The Department of Insurance (CDI) regulates the largest insurance market in the United States, and the fourth largest market in the world. The department licenses more than 1,500 insurance companies and 340,000 insurance agents and brokers. It enforces the California Insurance Code, grants licenses, conducts examinations and criminal investigations of insurance companies, provides consumer protection and education, and works to ensure the solvency of companies on behalf of policy holders and claimants. The department is headed by the insurance commissioner, who is elected statewide.

The department’s roots go back to 1868, but it wasn’t until the Division of Insurance was created within the Department of Investment in 1929 that the modern department began to take shape. Five independent departments— Banking, Corporations, Insurance, Real Estate, and Building and Loan Supervision—retained their autonomy but were grouped together in a single federation within the Division of Insurance. The insurance commissioner was its administrative head and sat on the Board of Investment.

The division became the Department of Insurance in 1941 and over the next eight years went through a succession of reorganizations. In 1947, California passed the McBride-Grunsky Insurance Regulatory Act, laying out rate-making and rate regulation rules for many forms of insurance. While the act prohibited rates that were unfairly discriminatory and specifically allowed for differences in rates depending upon risk, it also effectively exempted insurers from federal regulatory legislation, including antitrust laws, and authorized cooperation between insurers in rate-making and other related matters.

The result has been characterized as turning the California's insurance marketplace into the Wild West. “Prices fluctuated wildly, precipitating destabilizing crises in the market for medical malpractice insurance in the 1970s and for auto and business insurance in the mid-1980s,” said Harvey Rosenfield, the founder of Consumer Watchdog. “Insurers also instituted a variety of discriminatory practices, like redlining and territorial rating.” The courts, applying the McBride Act's immunity provisions, repeatedly refused to entertain suits challenging the industry's rates and practices.

In 1988, California voters made fundamental changes in the department and insurance law with the narrow passage of Proposition 103. Previously, California was considered an “open competition” state, and insurance companies were not required to file rates for approval except for health and life. Proposition 103 promised up to a 20% rate reduction for automobile and other property/casualty insurance unless it led to an insurer’s insolvency. While that rollback requirement for insurers was later eased by the California Supreme Court, Proposition 103 still broadened the department’s responsibility to include property, life and auto insurance. Automobile premiums were required to be determined by driving record. Discrimination, price-fixing, and unfair practices by insurance companies were prohibited. The commissioner was required to provide comparative pricing information. Banks were authorized to engage in insurance activities. The proposition identified specific criteria for setting auto insurance rates and expanded the department’s role in consumer affairs.

According to the Consumer Federation of America, auto insurance rates in California dropped from the third-costliest in the nation to the 18th after Proposition 103 was approved. Average premiums declined from being 30% higher than the national average to being exactly at the national average.

In 1990, Democrat John Garamendi became the first commissioner to be elected by the voters rather than appointed by the governor. The state Legislature set about transforming the department into a law enforcement agency when it passed new anti-fraud insurance legislation. The legislation provided sworn peace officers to investigate and arrest those who commit fraud.

Republican Chuck Quackenbush, the second elected Department of Insurance commissioner, resigned in June 2000 after state Assembly hearings disclosed that he let insurers avoid as much as $3.7 billion in fines stemming from alleged mishandling of policyholder claims after the 1994 Northridge earthquake. Instead, the insurers paid $12 million into nonprofit foundations that Quackenbush created. Foundation money was then allegedly used to finance political events that benefited Quackenbush. Throughout the controversy, Quackenbush maintained that he was a victim of a political attack by a liberal media and enemies in the Democratic Party.

The CDI launched the Slavery Era Insurance Registry in 2001. The registry was created to require insurance companies to disclose any historical data regarding slavery insurance policies they might have from the early days of California for the purposes of historical research, genealogy, and to preserve any evidence which might be material to reparations claims.

A “Get Out of Jail Free” Card for the Insurance Industry (by Harry Rosenfield, Consumer Watchdog)

Dept. of Insurance Records (Online Archive of California)

About Us: An Introduction to CDI Operations (CDI website)

The department regulates virtually all forms of insurance, including workers’ compensation, health, automobile, life, long-term care, residential and earthquake. However, the Department of Managed Health Care regulates HMOs, health organizations that serve more than four times as many Californians as those regulated by CDI.

