COLUMN ONE : Insurance Without Guarantees : Californians lost $200 million last year in claims that went unpaid by insurers not licensed in the state. Even when regulators act, it’s often not soon enough.

In the two years since an uninsured motorist violently rear-ended Bellflower resident Anthony Odiase, he has been socked with dunning notices from doctors--and empty promises from his insurance company.

With $14,000 in medical bills, Odiase is just one in a parade of Californians left in the lurch by Southern Continental Insurance Co. Ltd.

Authorities in the tiny Caribbean island chain of Turks and Caicos say Southern Continental lacked a valid license. Its owner admitted under oath in July, 1991, that the firm was on the brink of ruin. Even so, Southern Continental went on to write an additional $8 million worth of policies in California. It finally halted operations last February.

Although warned repeatedly about Southern Continental, the California Department of Insurance took no effective action against the firm until last May, well after Southern Continental had withdrawn from the state.

At that point, Insurance Commissioner John Garamendi--citing the firm’s “financial instability,” though not charging it with any criminal wrongdoing--issued an order banning further sales of Southern Continental policies, an action he later spotlighted in a news release.

Cracking down on fly-by-night insurers has been one of Garamendi’s main themes in the two years since he became California’s first elected insurance commissioner--and he has had some successes.

But he also has had failures, and these gain significance as California’s insurance problem worsens.

In 1992 alone, by Garamendi’s estimate, Californians lost up to $200 million in unpaid claims against insurers that were unlicensed in California.

These so-called non-admitted carriers can sell insurance in California if they are properly licensed in another state or nation, though only through brokers with special California licenses. State regulations require brokers to disclose that the companies do not have California licenses and that their policyholders are not protected by the state’s private insurance guaranty fund.

Such carriers include many sound and reputable firms, such as Lloyd’s of London. The legitimate firms fill an important niche by supplying hard-to-get coverage for everything from a satellite launch to a football quarterback’s throwing arm.

But the non-admitted carriers include financially shaky or downright fraudulent companies that exploit regulatory blind spots to sell worthless insurance. Their typical victims are people who--because of factors such as their driving records, medical histories or places of residence--have trouble finding affordable coverage from California-licensed carriers.

Interviews with regulators, consumers and insurance professionals, coupled with court and administrative records, document several problems in Garamendi’s policing of non-admitted insurers:

* Communication breakdowns within his office or between California regulators and their counterparts in other jurisdictions.

* A tendency on the part of Garamendi’s legal staff to move slowly and take on only cases that are sure winners.

* A lack of aggressiveness in pushing for criminal sanctions against those who commit fraud.

“There’s been a lack of prosecution and follow-through,” said Lorelle Hurlbut, executive director of American Agents Alliance, a trade organization for independent auto insurance agents. “Until we stand these people up in front of the firing line, I can’t see how we’re going to rectify this.”

Garamendi defends his enforcement record, saying he is the first California commissioner to seize the assets of a non-admitted insurer and the first to revoke a broker’s license for knowingly dealing with a bogus carrier.

He has issued more than 50 objection letters against non-admitted carriers, Garamendi says, essentially blacklisting them from selling insurance here, and has pushed through tougher regulations governing such companies.

Garamendi blames his setbacks partly on Gov. Pete Wilson. Wilson blocked a budget request for more insurance investigators and lawyers, Garamendi noted, and the governor’s Office of Administrative Law delayed approving Garamendi’s regulatory reforms.

“The laws and regulations of California do not protect the public from unlicensed companies,” Garamendi said.

Con Artists Fill Void

“In order to sell insurance,” the FBI noted in a 1991 report, “all that is really needed is the ability to convince potential customers that the promise of insurance coverage will be honored at an attractive price. Making believable promises is the con artist’s stock in trade.”

Insurance con artists spotted an opening in California beginning in 1988.

Prices were rising so fast--especially for auto insurance--that outraged consumers took the market into their own hands, voting themselves a discount through Proposition 103. The initiative’s passage prompted some insurers to curtail the amount of auto insurance they wrote and led others to pull out of California.

Then, in 1990, came changes in the California Automobile Assigned Risk Plan. CAARP--an industry-sponsored pool designed as an insurer of last resort for high-risk drivers--had been pricing its coverage so attractively that good drivers were flooding into the program along with bad ones.

