State to Go After ‘Offshore’ Insurers : Auto coverage: Unlicensed companies sell cheap policies and then do not pay the claims, Garamendi says.
Unlicensed “offshore” auto insurance companies will sell $1.6 billion in cheap policies in California this year, and consumers buying them expecting to save money will lose hundreds of millions of dollars in unpaid claims, Insurance Commissioner John Garamendi declared Friday, pledging to crack down on such firms.
Garamendi, appearing at the Century Plaza Hotel before a convention of insurance brokers, said he would issue a list of companies “deemed unacceptable for business” in the state, and would go after insurers and agents who are not paying state premium taxes on funds they collect. The brokers promised to support Garamendi’s efforts.
“Surplus lines” is another name for unlicensed companies selling policies to Californians from outside the state. The National Assn. of Professional Surplus Lines Offices, which Garamendi addressed Friday, is a respected group whose members have by and large offered reliable commercial and other coverages not available from licensed carriers.
But association officers, concerned that their reputation is being ruined by an influx of fly-by-night operators, told Garamendi after his speech that they will cooperate with him in going after unworthy companies, 20 of which have been ordered to stop doing business in California just since March. Garamendi said about half of all public complaints now being received concern unlicensed insurers.
“A highly specialized racket (has) developed,” the commissioner said. “Offshore unlicensed companies backed by obscure or phony financial statements began aggressive marketing (of) their products all over the state, but primarily here in Southern California.
“They started selling cheap insurance policies to desperate motorists willing to try anything to avoid four-digit annual premiums. While some of these firms are honest, too many are not.” These “patterns of abuse” have stranded “tens of thousands of policyholders without legitimate insurance.”
Garamendi spoke out two days after it was revealed that one offshore company, Union Pacific Fire and Marine Ltd., registered in the British Virgin Islands, has bounced a number of claims checks in the Los Angeles area in the last few weeks.
This, however, is just the tip of the iceberg, the commissioner said.
He cited these examples of unlicensed insurers who, he asserted, have been “poisoning the surplus lines” by collecting premiums while not holding enough reserves to be able to pay claims:
- Palisades National Insurance Co. of the British West Indies, ordered by the state Insurance Department to stop selling new policies. “Our investigation revealed that $72 million in securities claimed as assets by Palisades were Indonesian war bonds issued to the Central Establishment for Trade Investment in Beirut,” Garamendi said. “Bonds issued by a Third World country to finance war materiel does not qualify, in our view, as a sound investment.”
- Apex Placement Insurance Co., ordered in June to stop doing further business here. Garamendi said that the company submitted an audited financial statement claiming $16.3 million in assets. But, he said, the accountant was found to be neither licensed nor certified. A note whose worth was claimed to be $11.9 million turned out to be issued by a bankrupt Japanese company, and the other $4.4 million was in common stock of obscure Sabel Palm Airways. When the company was placed under state conservatorship, its assets were found to be worth only $1.2 million, Garamendi said.
- Hibernian Insurance Co. of Antigua, determined by the department to be unqualified to sell any more policies in California. Garamendi said the firm’s financial statement showed a surplus of $141.8 million, but a departmental investigation revealed that Hibernian did not own the assets but instead paid a fee to another entity to be able to claim those assets as its own.
Garamendi said many of the offending companies are registered in the Turks and Caicos Islands near the Bahamas, and his department is seeking information about them from authorities in the islands.
He added that the Insurance Department will publish weekly reports on the financial integrity of unlicensed carriers, give data on questionable companies to agents and brokers selling their policies, and bill both insurers and brokers for the costs of handling consumer complaints about such insurers.
Garamendi said his department “is aggressively pursuing a strategy to hold surplus lines brokers and agents financially responsible for the unlicensed products they sell.”
