Picture if you will a public agency created specifically to protect consumers. Let's call it the , given new life by Proposition 103, the 1988 ballot initiative passed by voters outraged by skyrocketing automobile insurance rates.The agency got off to a shaky start in 1990, under the tutelage of Commissioner John Garamendi, a liberal Democrat who quickly discovered idealism was no match for the tremendous weight thrown around by the insurance lobby. Nevertheless, CDI began making slow, pragmatic steps toward its goal of protecting consumers from price-gouging insurance companies.In 1994, Garamendi decided not to seek re-election to the statewide post. Thanks to $2.4 million donated by the insurance industry, a conservative Republican Assemblyman with a staunch anti-consumer, pro-insurance industry voting record who had opposed Prop. 103 (the very initiative that had created the position he was seeking) was elected.In less than two years since assuming the post of commissioner, critics say this man has managed to completely reverse CDI's direction, turning an agency originally created to protect consumers into a rubber stamp for the powerful insurance industry.His name is Chuck Quackenbush, and consumer advocates say he is a prime example of everything that is wrong with politics today. His own employees agree with that assessment, and some have filed suit against his administration, which they say is unduly influenced by the insurance industry. "It really is true that he's the best commissioner that money could buy," said Nettie Hoge, a former deputy commissioner appointed by Garamendi who served under Quackenbush for seven months before quitting in disgust. "He's a perfect example of why our campaign financing system is so horrible."Quackenbush refused to be interviewed for this article, instead choosing to respond through Deputy Commissioner of Communications Richard Wiebe."What we have is a basic, fundamental difference in philosophy," said Wiebe, the former spokesman for the insurance industry's fight against Prop. 103. "The so-called consumer advocates, the self-appointed protectors of consumers, want to take a heavy-handed regulatory approach.""The commissioner's philosophy is that it is certainly appropriate that the insurance industry be regulated in certain respects, but we also need to let the market work. He believes that a healthy, competitive marketplace really is what serves consumers best."Of course such laissez-faire thinking, taken to extreme, would deny the need for any regulation in the marketplace, and an extensive investigation has revealed that is precisely the direction CDI is moving toward under Quackenbush. After conducting dozens of interviews and reviewing numerous public documents and sensitive internal memos, it has been found:* Internal memos indicate that before Quackenbush won his 1994 primary, the then-Assemblyman pressured CDI investigators on the behalf of a major insurer, who later contributed a large sum to his campaign.* Members of the CDI fraud division have filed two lawsuits against the Quackenbush administration, claiming that it has been pressured to send fraud investigations conducted by the insurance industry directly to county prosecutors -- without first verifying that the evidence justifies criminal charges.* Although auto insurers continue to record sky-high profits, the commissioner has not intervened -- except to override staff recommendations that insurers lower their rates.* Employees claim that Quackenbush and his inner circle routinely intervene in CDI regulatory and enforcement matters to the benefit of insurance companies.* Quackenbush has done nothing to protect consumer-oriented watchdog functions of CDI from crippling layoffs.Obviously, Quackenbush is close to the industry. But how close is too close? He's crossed the line and more, said Ina De Long of United Policyholders, a consumer group. She believes Californians will not soon recover from Quackenbush's anti-regulatory rampage."It's almost to his two-year mark," she said. "As rapidly as things have been going downhill, I can't imagine what it will be like in another two years."BAD FAITHIn late 1991, racist thugs celebrated the Gulf War in Palo Alto by scrawling hate messages on the door of a Sufi mosque and then jamming a running hose under it. The mosque, operated by M. Mazhmar Jamil, was ruined, and he went to his insurer, Fireman's Fund, which began making payments to cover the damages.Heavy rains hit in 1992, resulting in more damage, and Jamil filed a claim through a second carrier, Sequoia Insurance Company. In the meantime, Fireman's Fund stopped making payments, though the original claim had not been paid in full. The matter went to an independent appraisal panel, and Fireman's Fund hired Bill Palmer, a private attorney, to make its case.Palmer would eventually be appointed by Quackenbush as CDI's general counsel, but his interest in the Jamil case has apparently not waned, leading CDI fraud investigators to accuse Palmer of a conflict of interest in a suit filed in Sacramento County Superior Court that claims they are being pressured to insulate insurance companies against potential bad-faith lawsuits (those filed against companies that fail to pay promised benefits)."I deny [the allegations], and obviously I'm very upset about this," Palmer said. He refused to comment on specifics.Companies can avoid bad-faith charges by showing they had good cause to suspect fraud. According to a memo written by CDI investigator Steve Begley in February 1994, Palmer, while still a private attorney, went to CDI's Fraud Division, accusing Jamil of fraud and promising documents to prove it.After making the charges, Palmer