Quackenbush’s Magic: $3 Billion Turns Into $0

State Insurance Commissioner Chuck Quackenbush has been urged to resign because of a pattern of alleged wrongdoing and misuse of the powers of his office. Among the serious issues being investigated by the state attorney general and two state legislative committees is whether Quackenbush permitted insurance companies to avoid paying upward of $3 billion in market-conduct fines related to the 1994 Northridge earthquake in exchange for funneling more than $12 million into nonprofit foundations he controlled.

The foundations used the money for earthquake preparedness commercials featuring Quackenbush and for non-earthquake related entities, including more than $250,000 that went to a football camp attended by Quackenbush’s two children.

On May 19, the Los Angeles Times reported that during private meetings with insurance companies, members of Quackenbush’s staff displayed fake press releases “designed to force insurers to contribute voluntarily to a private foundation that in fact served largely as a political slush fund for Quackenbush.” While we now know that these press releases were fake, it seems that Quackenbush’s figure of $3 billion in fines (fines, by the way, that would have gone to the state treasury and not for earthquake damage repair) for mishandling earthquake insurance claims is also fake.

Based on fines averaging no more than $1,000 per incident, Quackenbush’s office would have needed to find 3 million incidences of market-conduct violations to justify $3 billion in fines. Yet the total number of homeowner insurance claims for the 1994 Northridge earthquake was only about 600,000. Moreover, history shows that market-conduct fines have never reached this level. Department of Insurance reports show that the total of all market-conduct fines collected from life, health and property insurers in the last 10 years under Quackenbush and his predecessor, John Garamendi, was only about $25 million. While there are certainly documented instances of failures by insurance companies to handle claims from the 1994 Northridge earthquake properly, the idea that the insurance commissioner would have been able to assess and collect $3 billion in fines for millions of incidents of market-conduct violations is truly incomprehensible.

As part of their investigations, the attorney general and the legislative committees should question how and why the commissioner’s office came up with a figure of $3 billion in potential market-conduct fines. If Quackenbush’s office really believed that the state treasury would have collected $3 billion in fines, why did they settle for zero dollars for the state treasury and only token contributions to the foundations allegedly controlled by Quackenbush?

If the figure of $3 billion in fines was simply concocted as a ploy to help maximize the amount of money insurance companies would contribute to the nonprofit foundations, then why hasn’t the insurance commissioner’s office admitted that there was no reasonable expectation of ever collecting fines of such magnitude?

The emotional issues related to claims-handling from the Northridge earthquake and public perceptions that insurance already costs too much should not be exacerbated by purposeful misinformation from Quackenbush’s office.

If the investigators find that his office created false information about potential fines facing the insurance industry and then failed to inform the public of the truth, there is an argument that can be made for making the insurance commissioner an appointed rather than an elected office. The array of potential conflicts of interest for an elected insurance commissioner who can use money from the industry he regulates to run for office and make public announcements from his office to improve his public image should be expected to continue as long as the commissioner is elected.

Getting an appointed insurance commissioner to do a good job is a challenge, but our recent experience with Quackenbush suggests that getting a good job from an elected commissioner with all the inherent conflicts of interests may be especially difficult.