November 20, 2004
Insurance Probe Competition
The insurance industry probe took an interesting turn on Thursday (Nov. 18) when California Insurance Commissioner John Garamendi (California Department of Insurance) filed a lawsuit against Universal Life Resources (ULR) for taking undisclosed compensation and bid-rigging. This is the same company that New York Attorney General Eliot Spitzer sued the previous Friday (Nov. 12), alleging the firm took undisclosed compensation and engaged in bid-rigging. Quite a coincidence, isn't it? ULR settled the California law suit by agreeing to the entry of a Consent Decree, while disputing the factual allegations in the Insurance Commissioner's complaint, and agreed to cooperate in an on-going investigation.
Is California trying to compete with New York, or at least Garamendi fighting for headlines with Spitzer? According to a Wall Street Journal story, here's the spin provided by each side on the competing law suits:
Mr. Garamendi's actions "don't represent any type of coordinated effort with this office," said Kermitt J. Brooks, a deputy attorney general in New York and head of that office's ULR probe. Mr. Brooks added that the California settlement with ULR "has no effect in the lawsuit in New York." Mr. Garamendi seemed to play down any conflicts with Mr. Spitzer, calling the two suits part of an "East Coast/West Coast knockout punch."
Spitzer and Garamendi testified together at a U.S. Senate Subcommittee hearing this past Tuesday (Nov. 16) on the topic of insurance regulation, and they certainly had a chance to discuss the matter then. Could Douglas Cox, ULR's owner, be using the California Dept. of Insurance to fend off Spitzer by agreeing to cooperate with one agency to keep the other at bay?
In a prepared statement given to the Senate Subcommittee, Spitzer declared:
From our work in this area, it is clear that the federal government's hands-off policy with regard to insurance combined with uneven state-regulation has not entirely worked. There are too many gaps in regulation across the 50 states and many state regulators have not been sufficiently aggressive in terms of supervising this industry. The federal government should not preempt state insurance enforcement and regulation. Nonetheless, I do believe there is a role for the federal government, especially in the areas of off-shore capitalization and investment by insurance companies. At a minimum, federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals.
Competition among regulators is not a good thing if cases are filed to establish the regulator's bona fides as a tough enforcer or, even worse, as a means to garner a share of the national spotlight. It will be interesting to see if theULR case, which involves a fairly small firm with only 80 employees and annual revenue of $25 million, triggers greater cooperation among the state agencies or presages a "race to the courthouse" among state regulators. That alone may be reason enough to call for more federal regulation.