Insurance Dept. Criticized to Lawmakers

One month after he took over the state’s scandal-ridden insurance department, Clark Kelso delivered a harsh evaluation Wednesday, telling lawmakers that the agency had been without effective management for more than a decade.

Decisions affecting millions of dollars, the acting insurance commissioner said, often were made arbitrarily because no formal policies or guidelines had ever been established. And the potential for abuse, he said, was heightened by a loose management structure that required no accountability from managers or employees.

“I believe the department has not been effectively managed for at least a decade and probably longer than that,” he told the Senate Insurance Committee, which asked him for an appraisal of the department. “Too many things happen in the department simply as a matter of customary practice and not as a matter of written policy and guidelines.”

Kelso, a law school professor who was thrust into the top job when former Commissioner Chuck Quackenbush was forced to leave office July 10, said ineffective management had left the department with two critical questions: What to do with settlement agreements signed by Quackenbush and insurers after the Northridge earthquake, and how to stabilize the state’s workers’ compensation insurance market.

Kelso said he has started negotiations with insurance companies in an attempt to dissolve the settlements and reopen an examination of their handling of Northridge earthquake claims.

Such an agreement “would avoid many years of protracted and expensive court action, would give us a clean break from a series of tainted settlements and would give the department the ability to move forward with a full and fair . . . evaluation,” he said.

Quackenbush had reached settlements with insurance companies that required them to contribute to nonprofit foundations he created. Court documents filed by Atty. Gen. Bill Lockyer showed funds from one of the foundations were then used to pay for television advertisements designed to enhance Quackenbush’s political image.

As his part of the settlement, Quackenbush promised not to levy fines against the companies or to continue with an examination of their handling of Northridge earthquake claims.

Kelso said his ability to reach an agreement with the companies could be hampered by proposed legislation, particularly a bill by Senate President Pro Tem John Burton (D-San Francisco) that requires companies to reopen Northridge claims.

To speed up the negotiations, Insurance Committee Chairwoman Jackie Speier (D-Hillsborough) said lawmakers may consider using $6 million in state funds to reimburse companies for the contributions they made to the foundations.

She said it would cost the state much more than that to defend lawsuits likely to be filed if the settlements remain in force.

Kelso said he has begun to reorganize the department but many of the other issues it faces will have to be resolved by his successor, former appellate Judge Harry Low. Gov. Gray Davis has nominated Low, 69, as a permanent replacement for Quackenbush. Low is expected to take office in mid-September.

One of the most pressing issues facing the new commissioner, Kelso said, will be the financial problems in the workers’ compensation insurance market.

“There is a genuine potential for substantial instability” in that market, he said.

He said the problems came when deregulation increased competition, prompting companies to set unrealistically low rates that endangered their ability to cover losses.