Quackenbush Abuses Rife, Auditor Finds

An independent state investigator on Thursday ripped the state Department of Insurance under former Commissioner Chuck Quackenbush as an agency out of control, but stopped short of concluding that it broke the law.

In a detailed report, state Auditor Elaine M. Howle repeatedly accused Quackenbush of abusing his authority and overstepping his authority in making secret settlements with insurers that had mishandled claims resulting from the 1994 Northridge earthquake.

In a related development, new insurance Commissioner Harry Low on Thursday rejected a plea by Quackenbush that the department spend public funds to pay for his defense against any criminal charges that may result from the scandal.

Low also refused to authorize public funds for the criminal defense of former employees William Palmer, Michael Kelley and George Grays, all top aides to Quackenbush.

“The department will not be responsible for the payment of any legal expenses for any present or former employee who is charged with a crime,” Low said.

Quackenbush left office in July as momentum gathered in the Legislature for his impeachment and the state Department of Justice intensified its investigation of the scandal. He since has moved to Hawaii.

In confirming earlier disclosures by The Times and legislative committees in the Northridge insurance controversy, the state auditor’s report noted that at least $12.3 million from the settlements had been routed through an industry-financed foundation to private organizations that had no connection with earthquake issues.

None of the insurance company penalties reached victims of the Northridge tragedy. But some funds meant for earthquake outreach financed television commercials featuring Quackenbush, who was a potential Republican contender for governor.

Howle noted that Atty. Gen. Bill Lockyer has concluded that payments to nonprofits or other third parties are “legal only when used for activities related to the regulatory issues that prompted them.”

In one case, $500,000 was donated to the Sacramento Urban League for construction of a headquarters.

“The former commissioner abused his authority by requiring companies to make ‘off the book’ payments directly to third parties that were unrelated to the enforcement activities that led to the payments,” Howle said.

In addition to the $12.3 million in settlements, the investigation identified an additional $16.5 million in Quackenbush outreach payments that appear to be legal but are imprudent because they went outside normal state purchasing and expenditure controls, the report said.

This practice usurps the authority of the Legislature to direct and oversee the expenditure of public funds through the state budget, she said in a 55-page report to the Legislature on Quackenbush’s settlement practices.

Howle, whose office is independent of the Legislature and Gov. Gray Davis administration, said the settlement agreements deprived consumers of important knowledge because they “omitted details of the insurers’ illegal activities.”

Further, she said, investigators found that many settlements “failed to include any monetary penalties against insurance companies that violated the law.” She warned that some companies may go “unpunished because the department does not effectively manage its enforcement activities.”

In an interview, Howle said she stopped short of concluding laws were broken because “we don’t have the expertise to say there was criminal or illegal activity. I’d defer to the attorney general on that.”

Lockyer, the FBI and Sacramento district attorney are conducting criminal and civil investigations into whether Quackenbush violated any state or U.S. laws.

Lockyer’s office did not say what effect the report might have on his investigation, but said in a statement that the report reinforces findings he made in suing the California Research and Assistance Fund, a private foundation that received funds from the settlements and distributed them to the nonprofits.

In her audit, Howle proposed a variety of steps to avoid similar problems in the future, including a requirement that insurers make payments directly to the department rather than to others.

She also suggested that the commissioner be stripped of the authority to order that payments be made to nonprofits, foundations and other entities as part of a settlement.

In cases of egregious violations, Howle said, insurance companies should be required to pay an appropriate penalty and terms of settlements should be made public along with a list of the violations.

Newly appointed insurance Commissioner Low, who replaced Quackenbush, embraced the recommendations. “I am committed to making those improvements happen during my tenure,” he said.

Sen. Jackie Speier (D-Hillsborough) and Assemblyman Jack Scott (D-Altadena), who led the legislative investigations of Quackenbush, welcomed the state auditor’s report.

“I think it confirms everything that we thought was going on,” Speier said.

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Times staff writer Julie Tamaki contributed to this story.