It would be in the range of expected political rhetoric,” he said.