provided no proof, Begley wrote, but repeatedly called Begley to ask about the status of the investigation. But there seems to be some disagreement. In a confidential letter to his employer in May, Palmer said he provided documentation to the CDI, but that the division did not display much interest. In any case, the Jamil file was handed over to investigator Wayne Wilkinson."Palmer told Wilkinson that claim payments would have [to be] made to Jamil if Jamil was not arrested soon," Begley wrote. "Wilkinson told me that he felt that Palmer was trying to pressure him into arresting Jamil."The case also drew the interest of Assemblyman Chuck Quackenbush, then deeply immersed in the primary campaign for Insurance Commissioner. He also inquired about Jamil numerous times. According to one of Palmer's former co-workers, the attorney was heavily involved in the Quackenbush campaign.In April 1994, the appraisal panel unanimously voted to award Jamil more than 75 times what Palmer and his employer had offered. But Fireman's continued to withhold payment, according to a bad-faith lawsuit filed by Jamil in June 1994. "From reviewing the claim files," Begley wrote in his memo, "it appears that Mr. Palmer's motive was to pressure the Fraud Division to conduct a criminal investigation so that Jamil would drop his bad faith lawsuit." As the November election approached, Fireman's Fund donated $45,000 to Quackenbush, said Phil Roberto of the Prop. 103 Enforcement Project. About half of that money was funneled through a Republican political action committee just in time to help fund a last-minute blitz of attack ads against his opponent, then-Sen. Art Torres.Thus the ambitious Chuck Quackenbush suddenly went from being a little-known Assemblyman to the holder of a prominent statewide office.In January 1995, Quackenbush began as commissioner and appointed Palmer as CDI general counsel. Conflict of interest rules outlined by the state Fair Political Practices Commission prohibit government officials from participating in a decision that benefits a company from which they have received $250 or more in the previous 12 months.When CDI investigators refused to go along with Palmer's attempt to interfere in the Jamil investigation, their lawsuit claims, they were retaliated against and harassed.In June 1995, the Santa Clara DA found that the allegations against Jamil either could not be proven or the statute of limitations had expired. With no fraud case, Palmer's former employer had to settle Jamil's bad-faith lawsuit for $600,000, CDI correspondence shows. Despite the DA's findings, internal CDI correspondence shows that Palmer reacted to news of the settlement by urging further investigation as recently as six months ago.According to spokesman Richard Wiebe, it wasn't unusual for Quackenbush to "expedite" such cases. "He probably did that dozens of time a week while an assemblyman, and this case doesn't stick out in his mind."WHO'S DEFRAUDING WHO?Many CDI employees believe Quackenbush holds a special place in his heart for his department's fraud division. He tools around Sacramento in an unmarked CDI cop car borrowed from the unit, complete with siren and flashing lights -- which he is rumored to sometimes turn on for kicks. The commissioner loves nailing those who steal from insurance companies; frequent press releases boast of the fraud unit's accomplishments.So why are his fraud investigators rising up in rebellion?Two lawsuits filed by fraud unit employees in the last two months claim the insurance industry is improperly influencing the Quackenbush administration. The first, which includes the allegations against General Counsel Bill Palmer mentioned above, was filed against several insurance companies, Palmer and Deputy Commissioner Barbara Dotta by eight investigators in July, and alleged that unit personnel are being asked to "rubber-stamp" insurance industry investigations, to the potential detriment of innocent members of the public.The plaintiffs claim that high-ranking CDI officials have conspired with insurance industry officials, instructing fraud investigators that they must process more cases or the industry will go to the Legislature and cut off their funding. The investigators say they are being forced to approve cases for prosecution "without meaningful review," violating the oaths they took as sworn peace officers. Defendants in these cases, faced with the intimidation of felony charges and an aggressive district attorney, choose to plea bargain to a misdemeanor about 90 percent of the time, the investigators say.Insurance companies are required by law to maintain their own investigative units to root out suspected bogus claims and submit them to CDI's fraud division. However, according to the investigators who have filed the suit, these investigations are occasionally skewed, using edited film, partial quotes or withheld evidence of innocence. If they are not reviewed by an unbiased law enforcement officer, it opens the door for the insurance industry to use bogus fraud prosecutions to insulate itself against costly claims. The ability to stifle bad-faith suits could save the industry hundreds of millions of dollars, claims Sacramento attorney Paul Lacy.But Quackenbush spokesman Richard Wiebe denied any wrongdoing on the part of the commissioner's administration."If they're accusing us of trying to put more crooks in jail more quickly, we plead guilty," said Wiebe. He said Dotta, a former deputy DA who took her new job in January, knows "better than most" the need to build a strong case. "Our job is to prove the case as thoroughly as possible, so prosecutors can obtain a conviction," she said.However a draft copy