In addition to the prevention of fraud in its many forms, the department responds annually to 300,000 complaints and performs these various activities with a staff of 1,271 employees statewide.

The CDI publishes a consumer complaint study focused on automobile, homeowner and life insurance companies. It also provides a report card on the performance of health care insurance providers, rating them for overall performance as well as in specific areas like diabetes care. While the department rated the six major providers “good” or “fair” overall, members rated five of the six “poor” and one “fair.” Only six of the larger preferred provider organizations (PPOs) in California voluntarily reported their quality performance. Many smaller PPOs do not publicly report their quality results.

The department is organized into essentially nine offices:

Fraud—More than 44% of the department’s budget is earmarked for fraud control. By contrast, the State Controller is the state’s chief fiscal officer with a budget comparable to CDI; it spends just 18% of its budget on audits that “uncover fraud and abuse of taxpayer dollars.”

Legal—The branch ensures compliance with the California Insurance Code, litigates enforcement actions, reviews insurance policies before sale to the public, analyzes the condition of insurers and provides legal assistance to other CDI units.

Consumer services—Consumer protection gobbles up 23% of the department’s budget. The office educates the public, mediates consumer complaints and enforces insurance laws. In 2009, more than 36,000 complaint cases were opened by the department. 34% were auto-related and 31% concerned accidents and health. The largest category of complaint by far was denial of claim, 26%.

Conservation & liquidation—This office was created in 1994 and through 2009 had overseen the closure of 121 enterprises due to financial difficulties.

Community relations—In 2009, the office distributed 200,000 insurance-related informational guides and coordinated or participated in more than 180 outreach events throughout the state.

Rate regulation—Proposition 103 in 1988 put this branch on the map by requiring it to review rates for most property and casualty lines of business before property and casualty companies could use them. It also reviews workers’ compensation plans, title insurance rates, auto insurance plans and myriad other insurance plans.

Ombudsman—It’s the only “office” without a chapter of its own in the 2009 annual report. But its activities are mentioned as one of the department’s Community Services. The ombudsman handles complaints about the department and is a primary contact for legislative offices. It handled 1,229 requests for assistance in 2009.

Policy—The policy and planning branch conducts long-term insurance policy and statistical research.

Legislation—This office oversees legislation sponsored by the department. In 2009, six of the seven bills it supported were passed by the legislature.

The insurance commissioner makes appointments to several advisory boards and committees, including the California Earthquake Authority, the Advisory Committee on Automobile Insurance Fraud and the Life & Health Insurance Guarantee Association Board of Directors.

Department of Insurance 2009 Annual Report (pdf)

The Department of Insurance is not funded by the state general fund. Its only sources of revenue are the fees and assessments paid by the insurance industry. These sources include: fraud assessments, which are used exclusively to enforce laws against insurance fraud; reimbursements from insurers to recover the actual costs of tax audits as well as market conduct, rating, underwriting and financial examinations; and fees and licenses, which must finance all other department programs and operations.

State law requires that assessments be used to finance specific activities and programs, and reimbursements may be used only to recover the actual costs of providing specific services. The department has the authority to raise only license fees to fund operations not financed by other sources of revenue. Premium taxes, which are a form of sales tax paid by insurance companies on the basis of gross premiums, are deposited in the state's general fund.

Top 10 Contractors: The Department of Insurance reports that its largest  contractors in 2012 were:

Many of the contractor totals include several purchase orders or contracts, according to the department. These contracts are primarily for purchase of software, hardware, software maintenance, hardware maintenance, technical services or information technology consulting services.

The Coalinga Motors contract is to replace existing vehicles in the department’s fleet which had been surveyed over the past several years due to age, high mileage, costly repairs, and safety concerns and is subject to DGS guidelines and approval.

