Audit Criticizes Insurance Agency

The state’s top auditor released a scathing appraisal Thursday of the Department of Insurance, saying it has exhibited a “limited effectiveness” in protecting consumers from illegal or unfair insurance practices.

Although the agency whose mission is to regulate insurance carriers has a backlog of 5,000 complaints, it has drastically scaled back the number of employees who directly respond to consumers and has put high-priority investigations on the back burner, according to the 66-page report by state Auditor Kurt Sjoberg.

In criticizing the department for “numerous shortcomings,” Sjoberg said the agency has failed to examine the financial health of companies every five years as auditors believe is required by the law--a point disputed by the department.

“As a result, the department increases the risk that unfair insurance practices will go undetected and cause continuing harm to insurance consumers” who might wind up paying higher premiums, the report said.

The audit, mandated by the Legislature, also criticized a number of financial problems that have plagued the department, including shortcomings in its billing of insurance companies that run into the millions.

Insurance Commissioner Chuck Quackenbush, a Republican, was unavailable for comment. But Quackenbush’s top deputies acknowledged a number of administrative failings, saying that they are rooted in decisions of his predecessor, Democrat John Garamendi, whose stewardship of the department was criticized in audits in 1994.

“The condition of this department was disgraceful” when Quackenbush took over in 1995, said Chief Deputy Commissioner Ken Gibson. He and other department officials say they are taking steps to improve department operations.

“Yes, there are problems. We knew there were problems when we took over and we’re on the road to solving them, and corrective actions have been taken and put in place,” said Deputy Commissioner Michael Kelley.

“There are a whole host of things that reflect that Chuck has done things that positively impact ‘Joe Six-Pack,’ ” Kelley said.

In an interview, Sjoberg said it was too early to tell whether the changes described by Quackenbush’s aides were making a difference.

“We think they are making adjustments and changes. . . . Whether or not those changes will remediate the problems we found . . . it’s too early for us to see that,” Sjoberg said.

The report was not good news for Quackenbush, who probably will run for reelection next year or perhaps seek another statewide office. Quackenbush was elected to the commissioner’s post in 1994.

Not only will the report provide ammunition to consumer critics who complain Quackenbush is too close to the insurance industry, it will fuel criticism in the Legislature, where lawmakers are poised next week to conduct an oversight hearing of the agency.

With a budget approaching $129 million, which includes grants to local governments, and 1,055 staff positions, the department is one of the largest state insurance regulators in the nation.

Financial problems in the department can be traced, in part, to resolving two lawsuits that cost the department about $21 million--which triggered budget cuts, according to the audit.

But the Legislature last year sought to make sure that any resulting cutbacks did not disproportionately affect consumer services.

The auditors questioned “the department’s compliance because 70% of its staff reductions” for the current fiscal year occurred in areas that deal with consumers, yet those divisions employed only 19% of the agency’s personnel.

Meanwhile, the agency’s investigations bureau has accepted more than 5,000 complaints for which it has not completed investigations, auditors said.

Moreover, the department expects this backlog to grow because in order to avoid laying off more investigators, it has assigned some of them to other, revenue-producing work, rather than consumer complaints.

Part of the audit examined the formulas the department uses to grant or deny rate changes and determined that there was inadequate documentation to support some rate approvals.

Auditors determined that in 120 cases the department granted increases that were too high and in another 110 granted decreases that were too little.

The department’s Kelley said the auditors were unfairly second-guessing the department.

Harvey Rosenfield--the insurance activist who spearheaded the campaign for Proposition 103, which created the current elective commissioner’s post--said the audit reflects Quackenbush’s abdication of authority.

He said the audit shows the department has “become a renegade agency operating arbitrarily and not complying with Proposition 103 rules for whether rates should be increased or decreased, subjecting consumers to price gouging” or companies that could become insolvent.

According to a statement from Rosenfield’s Proposition 103 Enforcement Project, the audit findings “validate the growing public perception . . . that the department is ignoring its legislative mandate and that the commissioner is more concerned about the industry than he is about taxpayers.”

Dan Dunmoyer, a lobbyist for the Personal Insurance Federation of California, noted that audits of Garamendi’s operation also detected a number of flaws in the department.

“It appears that things have improved slightly but at a glacial pace,” Dunmoyer said.