Audit Faults Department of Insurance

A highly critical audit of California’s beleaguered Department of Insurance found Tuesday that it improperly managed nearly $2 billion in assets seized from financially troubled companies.

In a 50-page report to the Legislature, state Auditor Elaine Howle said the department often hired contractors without seeking competitive bids, employed workers who did not meet the minimum qualifications for the job and wasted $6 million on a computer system that does not work.

At the same time, Howle, who said previous audit findings had been ignored, added that the department frequently failed to keep track of all of the physical assets of the companies--including vehicles, computers, fax machines and office furniture.

State Insurance Commissioner Harry Low, who requested the audit, joined with some critics of the department in confirming some of the problems described in Howle’s report.

“I’m not surprised [by the audit findings],” said Tom Schaefer, a San Diego attorney who has sued the department on behalf of a disabled woman who was insured by one of the failed companies. “I think the bureaucrats in the Department of Insurance often have the feeling that they don’t have to answer to anyone.”

The assets of failed insurance companies are managed by the department’s conservation and liquidation office, an anomaly in state government because it operates independent of the Legislature and other state watchdogs. The office is also unusual in that it does not have have to comply with state contracting and Civil Service requirements.

Under California law, the insurance commissioner can seek a court order allowing the agency to take over the management of financially troubled insurance companies. The commissioner also has emergency powers to seize a company without court order if he believes its assets are in danger of being embezzled or illegally diverted to some other use.

In both instances the assets are turned over to the conservation and liquidation office, which manages the holdings of 54 failed insurance companies valued at nearly $2 billion. The money held by the department is used to pay claims and creditors.

The audit comes exactly a year after former Insurance Commissioner Chuck Quackenbush resigned in disgrace after disclosures that he had allowed insurance companies to contribute to a foundation he created rather than pay fines for mishandling Northridge earthquake claims. Money from the foundations was used for television ads and polls designed to help Quackenbush’s political career.

The latest audit was requested by Quackenbush’s successor, Low, who said he was concerned that the office had been mismanaged during the Quackenbush administration.

But the auditor’s criticisms covered the operation of the office under Low as well as Quackenbush.

Low acknowledged that he had delayed instituting reforms until the audit was completed so that “I could have a really good road map to correct a number of things.”

He said he concurred with the findings even though they were extremely critical of the department’s management under him and Quackenbush.

“I wanted the audit to confirm some of my concerns, and now we’re going to have to make changes and some of them are going to be fairly drastic changes,” he said. “To start with, we’re going to probably have to make some changes in personnel.”

Low said he also intends to establish a conflict-of-interest policy, another recommendation of the auditor.

Howle’s report noted that the omission was particularly glaring because contracts issued by the commissioner contained language requiring others to adhere to conflict-of-interest rules that did not exist.