Panel Says State Acted Too Slowly in Coastal Insurance Co. Insolvency

The Assembly Finance and Insurance Committee issued a report Friday on last year’s insolvency of the Coastal Insurance Co., concluding that there had been numerous violations of state law, fraudulent sales practices by both the company and its sales agents, and a failure on the part of the state Insurance Department to act promptly to close Coastal down.

Committee Chairman Patrick Johnston (D-Stockton) expressed concern that insolvencies in the insurance industry have been mounting, putting a drain on both the California Insurance Guarantee Fund and the state’s citizen ratepayers, who are levied a surcharge on all policies to pay off claims through the Guarantee Fund against bankrupt companies.

Losses to the Guarantee Fund in the last four years were $693 million, according to the report, compared to a total of $150 million in the 13-year period after organization of the Guarantee Fund in 1969. Johnston called the trend alarming, and speculated that unless corrective steps are taken, the insurance industry could follow the savings and loan industry into dire financial losses.

Coastal became well known to television viewers in the late 1980s for the advertising slogan, “It’s no problem,” selling about 200,000 policies by appealing to drivers with poor records. It was placed into conservatorship by Insurance Commissioner Roxani Gillespie last February, and, on her petition, later ordered liquidated by a court.

In Friday’s report, however, the Assembly committee, which held five investigative hearings into the collapse, said there was evidence the Insurance Department knew Coastal was in financial difficulty a year before the company was shut down and did not take timely action to cut losses, which it estimated will run the Guarantee Fund $80 million.

The report accused the department of failure to file charges against the company for “flagrant violations” of state laws requiring that it give notice to insurance authorities of its true financial condition and also of various money transfers to parent companies. The department was also accused of failing to follow through on promised disciplinary actions against the company’s chief sales agents, FGS.

A spokeswoman for Gillespie and the Insurance Department said Friday that the department had moved on all these matters as quickly as it could.

“(The) assessment that the department failed to move swiftly enough ignores principles of due process to which all persons are entitled under the federal and state constitutions,” said the statement issued by spokeswoman Carey Fletcher.

She also disclosed that the department is working with Atty. Gen. John K. Van de Kamp’s office “in preparing a case against principal persons connected with Coastal.”

The former chief executive officer of Coastal, Harry O. Miller, declined comment on the report, as did Sid Field, owner of the still-active FGS.

Johnston said FGS continues to write 10,000 assigned-risk policies each month and thus is a major factor in the growth of the money-losing assigned-risk plan.

Johnston and two other Assembly members, Gwen Moore (D-Los Angeles) and Bob Epple (D-Norwalk), said at a Los Angeles news conference that they will sponsor several bills designed to strengthen the power of regulators to deal with bad sales practices and difficult financial situations in the industry.

One bill would allow the insurance commissioner to prevent someone, such as Field, who has lost his agent’s license, from continuing to participate in the insurance business. Under present law, Field can continue if he simply finds someone else with a valid agent’s license to work for him.

A second bill would authorize the commissioner to shut down insurance organizations if they continued to employ people whose licenses had been revoked.

Other bills would require auditing of annual company financial statements filed with the Insurance Department. Also, the chief executive officers of all companies would be required to notify, in writing, both the insurance commissioner and the company’s board of directors whenever a company became financially impaired or insolvent.