The Proposed Department of Insurance Budget, 2011-2012

3-Year Budget (pdf)

Quackenbush Scandal

Republican Chuck Quackenbush was elected Department of Insurance commissioner in 1994, was embroiled in scandal shortly after being elected to a second term and resigned during an investigation in the state Assembly. 

He grew up in a military family, moving every few years to different bases around the world. He attended Notre Dame on an ROTC scholarship and graduated in 1976 with a degree in American Studies. Quackenbush enlisted in the army and rose to the rank of captain before leaving in 1982. He was elected to the California Assembly in 1986. He was elected insurance commissioner in 1994 and won a second term in 1998.

The Los Angeles Times wrote in a March 26, 2000, article that Quackenbush allegedly collected political contributions from insurance companies and then moved $100,000 of the money to the campaign accounts of his wife, Chris, to pay debts from her 1998 race for the Republican nomination to a state Senate seat. 

Within a week, the state Assembly was demanding he appear and testify about the allegations in April. New accusations surfaced in April about donations from other insurance companies, including a $555,000 contribution from Fireman’s Fund Insurance Co. to the California Research and Assistance Fund, which then ran televised public service spots featuring Quackenbush.

Throughout the controversy, Quackenbush maintained that he was a victim of a political attack by a liberal media and enemies in the Democratic Party. Months into his ordeal, Quackenbush—only the second elected Department of Insurance commissioner in California history—said the commissioner should be appointed, not elected.

A Field Poll in June showed 47% of Californians thought he should quit. If he didn’t quit, 54% thought he should be impeached. He finally tendered his resignation on June 28 after Assembly hearings disclosed that he let insurers avoid as much as $3.7 billion in fines stemming from alleged mishandling of policyholder claims after the 1994 Northridge earthquake. Instead, the insurers paid $12 million into nonprofit foundations that Quackenbush created. Foundation money was then allegedly used to finance political events that benefited Quackenbush.

An 18-month investigation by federal, state and local Sacramento authorities ended without charges being pressed. Quackenbush moved to Hawaii and then Florida where, in 2005, he became a sheriff’s deputy. In 2008, Quackenbush critically wounded a suspect who was allegedly resisting arrest. He offers a spirited defense of his insurance commissioner tenure at his website.

Welcome to Chuck Quackenbush’s Website

The Downfall of California’s Insurance Commissioner (Insurance Journal)

Donations to Quackenbush Paid Wife’s Campaign Debt (by Virginia Ellis, Los Angeles Times)

Quackenbush Resigns; Probe Will Continue (by Virginia Ellis and Carl Ingram, Los Angeles Times)

Iran Investments

In March 2010, Insurance Commissioner Steve Poizner announced, “I intend to ensure that any insurance company licensed in California is not doing business, in any way, with the Iranian regime.” He released a list of 50 suspect companies and introduced new regulations that would pressure them to divest. The move was seen by some as a naked political attempt by Poizner, who was seeking the Republican nomination for governor, to rally the GOP base. National Review’s Maggie Gallagher wrote, "And what will happen when the son of Jerry Brown or Nancy Pelosi occupies the post of California insurance commissioner? Will businesses that do business with the Catholic Church or the LDS church take a hit for cooperating with 'discriminators'? Could Israel, itself already the target of divestment campaigns in Europe, become the new South Africa in the minds of San Francisco liberals?" The CDI regulation was challenged as unlawful by the California Administrative Law Office, ended up in court and was unresolved when Poizner’s term ended in January 2011. 

Insurance Commissioner Poizner Sues to Stop Insurance Companies from Investing in Iran (California Department of Insurance)

Fight Escalates over Insurance Ties to Iran (by Robert Salladay, California Watch)

California Insurance Commissioner, Insurers Settle on Iran Investments (by Don Jergler, Insurance Journal)

National Health Insurance

California, in September 2010, became the first state in the nation to establish a health insurance exchange as directed by the new federal health reform law. All 50 states are required to set up state-managed funds by 2014 where mostly low-income individuals and employees of small companies can purchase health insurance coverage. The exchange would offer health insurance plans, theoretically, to everyone.