of the department's planning document, titled "Goals 96-97," lends some credence to the claims of the fraud investigators who have filed the suit. It states that the fraud division must "increase productivity... [or] funding support for the program will be reduced." The draft measures "productivity" not by the number of cases processed or crooks convicted, but by counting total "prosecutions" -- making no distinction if they result in guilty verdicts or not.Although this jibes with the plaintiffs' claim that cases will be more likely to go to prosecutors without meaningful review, Wiebe portrayed the plaintiffs as a few disgruntled good old boys, suggesting that under their watch, cases have been processed slowly."Some of these guys didn't like the idea of working for a tough-minded woman prosecutor, and they've resisted the changes she's tried to make," said Wiebe. Yet two of the nine plaintiffs are women. Three of the division's four bureau chiefs have joined in, as well as supervisors and line investigators. Many of the investigators now suing CDI are highly regarded in the law enforcement community. Even Quackenbush has complimented the unit's productivity in a recent issue of its in-house magazine. "Division arrests in 1995 increased by approximately 45 percent overall over 1994," he announced.The plaintiffs also point out that Dotta hadn't implemented any policy changes when she demoted one of the plaintiffs in the lawsuit on the very day she arrived.Even former Sacramento Sheriff's Lieutenant Bob Gaultney, an old law school chum of Dotta's whom she brought in to be division chief, defends the plaintiffs. For months beforehand, Dotta had regaled him with stories of how unproductive and lazy the CDI fraud investigators were."She told me a lot of things about those people," Gaultney said. "When I got there, it just flat-out wasn't true. I was very impressed with the staff." After six weeks of Dotta bypassing him to give direct orders to investigators, Gaultney asked to discuss the chain of command with her. She promptly fired him with no explanation.Meanwhile, Wiebe's explanation that the suit reflects only a few disgruntled employees continues to crumble. A second lawsuit, filed last week by nine analysts who work with the fraud unit, echoes the first.In fact, most of the division's sworn peace officers share the sentiment underlying the lawsuit -- that the unit is being forced to work on behalf of insurance companies, rather than the people of the state of California, said Dennis Lovejoy of the California Association of United Safety Employees, which represents fraud investigators."It's kind of like letting the fox guard the henhouse," he said.THE BUSINESS OF BUSINESSNot everyone who works for or is associated with Quackenbush thinks he's doing a bad job. Wiebe, for one, finds his boss's performance a vast improvement over his predecessor's approach."Garamendi's attitude was, "Let's just hit 'em over the head until they either do what we want, or leave the state,' " Wiebe said, noting that companies often chose the latter option. "And I think the economy has suffered as a result. And the consumer has suffered." Others agree."I honestly think the commissioner is taking a balanced approach to good public policy with an eye toward maintaining a healthy business environment for the insurance industry," said Bob Smith, a Pocket Area State Farm agent who worked on Quackenbush's campaign. "The insurance industry is a business -- it is not a public utility. I believe Commissioner Quackenbush has brought a businessperson's approach to the Department of Insurance that is very appropriate."As proof that Quackenbush is not strictly a yes man, Smith and other agents noted that CDI recently approved consumer-friendly, industry-unpopular auto insurance regulations that do not allow agents to jack up rates in cities. Of course, these were required by Prop. 103.Quackenbush has not been all bad, said Bill Ahern, chief counsel for Consumer's Union and a former deputy commissioner under Garamendi. The price of workers' comp insurance has come down under Quackenbush's watch, for instance, and CDI started a new program to help inner-city residents get insurance, he said. However, Ahern noted that Quackenbush is refusing to carry out his duty to protect consumers from excessive profits in the area of auto insurance. A June study by an actuarial firm commissioned by Consumers Union charged that each California consumer could save $55 per year per car if the commissioner would bring profits down to 14 percent. The study found that individual companies' profits are as high as 35.8 percent, and on average are far higher than in many other states. In Missouri, for example, profits as a percent of premium are less than half of California's."The findings of our report should act as a litmus test for Commissioner Quackenbush," said Ahern, who called for the curbing of profits.The commissioner fired back that the Consumers Union's study was "seriously flawed" and "misleading." He said Consumers Union ignored recent voluntary rate reductions, which he said proved the marketplace is working. Ironically, Quackenbush based his response on a CDI analysis that showed auto insurance companies are in fact raking in profits as high as 34.3 percent.Quackenbush's spokesman Wiebe insists that recent rate reductions in 7 out of the 10 top carriers -- like Allstate -- are proof that the marketplace is working.But as far as the recent rate reductions, in the case of Allstate's recent cut of 2.7 percent, consumers should have seen a much greater discount. According to an internal analysis based on CDI guidelines, a reduction of at least 5 percent was called