Out-of-State Insurers Face Roadblock at the Border

In the summer of 2001, U.S. customs agents asked the California Department of Insurance to verify the validity of insurance policies presented by Mexican truckers at the border.

The request unexpectedly plunged state investigators into a murky corner of the insurance market -- the growing, often unregulated business of insuring Mexican motorists who drive their cars, motorcycles and pickup trucks into the United States.

It led them to a Chula Vista insurance broker who told officials that since 1997, he’d sold more than 85,000 automobile policies to motorists in Mexico who had driven into California. Investigators determined that the insurer selling the policies, AEA Insurance Co., was licensed in neither California nor Mexico, but in the British Virgin Islands -- a colonial remnant in the Caribbean famous for scuba diving and offshore banking.

The Department of Insurance, citing a law that requires insurers doing business in California to be licensed by the state, ordered AEA in January 2005 to stop selling policies to drivers in Mexico crossing into California. Two months ago, a state judge upheld the order.

Officials said the crackdown on AEA -- the first by the department -- was a message to insurers that they couldn’t operate outside the law if they wanted to sell state-required liability coverage to the estimated 80,000 motorists in Mexico who drive into California every day.

The Department of Insurance contends that the AEA case backs up the agency’s position that auto policies issued by companies in Mexico -- or even in other U.S. states -- that are not regulated by California aren’t valid in California. And that could leave California drivers unprotected against damages caused by a motorist covered by an insurer not licensed by the state.

“The danger with these companies is that, just overnight, they are gone,” said Bernardine Spivey, the department’s chief investigator in San Diego.

“We’re always on the lookout for new ones that could pop up. And a case like AEA sends a message that we’re going out and aggressively stopping this,” she said. “If you want to do business here, you’ve got to get a California license.”

AEA disputes that claim, and said it was appealing the March court ruling. AEA contends that it doesn’t need a license from California because it sells all its policies to Mexicans in Mexico. The insurer’s attorney, Raul Aguilar, said AEA had moved its administrative and underwriting operations to Mexico pending the resolution of the appeal.

Although AEA paid claims and received a positive financial rating from A.M. Best Co., an independent insurance analyst, it still needs to be licensed so that the state can protect consumers from poorly managed or unscrupulous operators, Insurance Commissioner John Garamendi said.

“Who knows where the company is or where the money is to pay claims?” he said.

Only 20% of drivers in Mexico who cross into California carry valid liability coverage, said Juan Buendia, a specialist in border-related insurance at Los Angeles brokerage MacAfee & Edwards Inc. But sales of the so-called northbound coverage are growing, and regulators fear that under-funded, fly-by-night companies could flood the market with cheap -- but worthless -- policies.

Unlike Mexican trucks crossing into California under the auspices of the North American Free Trade Agreement, automobile drivers are not required to show proof of insurance at U.S. ports of entry. The lack of inspections makes it easy for auto owners to carry fraudulent documents such as photocopies of old or nonexistent policies, Buendia said -- or no documents at all.

Industry experts said they were aware of at least eight companies in the United States and Mexico now selling insurance to motorists coming into the United States. Only one of the companies -- Monterey Insurance Co. of Monterey, Calif. -- holds a California license; a second -- San Antonio-based National Unity Insurance Co. -- has applied for a state license. Policies from the other six companies are not considered valid in California, regulators said.

The cross-border policies, which vary in duration from a few days to a year, provide the minimum amount of state-required liability coverage: $15,000 for bodily injury per person, to as much as $30,000 per accident, plus $5,000 for property damage.

During Garamendi’s first term as insurance commissioner from 1990 to 1994, California was plagued by dozens of Caribbean-based insurance companies that regularly changed their names and license locations, leaving behind millions of dollars in unpaid claims and sometimes ruining the lives of policyholders and accident victims.

California regulators want to encourage more drivers in Mexico to buy insurance, but want to make sure that it’s legal and issued by a company that meets the state’s standards for financial strength, Department of Insurance attorney Danette C. Brown said.

Bob Winn, vice president for underwriting at Monterey’s parent company, Capital Insurance Group, said northbound coverage sold to motorists in Mexico grew sixfold to $14 million from 1999 to 2005.

Given the number of potential customers, “it’s a huge market,” said Buendia, the Los Angeles broker.