State Checking Out-of-State Insurance Deals

The state Department of Insurance is investigating several automobile insurance agencies that sell cut-rate policies provided by out-of-state and foreign insurers that are unlicensed in California, a department spokesman said Tuesday.

“I can’t comment on what actions we’re taking. I can say we’re investigating them,” said Bill Schulz, a department spokesman based in Los Angeles. He would not name the companies involved.

But an Orange County lawyer who has helped organize some of the driver groups that bought the policies said the system is totally legal and offers insurance at discount rates.

The controversy surrounds an interpretation of a clause in Proposition 103, the insurance reform initiative passed by California voters in 1988. The issue involves whether, as some insurance brokers contend, groups can obtain auto insurance from unlicensed insurers operating from another state or another country.

Unlicensed insurers may offer lower rates and be more willing to accept drivers who would otherwise have to pay extremely high premiums because of bad driving records or traffic tickets.

Because unlicensed insurance companies are outside the jurisdiction of regulators, the state is unable to check on their financial condition--claims history, investment returns, capital ratios--to ensure the companies will not fail and leave claimants with nowhere to turn.

Los Angeles lawyer Doug Hallett, who co-owns a licensed insurance company that sells auto policies to inner-city drivers, said the Department of Insurance has been lax in cracking down on firms that trade in the gray area of group insurance policies.

Michael Sayer, a lawyer in Irvine, says that the state’s assigned-risk pool refuses to handle groups, as do licensed insurance companies, so it is perfectly legal for these groups to seek coverage from out-of-state insurers.

Sayer, who helped form four such groups, said he has helped about 3,500 people obtain coverage so far this year. For dues typically ranging from $25 to $35 a year, members receive such services as towings, safety courses and low-cost legal advice. And he said they can obtain auto insurance at 25% to 50% less than from major insurance companies.

One brokerage operating with Sayer, Power Insurance in Santa Fe Springs, said that a 23-year-old Santa Ana man with two speeding tickets on his record would pay $1,898 a year for coverage through the assigned-risk pool. But a policy from an unlicensed insurer based in the British West Indies would be $1,010 a year.