L.A. complaints against unlicensed insurers soar; state regulators declare war on 'bogus' companies.

In Insurance Commissioner John Garamendi's war on bogus insurance companies, L.A. County is considered the front lines.

A report from Garamendi's office found that the number of written complaints from consumers against all insurance companies without a California license rose from 22 in 1988 to 2,303 in 1991 -- more than a 100-fold increase.

The majority of those complaints were filed by policyholders in Los Angeles County, said Elena Stern, a spokeswoman for Garamendi's office.

Garamendi issues a steady stream of press releases on actions against so-called "nonadmitted" carriers -- insurers not based in California and without a California license -- and the agents that peddle nonadmitted carriers' policies.

"It's war," proclaimed Stern. "We're going after the carriers who are coming into California without any intention of paying claims. The ones that are boldly stepping in and taking advantage of a vulnerable market in need are the ones we want to put out of business."

On Nov. 18, Garamendi's office accused three men of operating a phony health insurance program in Simi Valley and ordered two other nonadmitted insurance companies to cease operations in California.

Garamendi's office received about 500 complaints against Physicians Choice Plan, also known as Golden State Preferred Trust, Physicians Benefit Plan and Unified Benefit Plan, according to a release.

L.A. is a prime target for these bogus companies, Stern said, because the area is heavily populated, insurance costs are high and a number of minorities live here. She said scam insurance operators prey on non-English-speaking residents because they often don't understand the risks of buying insurance through unlicensed companies.

While policyholders of licensed companies are protected by the California Insurance Guaranty Fund, those who are insured through unlicensed companies have little or no protection against losses suffered when the insurer is unable to pay claims.

Most of the 850 companies operating in the state without a California license are legitimate, said Stern. These are companies such as Lloyd's of London, which offer insurance for a wide range of items that admitted carriers consider too risky. One of the most noted examples is when Lloyd's issued a policy to protect Marlene Dietrich's legs. Companies like Lloyd's typically don't get a license in California because they would be subject to the state's insurance rate schedule and many items, such as Dietrich's legs, defy a set rate.

Although state law prohibits the sale of insurance by nonadmitted companies, unless the individual line of insurance is not available through a licensed company, nonadmitted carriers have found a number of loopholes around that restriction.

For example, a number of automobile clubs have popped up around the country and, if one person in the group doesn't qualify for insurance, then the whole group can get insurance through a surplus-line broker, Stern said.

State law also prohibits the sale of insurance by a nonadmitted carrier for cost reasons alone. But more and more insurance is being "exported" to nonadmitted carriers on the basis of price.

Nonadmitted carries are only allowed to sell their policies through surplus-line brokers, those who specialize in offering insurance that people can't typically get from an admitted carrier, such as commercial trucking insurance, fine-art insurance and product-liability insurance.

The problem is that a number of offshore companies, who often list islands in the Caribbean as their headquarters, have found a lucrative niche by ripping off people who can't get insurance for the most basic of needs: automotive, health and business.

They offer insurance for high-risk cases at low rates and give surplus-line brokers high commissions to peddle their policies, said Stern. She cited one case of a nonadmitted carrier giving surplus-line brokers a 78-percent commission, far above the standard 10-percent commission.

Stern explained that revoking a license from a surplus-line broker is extremely difficult because investigators must prove the broker "knowingly placed insurance in an unlicensed company that had questionable financial solvency."

Stern said the biggest area for abuse has been in auto insurance. The report from Garamendi's office found the amount of auto insurance sold by nonadmitted companies in California grew from $3.9 million in 1988 to $128.7 million in 1991.

A Department of Insurance survey also found that victims of the L.A. riots had $64 million in claims on nonadmitted companies, but only $21 million of that had been paid. Department investigators estimated that much of the remaining $43 million in claims will never be paid.

Since Garamendi took office in January 1991, he has taken on nonadmitted offshore companies with a vengeance. But some industry observers contended Garamendi's high-profile efforts are being motivated by his desire to be governor of California. They further charged Garamendi's efforts show an ignorance of the insurance industry. In the process of cracking down on offshore carriers, industry observers said, Garamendi has given legitimate surplus-line brokers a bad name.

"Garamendi's cleaning out a house that needed to be cleaned out," conceded Howard Green, a wholesaler to surplus-line brokers. "But he's painting all surplus-line brokers with a black brush. We're needed."

Green said his company, Sherman Oaks-based Howard-James Co. "has never and will never deal with the offshore market." He further said he only deals with insurance carriers that receive a B+ rating or better in Best's Key Rating Guide -- the insurance industry's bible on information about carriers. He added that his commission is 10 percent, or less, on all policies sold.

"In Garamendi's zeal to become governor, he's picking on a segment of the insurance industry that doesn't need to be picked on," asserted Green. "You don't need to go after us for a few errors by a dozen unscrupulous surplus-line brokers."

He said he would support a "white paper," or definitive listing, in the state showing insurance companies that should be admitted and those that shouldn't.

Stern said Garamendi has proposed a number of regulations, but most were defeated because of the powerful insurance lobby.

The Office of Administrative Law, however, recently approved an emergency regulation imposed by the Department of Insurance, which requires carriers to prove their financial viability. The regulation, formally known as Regulation 2174, requires nonadmitted carriers to maintain $15 million in capital, $5.4 million in a U.S. trust account and a three-year operating record.

Many in the industry noted that the Office of Administrative Law, which approves such regulations, will likely request Garamendi's office to get further emergency regulations approved through the legislative process.

Regulation 2174 still falls short of solving the fraud problem, though, because it only pertains to new companies that want to operate in California, not the hundreds of nonadmitted carriers already here.

Raymond Cowan, president of Cowan Surplus Lines Insurance Services Inc. in Sherman Oaks, said these regulations are akin to "throwing the baby out with the bath water" because they would discriminate against the smaller U.S. domestic carriers.

Stern said Garamendi's top priority now is stepping up the number of investigations on nonadmitted carriers. She said the insurance department's surplus-line program currently has only one full-time attorney, seven full-time investigators and two financial analysts to verify a company's solvency.

Of the 25 new positions being requested in the 1993 budget, she said, eight would be attorneys, seven would be analysts and 10 would be investigators.

In Garamendi's war, he has issued letters of objection on 50 nonadmitted carriers, Stern said. These letters notified surplus-line brokers not to do business with these carriers. Stern said such letters have only been issued against 90 carriers in the history of the department.

Cowan, who said he has been "stung" by bogus carriers, accused Garamendi's office of being too slow in sending out these letters.

"If a financial statement smells, they should investigate immediately and then send a letter to the brokers," he said.

Stern defended her boss by pointing out that Garamendi has revoked licenses from three surplus-line carriers and seized the assets of seven nonadmitted carriers, which she said, had never happened before.