California Liquidation Office Criticized By State Auditor

California Correspondent

Californias official auditor has issued a sharply critical study–again–of the section of the Department of Insurance that seizes and operates insolvent insurers, saying the department doesnt adequately supervise the office and doesnt sufficiently protect insurers assets.

The study also says the department has spent at least $6 million on an automated claims-handling system that doesnt meet its needs.

The July report by the Bureau of State Audits is the latest in a series of studies targeting the Conservation and Liquidation Office. Earlier audits, released in May 1994 and April 1996, were also critical of the operation, which is at the heart of the departments regulatory and enforcement functions. The office also was the subject of a separate, private audit.

The Joint Legislative Audit Committee commissioned the study, at the request of Insurance Commissioner Harry Low. The joint committee examines state operations on behalf of the legislature.

“During our current audit, we found that the department and the CLO have not addressed many of the issues addressed in our previous two audit reports, nor have they corrected some of the problems identified by the other external auditor,” said the latest report by State Auditor Elaine Howle.

She said the office doesnt adequately supervise assets that come under its control, doesnt effectively manage its contracts, has never adopted a comprehensive conflict-of-interest policy for employees and contractors, and has not engaged in adequate competitive bidding.

The audit also noted that the office doesnt maintain an equitable system of allocating fixed costs to insurers and doesnt track its expenses. In one case, for example, a contractor was overpaid $43,000.

“It has unfairly burdened some insurers while undercharging others,” the audit noted. In another example, an insurer was charged $55,000 when the correct charge should have been $900, and the CLO failed to charge another insurer $4,000 in fixed costs.

Howles audit also found that the CLO does not conduct regular reviews to determine which insurers meet the criteria for sharing costs, and that its formula for assessing those costs is inadequate. One insurers estate was billed $58,000, but a more equitable charge would have pushed that cost to $190,000 or more, the audit said.

The California insurance department regulates about 1,600 insurance companies and some 300,000 brokers and agents operating in the state. The agency is supported by insurers fees.

The CLO manages the estates of 54 conserved or liquidated insurers, 46 of whom are incorporated in California and the remainder incorporated in another state or country. Of those seized, 16 companies represented no-asset estates and did not provide enough to cover the CLOs costs and claims.

The departments CLO operation steps in to protect consumers, ensures that companies have sufficient assets to cover their obligations, and administers an investment pool containing the cash assets of liquidated insurers. As of May, that pool had about $916 million.

Separate operations, such as the California Insurance Guarantee Association and the California Life and Health Insurance Guarantee Association, cover the claims of the policyholders of insolvent companies. These rescue funds are financed by premium assessments.

According to Howle, the CLO is also one of the most independent offices in state government. Fifty-nine of the CLOs staff positions are not within the states civil service system, and it follows its own procedures and guidelines, although under the insurance departments general supervision, in setting salaries and positions.

Low said he agreed overall with the audits findings.

“The report validated my concerns and provides me with the baseline I need to make certain the CLOs operations are consistent with policies and procedures and in the best interests of the estates it manages,” Low told the auditor in a written response.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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