‘Impropriety’ Questioned in Appointment by Gillespie

The chairman of the state Assembly’s insurance committee has questioned whether Insurance Commissioner Roxani Gillespie created “the appearance of impropriety” by naming a liquidator for the bankrupt Coastal Insurance Co. whose wife once worked for a man who later became the company’s chief executive officer.

In a series of 10 written questions, Assemblyman Patrick Johnston (D-Stockton) asked Gillespie to respond within 10 days whether she considered the appointment of Edward Middleton as Coastal liquidator to be “appropriate.” Johnston has held one investigative hearing into the Coastal bankruptcy and scheduled another on Aug. 29.

The bankruptcy earlier this year of Coastal, insurer of 200,000 California auto policyholders, has aroused widespread interest because of allegations by state officials that company executives skimmed millions of dollars out of the company--leaving California’s other auto insurance policyholders with surcharges totaling $60 million to pay off claims against Coastal.

Johnston asked the questions of Gillespie after a committee investigator learned that Middleton’s wife, Angele Khachadour, had worked in the law firm of Harry O. Miller several years before Miller became chief of Coastal. Middleton, Khachadour and Miller also worked concurrently at the state Department of Insurance in the 1960s.

In a sharply worded response to Johnston’s questions Thursday, a spokeswoman for Gillespie told The Times, “There is absolutely no conflict of interest here.” The spokeswoman, Carey Fletcher, described Middleton’s assignment as liquidator as routine.

“Middleton does not have any personal relationship with Harry Miller and to suggest this is ludicrous,” Fletcher said.

In an interview, meanwhile, Khachadour, now counsel to the University of California’s Hastings College of Law, said she was “rather chagrined” by Johnston’s questions. “Its implications are pretty awful,” she remarked.

Khachadour said that after leaving the position of chief counsel to the Department of Insurance in 1980, she worked for a law firm headed by Miller until early 1983 “long before he got into Coastal.”

“I’ve had absolutely no contact with Mr. Miller since leaving him, and my husband does not know him well,” Khachadour said.

Middleton referred the matter for comment to Gillespie. Miller could not be reached for comment. He has been reported in Alaska, out of reach of a legislative committee subpoena, since the Johnston inquiry began.

In his letter to Gillespie, Johnston wrote, “In that you have on your staff a very able and experienced in-house liquidator in the person of Ron Rosen, the committee is desirous of knowing the reason for hiring an outside liquidator in the Coastal matter.”

As a salaried $200-a-day liquidator, Middleton is responsible for closing out company operations, referring claims by policyholders to an insurance guarantee association financed by auto insurance policyholders with all the state’s solvent companies.

Gillespie’s spokeswoman said that it was Rosen who “assigned Middleton to Coastal because of his specific background and skills in insurance investigations.” The insurance commissioner suggested months ago that there had been “an illicit dividend” paid to the parent company in the Coastal bankruptcy and has since said there might be legal action taken against some company executives.

Miller was responsible last year for making more than $5 million in gifts and loans in company funds to the campaign for Proposition 101, one of several defeated insurance initiatives on the 1988 ballot. With the Coastal bankruptcy, that money in effect became a general liability of the state’s auto insurance ratepayers.