Man Accused of Illegal Insurance Firm Operations : Charges: The state has moved to revoke the license of a Huntington Beach businessman. He is also alleged to have defrauded small businesses of up to $9 million.

The state Department of Insurance on Tuesday accused a Huntington Beach businessman of operating several illegal health insurance companies and moved to revoke his license and that of one of his companies.

The agency filed the administrative charges against Henry Walter Hay, who operates Health Data Processing Insurance Administrators Inc. and other insurance-related companies out of a Huntington Beach office.

Hay, 57, is already under investigation by federal and state investigators for possible bankruptcy fraud and mail fraud. An affidavit filed recently by a U.S. postal inspector in federal court in Santa Ana alleges that Hay defrauded small businesses of up to $9 million by claiming that his company was fully insured but then not paying medical bills.

Hay and his attorney could not be reached for comment Tuesday. Hay has the right to seek a hearing on the proposed license revocation before an administrative law judge.

The probe of Hay’s activities is part of a larger investigation that state and federal officials are conducting into health insurance plans for small businesses. Investigators claim that rising health insurance costs have forced many small businesses to seek coverage from some unscrupulous operators.

“The department has seen quite a lot of fraudulent activity in the area of small business health insurance where there are unlicensed insurers or self-funding schemes,” said department spokesman James P. Harrington. “We have a number of similar investigations under way involving unlicensed insurance companies, many of which are headquartered in Orange County.”

On Tuesday, the Department of Insurance alleged that both Hay and Health Data formed Building Employers Trust (BET) and Professional Employers Trust (PET) to provide health insurance for Hay’s California Development Maintenance Assn. members.

The Department said BET and PET are unlicensed and illegal insurance companies that sold policies solely to small business operators. BET has since filed for bankruptcy.

In addition, the department accused Hay and Health Data Processing of falsely representing California Benefit Life Insurance Co. as fully insured to two trust plans and of refusing to open its financial records to department investigators. As a result, the agency is seeking to revoke the licenses of Hay and Health Data Processing.

Harrington said Hay and Health Data refused requests for information on their financial dealings. But based on information from customers and people “who have complained or are aware of having bought or sold the product, we determined that the two trusts were actually illegally operating as insurance companies,” he said.

Bruce Wiener, attorney for the department in San Francisco, said that PET wrote insurance through San Jose-based George Washington Life Insurance Co. of California, an affiliate of George Washington Life Insurance Co. in Miami.

The department last month ordered George Washington Life to stop transacting business in California. The agency alleged that the company was conducting business in a hazardous manner.

“Its last quarterly statement revealed operations losses of more than $200,000 and overstated reserve figures,” the department said in a June 26 statement. “If the loss trend continues, the company will be insolvent by year’s end.”

According to the affidavit filed last week, Hay and his companies serve as many as 1,900 small business employers representing about 7,100 participants, most of whom are in Southern California. But Harrington said that the number of employers involved could be as high as 4,400, with as many as 10,000 participants affected.

Investigators said Hay and his companies offered inexpensive health insurance coverage to small business owners. He represented that his agencies were “100% insured” by other highly rated insurance companies.

For instance, Donald P. Johnson, the president of Anza Management Co. of Irvine told investigators that his broker gave him an extremely low quote from Hay’s California Development Maintenance Assn. for a health insurance plan for his 97 employees. He was told that Hay’s company was fully insured and underwritten by Landmark Insurance Co., an insurer with an A-plus industry rating.

But Johnson said that claims went unpaid and that the employees ended up having to pay large medical bills, some as high as $25,000.

“I’ll tell small businesses to be wary of self-funded programs that are highly inexpensive or promise unreasonably high benefits,” Harrington said. “Be careful of organizations that are not known to you and not recommended by other small businesses.”