Hubris Strikes Again: Lessons From the Quackenbush Affair

By Jock O'Connell

As the disgraced former California Insurance Commissioner Charles W. "Chuck" Quackenbush sits in self-imposed exile on a distant Pacific isle, the preposterously photogenic Notre Dame alumnus must occasionally wonder whether his next "photo shoot" will involve posing for a mug-shot. On July 12, just two days after his resignation took effect, federal, state and Sacramento County prosecutors announced they had joined forces to investigate whether Quackenbush and his aides had broken any laws in their management of Northridge earthquake settlements. Indictments seem quite likely.

For those who might not have been following the scandal as it unfolded this past spring and summer, a brief recapitulation of the events may be helpful. It began with a series of newspaper articles— most notably by Virginia Ellis of the Los Angeles Times -- that told of how Quackenbush had permitted a number of major insurance carriers to avoid billions of dollars in possible fines and penalties for their mishandling of insurance claims arising from the January 1994 Northridge earthquake. That temblor, California's costliest natural disaster, killed 57 people and caused $27 billion in commercial and residential property damage.

Four years later, Department of Insurance auditors who had been looking into how three large insurance companies (20th Century, Allstate and State Farm) had handled Northridge claims began to find a pattern of low-balling, delaying or misleading consumers. Rather than demanding more equitable and prompt claims handling or imposing substantial fines, Quackenbush let these three and, eventually, a number of other insurers off an exceedingly expensive hook by allowing them to make relatively modest tax-deductible "donations" to help finance public service programs related to earthquake safety and preparedness. In total, he seems to have authorized $19 million in such contributions from an array of insurers, including more than $12.8 million to the California Research and Assistance Fund (CRAF), a foundation created and controlled by Quackenbush.

It was perhaps bad enough that Quackenbush did not hold insurance carriers more accountable in providing prompt and adequate relief to thousands of Northridge victims. What was worse, it turns out is that not a penny of the millions forked over by the insurance companies ever went to settle a single claim.

Instead, an estimated $3 million went to pay for a series of television commercials that prominently featured the commissioner. According to critics as well as some of Quackenbush's own advisors, these ads were designed primarily to further the commissioner's political aspirations. Additional sums were donated to groups wholly unconnected with earthquakes or insurance. In one case, Quackenbush arranged for CRAF to give $500,000 to the Sacramento Urban League, a community action group located some 400 miles away from the Northridge quake's epicenter. Another $263,000 in CRAF money found its way to a Northern California football camp attended by Quackenbush's two sons.

What emerged, then, from investigative news reports and subsequent legislative hearings was a disturbing picture of an ambitious politician who had been funneling millions of dollars in insurance company donations to bankroll his political career.

To preempt a near certain impeachment vote in the legislature, Quackenbush resigned on June 28. Soon after, he and his family moved to Hawaii where, contrary to the story swirling around the capitol, he did not purchase a Firestone Tire franchise.

What is perhaps most distressing about this entire affair is not that Quackenbush may have played fast and loose with the public interest. Rather, it is that much of what Quackenbush and his staff did, while no doubt outrageous, was probably quite legal.

Insurance is the only major industry regulated almost entirely by the states. California's insurance commissioner enjoys virtually unchecked authority over insurance companies, serving as both judge and jury. In the words of a report issued by the state Senate Insurance Committee after its hearings into the Quackenbush Affair: "The very power of the office invites abuses. Out of sight of the press, the legislature and the public, the [commissioner] may enter into agreements with insurers, decide not to go forward on an examination, approve rate increases or decreases, or even tip off insurers about pending regulatory actions."

Interestingly, though, the committee report lambasted the inadequacy of state laws almost as much as it castigated Quackenbush's behavior. "Ambiguities in state law, and few written rules, permitted [Quackenbush] to engage in alleged improprieties," the report observed.

How, then, to prevent future insurance commissioners from becoming lured into a similar "the-devil-made-me-do-it" trap? To many voters, the answer would seem to lie in serious campaign finance reform which would keep the commissioner from becoming beholden to the industry he or she is supposed to regulate. That, however, is not unlikely to be top on the legislative reform agenda. As a group, politicians almost instinctively shy away from measures that would seriously crimp their ability to raise and expend huge sums to further their political ambitions. Indeed, in the waning days of August, the legislature rebuffed a bill that would have denied insurance industry from contributing to the campaigns of those running for insurance commissioner.

Another proposed remedy would involve letting the governor rather than voters decide on who should be the state's insurance commission. That anyone at the capitol should find this option appealing is, if nothing else, an indictment of term limits -- or specifically the institutional amnesia terms limits promote.

Does the name Roxani Gillespie ring a bell? She was California's last appointed insurance commissioner back before passage of Proposition 103 in 1988 changed the position into an elective office. Named to the job by Gov. George Deukmejian in 1986, she soon earned a reputation for favoring the interests of the industry over those of consumers. Ralph Nader called her an insurance industry lackey. By the time she left office, polls showed Gillespie to be the most disliked political figure in California.

Quackenbush has denied any wrongdoing in connection with his resignation. However, with his former top deputy George Grays reportedly providing investigators with testimony that denies any deniability for Quackenbush, it seems only a matter of time before the man once touted as the Republican Party's best gubernatorial prospect faces the music. In the meantime, however, the governor and the legislature are going to have to find ways of preventing these sorts of abuses in the future.