Business Booms for Unlicensed Insurers : Complaints Are Soaring Over Unpaid Claims, Regulators Say
Unlicensed auto insurers are snapping up an increasing portion of the state’s auto insurance market and an even larger share of consumer complaints, the California Department of Insurance said Thursday.
A survey released by state regulators found that “surplus-line” carriers sold $128.7 million in auto insurance in California last year, up from $3.9 million in 1988. Over the same period, complaints filed with insurance regulators ballooned from 22 to 2,303.
Some unlicensed carriers are sham operations that set up post office boxes in exotic locales only to disappear at the first sign of a claim. Consumers who buy policies from unlicensed carriers are not protected from an insurer’s collapse by the state’s insurance guarantee fund.
“Too often, Californians pay their insurance premiums month after month, only to discover when making a claim that the unlicensed company is little more than a mailbox in the Caribbean,” said Insurance Commissioner John Garamendi. “Consumers should check very carefully before buying coverage from a company not licensed in California.”
The surplus-line carriers do not confine themselves to auto insurance. Small business owners filed about $64 million in claims against offshore carriers after the Los Angeles riots, but only $21 million of those claims were paid. Insurance Department investigators believe that much of the remaining $43 million will never be paid.
Regulators say they have no way to force unlicensed companies--often based offshore out of reach of state authorities--to pay claims.
State law now prohibits unlicensed companies from selling insurance in California, unless the policyholder cannot find similar coverage from a licensed carrier. Agents are barred from suggesting consumers buy a policy written by an unlicensed carrier simply because the policy is cheaper. And only specially licensed surplus-line brokers are permitted to sell policies with unlicensed companies.
Moreover, surplus-line carriers are supposed to check on the financial viability of the companies that they use. However, regulators believe that there are widespread violations of the law by rogue agents who are either negligent or unscrupulous.
Garamendi has submitted a package of surplus-line reforms to the state office of administrative law. The proposals would toughen financial requirements for surplus-lines carriers.
The Surplus Lines Assn. in San Francisco says its brokers generally favor tighter controls. The hope is that stricter regulation would keep out the handful of bad agents that are ruining the industry’s reputation.
“We are totally supportive of the concept,” said Jerry Sullivan, chairman of the legislative committee for the trade group.
The OAL expects to rule on the reform proposals before Nov. 25. But other regulations designed to crack down on the surplus-lines market were rejected by the same office last year.
State regulators said consumers can protect themselves by checking with them when buying insurance policies to see if the carrier is licensed. The insurance department’s consumer hot line is 1-800-927-HELP.
Unlicensed Insurers
A growing number of consumers are buying auto insurance from unlicensed insurers, which often turn out to be bogus companies that evaporate the moment claims are filed.
Here’s the dollar amount of insurance sold by unlicensed companies in California 1988: $3.9 1989: $41.5 1990: $106.9 1991: $128.7
Source: State Department of Insurance
