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Suit Targets Quackenbush and Insurer

Courts: Legal action says ex-commissioner dropped probe of firm's fees after company donated to his campaign. Restitution for consumers is sought.


SACRAMENTO — A taxpayer lawsuit is seeking millions of dollars for consumers from Mercury Insurance Group, contending that former Insurance Commissioner Chuck Quackenbush did not pursue an investigation of the company's business practices after it gave him a $50,000 campaign contribution.

The lawsuit, filed by Berkeley engineer Robert Krumme in San Francisco Superior Court, alleges that Quackenbush scuttled a probe of the Los Angeles-based insurer shortly after his department advised the company that it had uncovered evidence of unfair marketing practices.

The department, the lawsuit says, complained that a "broker fee" was being added to the cost of Mercury's insurance premiums, driving up the price of some policies. Lawyers who filed the suit said the fees ranged from $65 to $300, depending on the size of the policy.

Mercury was advised of the department's findings Jan. 21 and directed to send representatives to a meeting with Quackenbush's staff Jan. 27 to discuss them, the lawsuit says. Two weeks after the meeting, the document says, Mercury gave Quackenbush a $50,000 campaign contribution.

"After the $50,000 contribution was received, the Department of Insurance took no further action," the lawsuit says.

As a result, according to the suit, consumers continued to be forced to pay broker fees on Mercury policies, a practice that the lawsuit contends violated the state insurance code.

A spokeswoman for the company declined to comment, saying decisions on campaign contributions were handled exclusively by George Joseph, Mercury's founder and chief executive. She said he was on vacation and unavailable to comment.

In the past, both Joseph and a spokesman for Quackenbush have said there was no connection between the timing of the contribution and the decision to stop the investigation of broker fees. Joseph told the Wall Street Journal that he made the contribution in response to a personal request from the then-commissioner for donations to help retire a campaign debt.

The debt was incurred by Quackenbush's wife, Chris, who ran unsuccessfully for the state Senate in 1998. Campaign finance records show that Quackenbush transferred $565,000 from his political accounts to his wife's campaign in the last two years. Her campaign reports disclosed that she used the money to pay back personal loans she made to her campaign and to pay herself $52,000 in interest on those loans.

Besides Mercury, the taxpayer lawsuit names the Chuck Quackenbush Committee as a defendant and asks the court to order that it pay the state $50,000. A lawyer for the committee said that he was unaware of the lawsuit but that any claims involving campaign contributions should have first been heard by the Fair Political Practices Commission, the state's ethical watchdog.

"It seems very odd," he said of the lawsuit.

The suit also asks that the company be required to make restitution to policyholders who were charged the broker fees and to the state for taxes not paid on the fees.

State law prohibits agents who represent a particular insurance company from charging a separate fee to policyholders. But it does allow independent brokers, who shop among various companies to find the best deal for their customers, to charge a broker fee.

The lawsuit alleges that Mercury attempted to get around the law by selling "insurance through brokers who do not provide independent brokerage services to consumers but who are in fact Mercury's agents."

"Mercury has created a hybrid," said Norman Goldman, an Encino attorney who represents Krumme. "It used brokers who were acting as its agents."

Joseph has said there was no basis for the department's investigation because the law is ambiguous.

The company is pushing state legislation, AB 2639, that would remove the distinctions between agents of a company and independent brokers. The proposal, which has passed the Assembly and is pending in the Senate, is being opposed by consumer groups.

"Mercury won with Quackenbush, and now they are trying to seal the deal through the Legislature," said Doug Heller, a consumer advocate with the Foundation for Taxpayer and Consumer Rights. "The Legislature right now should be focusing on protecting policyholders, not insurance companies."

Quackenbush was forced to resign last month, after it was revealed that he had reached settlements with insurance companies accused of mishandling Northridge earthquake claims. The settlements required six companies to make contributions to nonprofit foundations, one of which used the money to pay for television spots and other services designed to enhance the former commissioner's political image.

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