The California Legislative Analyst’s Office warned that new health insurance oversight requirements may create additional workloads for the state Department of Insurance and the Department of Managed Health Care (DMHC). With passage of the state legislation, government will now review how its statutes and regulations governing health insurers and health plans align with these new federal rules, as well as the standard packages of benefits that are to be offered to individuals participating in the health benefit exchange.

Among its already known responsibilities, the Department of Insurance is to monitor a federal website where residents and businesses can find affordable coverage options and if it finds the information insufficient is to jointly develop and maintain such a website with the DMHC.

Rate Hikes

The Department of Insurance shares primary responsibility for health insurance regulation with the Department of Managed Health Care. The latter mostly oversees HMOs, while the CDI handles everything else. A new state law passed in January 2011 echoes federal legislation passed the previous year by empowering both departments to require insurers to provide justification for “unreasonable” premium increases. But the regulators can’t reject them. Unlike Proposition 103 in 1988, which gave the insurance commissioner the authority to reject excessive premium hikes for auto, property and casualty insurance, this legislation does not grant that authority for health insurance. Legislation to accomplish this, sponsored by current CDI commissioner Dave Jones last year when he served in the state Assembly, failed to pass. It was opposed by then-commissioner (and Republican candidate for governor) Steve Poizner who, through a spokesman, called it an unnecessary “intrusion” by the state. Consumer groups, including Consumer Federation of California, called the bill “a powerful tool to control unabated rate increase from HMOs and health insurers.”  Jones has pledged to continue pursuing the legislation.

Merger with Department of Managed Health Care

Regulation of the health industry in California is essentially divided between two agencies: the Department of Managed Health Care (DMHC) and the California Department of Insurance (CDI). The former deals primarily with HMOs and has a strong mandate to protect consumers, while the latter is often characterized as regulating the “business of insurance” and deals with all types of insurance, medical and otherwise, except HMOs.

It is not unusual for there to be a certain amount of overlap between the departments and some confusion about their jurisdiction. But a debate which has simmered since the DMHC was created in 2000 is beginning to bubble up to the surface. And it is loaded with irony.

Some critics argue that Californians would be better served by a single health care regulatory agency because one of the two current dominant health care agencies, the DMHC, is too good. Managed care plans, somewhat at the behest of the DMHC, have pioneered innovations such as timely access to care, mandatory basic services, and disclosure and grievance requirements. A report from the New America Foundation maintains that the dual regulatory system produces strong incentives “for insurers to offer lower-value products with fewer regulations (under the CDI framework) rather than higher-value products with strong consumer regulations (under the DMHC framework).” The report concludes, “The best plan would be for California to transfer the CDI’s regulatory authority of health insurance to the Department of Managed Healthcare.(sic)”

A study from the Berkeley Center on Health, Economic & Family Security, agreed, claiming that Californians had a difficult time assessing the individual health care products and, “The division of regulatory authority between CDI and DMHC has led to inequities in minimum benefits packages.”

Election vs. Appointment

Although any high office in government is inarguably influenced by politics, critics have alleged that the switch from having an insurance commissioner appointed by the governor to one elected statewide has injected too much politics into the basic function of an agency critical to the well-being of Californians. The first elected commissioner in 1990, Democrat John Garamendi, was and is a career politician. Throughout his tenure, he was regularly accused of being in the employ of trial lawyers and antagonistic toward insurance companies. His successor, Republican John Quackenbush, resigned amid scandal and ignited cries for a return to an appointive office. Some reformers argue that the office of insurance commissioner should be changed from elective back to appointive, to depoliticize it. Others want to keep the position elective but ban insurance companies from contributing to the election campaigns. Others would leave it as is. "You cannot legislate honesty," said Harvey Rosenfield, the author of Proposition 103 and head of Consumer Watchdog (formerly the Foundation for Taxpayer and Consumer Rights). "Punishing the voters by stripping them of the right to elect isn't going to eliminate corruption."

Candidates for insurance commissioner in California depend heavily on contributions, because it costs millions to wage an effective political campaign. Not surprisingly, much of that comes from the insurance industry, which introduces an obvious conflict of interest, or public perception that it exists.