Under pressure from member insurers, which did not want their own program competing against them for desirable customers, CAARP doubled its rates and tightened eligibility criteria.

The changes worked. CAARP had accepted 1.2 million drivers in 1989 but last year enrolled only 140,000.

CAARP’s restrictions, along with Proposition 103, made it harder for many motorists to find coverage at reasonable prices--particularly in the inner cities. Some drivers reacted by ignoring California’s compulsory insurance law; others looked for alternatives.

And alternatives sprang up quickly--in the form of cut-rate policies offered by non-admitted insurers. Many of these carriers were phony from the start, regulators say.

Here is how a typical scam works, according to investigators:

The insurer sets low prices to attract a lot of business quickly. At first, minor claims are paid, to avoid regulatory scrutiny. But inevitably, unpaid claims start to outweigh incoming premiums, and complaints flood the Insurance Department.

At that point the company shuts down--sometimes vanishing completely, sometimes entering liquidation under the laws of its Caribbean haven.

Either way, there is seldom much left for customers.

Experts say the life cycle of such schemes tends to be 12 to 18 months--time enough to sell a lot of insurance.

Apex Placement Insurance Co., licensed in the Turks and Caicos Islands, wrote at least $12 million worth of insurance in California in 1990 and 1991 before the Insurance Department shut it down. Northern Commercial Fire & General Insurance Co. Ltd., also of Turks and Caicos, wrote $23.5 million in the state during the same period.

The firms were two in a string of 14 insurers run out of a Lexington, Ky., office by insurance promoter Robert W. Campbell. Campbell, now serving a federal prison sentence for fraud in a New Jersey case, admitted in court that all 14 “individually and collectively were mere shells and shams.”

The Campbell flimflam defrauded Californians of $80 million to $100 million, by Garamendi’s estimate. Garamendi succeeded in seizing Apex Placement’s assets, but their value has been put at only $1.2 million.

Several of the carriers linked to Campbell also were named in a 41-count federal indictment, unsealed in Alabama Friday, that accuses an Atlanta couple, Alan Teale and Charlotte C. Rentz, of insurance fraud and money laundering. Teale and Rentz allegedly operated an international scam that fleeced 5,500 consumers--most of them Californians--out of more than $50 million, the indictment said.

The connection between Campbell, Teale and Rentz is unclear, but at least eight of the Teale companies named in the indictment have operated in California, selling more than $100 million worth of insurance from 1990 to 1992, state records show.

In one instance, Garamendi tried to blacklist a Teale firm but was rebuffed in court.

When Garamendi took the action against Belgian-licensed United States & Continental Reinsurance Co. Ltd., the company parried with a lawsuit. At a hearing in Los Angeles Superior Court, US&C; offered to deposit $4 million in a Beverly Hills bank to guarantee its ability to pay claims.

Barely had the judge approved the deal when US&C; began wiring money out of the account, according to court records. By the time the discrepancy was uncovered, all that was left was $24,690 in cash and a stack of worthless stock certificates.

The Insurance Department says it did its best but was frustrated by a judge who accepted US&C;’s promise at face value.

In other cases, however, the department has mainly had itself to blame.

Too Little, Too Late

Complaints about Southern Continental still trickle into the Alabama Department of Insurance from California motorists. California authorities refer complainants to Alabama under the persistent but erroneous belief that Southern Continental is licensed there.

“We never could overcome that idea,” Alabama investigator Terry Raycraft said recently.

Although Southern Continental’s owner and president, Gary T. Ledbetter, operated out of an office in Mobile, the company never held an Alabama license and never was allowed to sell insurance there. All of its more than $20 million in sales apparently were in California.

Ledbetter said he believed that the company had authority from Turks and Caicos to write insurance. But Colin Holder, the islands’ insurance superintendent, said the firm never was properly licensed.

Alabama regulators say they have fielded about 100 complaints against Southern Continental from Californians, beginning in 1991. They routinely pass the information back to Garamendi’s office.

Alabama regulators were not the only ones sounding alarms about Southern Continental.

