California State Insurance Commissioner

In 1994, I was elected by the people of California to the critical position of Insurance Commissioner. This is a powerful office whose function is to regulate the entire insurance industry of the state, ensuring that companies have the money to pay claims and that policy holders are treated fairly. I was able to appoint six deputy Commissioners to assist me in leading the 1,100 Department of Insurance employees. Attaining this high office gave me the golden opportunity to implement free market principles, in which I so fervently believed, in the regulation of a very troubled market. Burdened with a bewildering array of contradictory regulations, politically vilified, and battered by losses from a devastating earthquake, the insurance market was not functioning efficiently for consumers. Prices were high, new homeowners’ insurance was becoming hard to find, and many companies were developing plans to either reduce their book of business in the state or leave. This was an intolerable situation and it demanded radical action by the Insurance Commissioner. I quickly instituted a review and rewrite of many regulations that had caused problems. The goal was to ensure clarity and compliance with the intentions of the rules. Key to this effort was implementing a free market approach to rate setting, allowing companies maximum discretion to enter different product lines and aggressively pursue market share.

The next monumental effort was to solve the growing crisis in homeowners’ insurance availability. The dangerous overexposure of insurance companies was a threat to a smoothly functioning economy in California. Scarce and expensive insurance coverage was becoming a drag on the real estate market and policy holders were taking an increasingly painful hit in the pocketbook. The creation of the California Earthquake Authority, initially a $10 billion quasi-public insurance entity, instantly solved the problem by shouldering most of the exposure to the earthquake hazard. In 1996 I drafted, and campaigned for, Proposition 213, a state wide initiative that restricted the rights of drunk drivers and the uninsured to sue. The measure passed overwhelmingly and had an immediate impact on insurance rates, dropping them 15-25%. A terrible injustice was brought to my attention in 1998. Many survivors of the Nazi Holocaust had not been paid by European insurance companies for their losses during that period. Most survivors lacked documentation of their claims and European insurers had not been helpful in researching the issue. Working with my fellow Insurance Commissioners from across the country, I helped set up the International Commission for Holocaust Insurance Claims and personally recruited Larry Eagleburger, the former US Secretary of State , to chair the organization. The organization works with Holocaust insurance claimants and European insurance companies to facilitate the payment of legal claims. In 1999, sparked by continuing complaints from dissatisfied policy holders, the Department completed a market conduct survey of several insurance companies that experienced massive claims from the Northridge earthquake of 1994. These examinations consist of auditing a small number of claims and determining if the companies have complied with claims handling regulations. Initial findings by our examination teams raised questions about the level of compliance. Companies strongly disputed any negative implications and pointed to the near chaos in the immediate aftermath of the quake, as claims adjustors, unfamiliar with earthquake damage, were flown in from outside California. The sheer number of claims appear to have overwhelmed the systems of many companies. Many claims were opened, settled, and reopened after new damage was found. Despite all the confusion, however, there was only a small handful of claims that remained in dispute by the end of 1999. After reviewing the responses of the examined companies and surveying the current state of the marketplace, I determined that pursuing a major enforcement action against companies that held the vast majority of market share in the state would not be in the interests of policy holders. Traditionally, all state agencies have a preference to settle regulatory disputes with their regulated entities. Compliance with regulations is often in the eye of the beholder and a long, tedious, and expensive administrative hearing process is the only recourse a state agency has to compel action and strict rules of evidence apply in those proceedings. The Department decided to aggressively press for a settlement that would most immediately benefit policy holders who might feel that they had been somehow slighted in the claims handling process immediately following the Northridge earthquake. At my direction, Department staff put together a memo that laid out the maximum exposure to a fine to which a company could be exposed. This was done by making an assumption that every alleged issue of non compliance that was uncovered in the tiny number of examined files would be replicated in every claims file from the quake. It was then assumed that each act was deliberate, exposing the company to a $10,000 fine for each incident. The total amount of these possible fines was staggering, running into the billions of dollars and all of us knew that the hearing process would never come to these kinds of conclusions. However, presenting the specter of these massive potential fines to the companies was the first step in convincing them of the wisdom of settling with the Department. The negotiations dragged on for months until we got what we wanted. The companies, in a massive concession, agreed to contact each Northridge claimant and offer to reopen the earthquake claim and readjust the claim. This was unprecedented in that the statute of limitations had already run on all Northridge claims. The legal position of the companies was strong and they could have easily ignored our demands on this issue. At the same time these negotiations were proceeding, I was also hard at work reaching out to underserved communities in California where vital insurance products were not available. This chronic problem had contributed to a stubbornly high rate of illegal uninsured motorists in the state that had unfairly shifted the insurance burden to other segments of the population. We assumed that working with recognized leaders from these communities would give us the best chance to reach and educate those citizens who were not adequately insured. Department attorneys had set up two charitable foundations to facilitate working with on these goals and a Deputy Commissioner was designated to be the Department liaison to the Boards of Directors of these entities. It seemed to be an excellent idea at the time that the companies involved in these negotiations, in lieu of admitting wrongdoing and paying fines, pay an amount into foundations that were charged with conducting earthquake research activities as well as outreach to underserved communities. This sort of arrangement had precedent in California enforcement actions and had recently been utilized by the State Attorney General in an anti-trust action against Levi Strauss and Nine West. In that case, the Attorney General directed that $2.9 million from those companies be directed to charitable organizations involved in researching women’s health issues. Approximately $12 million dollars was collected from insurance companies and deposited in the foundations. It was decided that, as Insurance Commissioner, it would be best if I was not involved with the deliberations of these Boards as they fulfilled their purposes. The foundations elected to spend a large amount of money on television advertisements promoting earthquake education that featured me and Los Angeles Laker Shaquille O’Neill. These educational messages were in fulfillment of my statutory requirement to promote insurance education of Californians. A significant amount of money was contributed to various community groups involved in charitable activities such as the Urban League, and 100 Black Men of the Bay Area. Unfortunately, the Deputy Commissioner who was supposed to monitor the foundations engineered a scheme where he was able to siphon away money for himself. As evidence of wrongdoing on his part surfaced, he resigned from his position and eventually pled guilty to federal charges. Rumors of irregularities in the handling of money at these foundations quickly drew the attention of the press and the Democrat controlled Legislature. Seeing a golden opportunity to weaken one of only two statewide Republican office holders, hearings into the activities of the Department were held and we were dragged through months of grilling on the intimate details of how we put the settlements together. The press swirled with lurid allegations and the partisan rhetoric was red hot. Understanding the true political motivations of what was happening, we patiently tried to explain our reasoning and the legal basis for our actions, but it was to no avail. The press wasn’t listening and the Democrat leadership, having cowed my Republican allies into silence, sensed they could destroy me as a political force. Finally, in late June 2000, I made the painful decision to resign as Insurance Commissioner. It had become impossible to function in the job and the role of the Department of Insurance was too vital to long exist under the political cloud that had been created over my head. In February 2002, a vigorous examination by the authorities was publicly ended without finding any wrongdoing on my part. Recently, the settlements were upheld as legal and equitable by the California Courts and all litigation against me ginned up by my trial lawyer opponents has been summarily dismissed. Exactly as intended, the settlements have resulted in hundreds of millions of dollars in additional money going to Northridge earthquake claimants.

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