Garamendi said he declined to accept insurance-company contributions during his 1990 campaign, yet managed to raise $1.5 million. He acknowledged that some of his financing came from trial lawyers, often opponents of insurance companies. But he approved because “the insurance commissioner doesn't regulate the trial lawyers.”

During the 2010 race for commissioner, both candidates claimed that they rejected  insurance company contributions. But the Republican candidate, Mike Villines, transferred $50,000 in insurance contributions from a defunct account into his election campaign. And a political action committee, awash with insurance money, spent $280,000 to oppose Democrat Dave Jones. Beyond insurance money, campaign finance records show Villines benefited from oil companies, pharmaceutical companies and developers, while labor groups, the health care industry and the lawyers gave generously to the eventual winner, Jones.

Jones’ predecessor, Steve Poizner, supports making the position appointive.

Confrontation or Cooperation

Four different men have served as insurance commissioner since the office became elective in 1990, two Democrats and two Republicans. (One of the Democrats served two terms.) Their tenures highlighted the political parties’ different approach to governance. During Republican Steve Poizner’s term of office, insurance companies found a commissioner responsive to their requests for rate increases. Poizner maintained, “It is essential that we foster an environment in which insurers want to compete and expand.”

Democrat John Garamendi, Poizner’s predecessor, took a slightly less deferential stance with insurers. “Poizner's job is to protect the consumers, not the insurance industry. His actions threaten to gut the consumer agency.” One insurance industry consultant characterized Garamendi’s general attitude as “unfriendly” and “dictatorial” toward insurance companies.

When the San Diego wildfires wreaked havoc in 2003, Garamendi said, “It appears to me as if the (insurers) are screwing their customers big time.”

After Poizner’s own experience with San Diego wildfires, in 2007, he enacted “emergency” regulations that reversed some of Garamendi’s policies and allowed insurers to boost their profit margins by 2% above previous levels. Another important change involved the rate-setting process. When evaluating requests for rate changes, Garamendi used a standard three-year base period to determine whether an insurer's business trends justified a higher–or lower–rate. Poizner changed the rule to let insurers suggest their own base periods of up to six years.

Poizner’s critics said such a change allowed insurers to game the system, since they can extend the period to show the effect of a long-resolved event which might have little relevance to their current financial position. “The things that Poizner has been doing and is now proposing constitute a deregulation of the insurance industry,” said Proposition 103 author Harry Rosenfield.

Steve Poizner, January 2007 – January 2011. The Texas-born multimillionaire started and ran several tech companies in Silicon Valley for 20 years before entering politics. His first successful campaign was for insurance commissioner.

John Garamendi, January 2003 – January 2007

Harry W. Low, September 2000 – January 2003. The mediator/arbitrator, deputy attorney general and former appellate court judge was appointed by Gov. Gray Davis to fill out the term of Chuck Quackenbush. He is a Democrat.

J. Clark Kelso (acting commissioner), July 2000 - September 2000. The Republican law school professor is known as the state’s handyman. “When a department seems broken or plagued by scandal, he’s the one brought in to fix it.” He was selected by Gov. Gray Davis and served just a few months.

Chuck Quackenbush, January 1995 – July 2000. He grew up in a military family, moving every few years to different bases around the world. He attended Notre Dame on an ROTC scholarship and graduated in 1976 with a degree in American Studies. Quackenbush enlisted in the army and rose to the rank of captain before leaving in 1982. He was elected to the California Assembly in 1986. He was elected insurance commissioner in 1994 and won a second term in 1998 before scandal forced him to resign. An 18-month investigation by federal, state and local Sacramento authorities ended without charges being pressed. Quackenbush moved to Hawaii and then Florida where, in 2005, he became a sheriff’s deputy. In 2008, Quackenbush critically wounded a suspect who was allegedly resisting arrest. He offers a spirited defense of his insurance commissioner tenure at his website.

John Garamendi, January 1991 – January 1995. Following passage of Proposition 103, he became the first elected insurance commissioner in California history. He has a long political history dating back to his election to the California Assembly as a Democrat in 1974 and is currently serving in the House of Representatives.