Doris Goleanor runs a Long Beach firm that processed claims for Southern Continental in 1990 and early 1991.

In a dispute, she stopped dealing with the firm in April, 1991, later suing Southern Continental for $285,000 in unpaid fees. While preparing her suit, Goleanor uncovered documents indicating that the insurer was in serious financial trouble.

In July, 1991, she began passing the information on to the Insurance Department. In October or November, Goleanor says she personally delivered to a senior insurance regulator sworn statements that Ledbetter and his accountant gave in a Louisiana court proceeding.

Ledbetter’s statement, dated July 14, 1991, said that Southern Continental was in danger of failing and that there was doubt “whether the company will be able to pay further claims.” His accountant said the insurer had “a deficit in capital and surplus amounting to approximately $470,000 (best case scenario) to $4.7 million (worst case scenario).”

In October, the Insurance Department tried to blacklist Southern Continental. But its order was based on emergency regulations that soon expired, and Southern Continental resumed selling.

Ultimately, Ledbetter notified his primary California broker on Jan. 31, 1992, that Southern Continental would cease writing insurance as of Feb. 15 of last year.

But not until fourteen weeks later--on May 27--did the Insurance Department issue its final order blacklisting Southern Continental.

Californians are owed at least $4 million in unpaid claims. Some have had liens placed on their property or found their credit ratings ruined. Rather than a paid claim, Odiase, the Bellflower victim, has a letter from Ledbetter promising to make good on an earlier settlement agreement.

In a telephone interview from his office in Mobile, Ledbetter denied any wrongdoing. Instead, he portrayed himself as the victim of an international conspiracy that, “on advice of counsel,” he declined to describe.

Dennis Ward, the Insurance Department’s chief of enforcement, acknowledged that mistakes may have been made in the Southern Continental case.

“If you focus on a few of these cases, yeah, sure, we can be faulted,” he said in a recent interview.

Enforcement action must be prepared deliberately, Ward said, or “these guys with their slick attorneys are going to lay a question on you that you haven’t thought about and all your evidence is going to fall through.”

Making criminal cases is especially hard.

Some insurance operators--working across state lines and international borders--are expert at hiding money and covering their trails with phony transactions, Ward said. Prosecutions take a long time to prepare, he added--though Ward expects current investigations to start bearing fruit within 60 days.

Ward also noted that the sheer volume of activity is overwhelming. Complaints filed with the Insurance Department against non-admitted insurers ballooned from 22 in 1988 to 2,303 in 1991. At any time, as many as 40 suspect firms are operating here, Ward said.

The Latest Debacle

Southern Continental’s demise, then, is hardly the end of the problem.

The Insurance Department has received more than 200 consumer complaints about another non-admitted insurer, Promed International Ltd. of Tortola, in the British Virgin Islands.

Garamendi tried to blacklist Promed in July, 1991. But Promed challenged his order, contending that it met regulatory standards for financial strength.

A San Francisco Superior Court judge appointed the international accounting firm of Arthur Andersen to audit the insurer’s books and settle the dispute. When the audit supported Promed’s position, the judge issued a restraining order against Garamendi’s action.

Last summer, however, the judge vacated his order after discovering that Promed had failed to pay Arthur Andersen for the audit as required. In the meantime, Simon L. Few, the businessman who ran Promed, had left the United States for his native England, court records say.

One Promed policyholder was Leo Jones, who founded the Leo Jones Oil Co. 30 years ago in rural Fall River Mills, near Mt. Shasta.

In 1990, Jones switched the group health policy for the firm’s 16 employees to Promed. Relying on his consultants, Jones had no idea the new carrier was unlicensed in California.

For a while there was no trouble. Then the company stopped paying claims.

“It went on and on and nothing was paid,” Jones said. The unpaid claims now total more than $66,000.

Attorney Raul Aguilar--who also represented Promed for a time but later had a falling out with Few--said that all Garamendi must do to put the firm out of business is return to court and refile his order.

“He’s been sitting on this for five months,” Aguilar said.

Ward disputed Aguilar’s contention, but acknowledged his frustration with the Promed case. Regulators believe they must base any new disapproval order on Promed’s current financial condition--not simply refile the old order, Ward said.

Action on the case is pending.