for. Allstate gave the Quackenbush campaign $67,000 in 1994, according to the Prop. 103 Enforcement Project.The commissioner's close ties to the insurance industry remain disturbing to consumer advocates and CDI employees. Wiebe acknowledged that his deputies meet with industry lobbyists at their weekly breakfasts to discuss legislative strategy. When industry pushes anti-consumer bills through the Legislature, critics say, CDI is not protecting Californians' best interests.A prominent example they cite is last week's approval of the California Earthquake Agency, which will remove insurers from earthquake liability. Insurers and Quackenbush said the new agency was needed to protect the financial health of insurance companies and a scarcity of homeowners' insurance. Consumer advocates said the insurance shortage was contrived by insurers, and that the plan is a multibillion-dollar industry bailout at taxpayers' and policyholders' expense. Another example of the close ties with industry is that representatives from State Farm and the Personal Insurance Federation, a lobbying group, are currently writing regulations with CDI to define which complaints are "justified" -- meaning that can be disclosed to the public.Wiebe said having industry write regulations for agency approval is "standard operating procedure," not only with CDI, but throughout state government. "It's a way to get legal work from sources other than the taxpayer," he said. "It's not at all unusual.""Lobbyists write laws," he added. "They write statutes. They write bills. They even write constitutional amendments. That's the way it's done."ENTER THE DUKEWhen CDI's consumer hotline gets one complaint of a violation, it often leads to others, eventually eliciting a fine. Such fines are crucial to deterrence, say consumer advocates and CDI employees.But some claim that CDI's watchdog role is being muzzled by frequent interference in enforcement actions and day-to-day regulatory decisions."Pretty much people have shifted gears in the enforcement area," said Okumura, who explained that enforcement employees have realized that, "If you give [insurance companies] too much of a hard time, they're going to go to one of Q's deputies." The CDI grapevine is rife with such stories.One example concerns Surety Company of the Pacific, which was being investigated by CDI for suspected violations, such as allegedly failing to pay claims unless a lawsuit is filed. Questions arose during a review of the company's files by CDI's Market Conduct Bureau, which turned up a list of numerous irregularities. Then former Gov. George Deukmejian entered the picture.Deukmejian is now an attorney who represents insurance companies. In a conversation with Chief Deputy Commissioner Ken Gibson (a former Deukmejian appointee), the ex-governor was told that his client, Surety Company of the Pacific, had nothing to worry about -- for the moment, at least."As a result of a collective internal decision," the investigation is "on hold to order to address another matter," wrote Deputy Commissioner of Enforcement Mark Lowder in a May 29 letter to Deukmejian. "As you discussed with Ken Gibson, there is no need at this time for Surety Company of the Pacific to answer any further questions from the Department of Insurance with regard to its market conduct examination."But there's a huge problem with this logic: If the investigators are only temporarily working on something else and will return to Surety Company, why does that mean the firm should stop working on its response to CDI's many questions? This is unprecedented, informed observers say.Surety Company of the Pacific gave Quackenbush $28,000 for his 1994 campaign. Spokesman Wiebe refused to discuss specific enforcement cases, but denied any improper interference.INDUSTRY HACKThe investigation of consumer complaints against insurance companies like Surety may soon become a thing of the past if Quackenbush and crew have their way. That's bad news for the 600,000-plus people who made complaints to the department each year, many of whom were overcharged, cheated or wrongfully denied coverage by their insurers.Internal email indicates that a task force of Quackenbush deputies, when faced with budget cutbacks, decided that department layoffs, then expected to be 30 to 40, would focus solely on Los Angeles -- which happens to be where most of the complaint handlers of the Consumer Services Division are headquartered.When the Legislature decided to cut the CDI budget by another $4 million, the number of layoffs jumped to 95, and spread into the groups that work hand-in-glove with the complaint hotline: white-collar crime investigators and other financial gumshoes.Consumers still can complain, but now they will typically be referred back to the insurer or agent -- where their complaint originated.Meanwhile, the bureaus handling licensing, tax audits and investigations are all facing major cuts or total elimination, memos show.The investigation bureau, which conducts background checks on insurers and investigates financial crimes, is now expected to become somewhat self-supporting. It will have to shift from going after the most harmful law-breakers toward maximizing revenue, memos show. In order to generate funds, it will seek "alternative discipline" settlements that bring money into the department. Some employees fear the tradeoff will result in confidential settlements -- as opposed to true penalties that deter violators with negative publicity.If the investigations bureau does not generate $2.1 million, it will be slashed in half. Employees smell a Catch-22, saying the huge cut was recently made inevitable when a bill capped the fees that CDI can generate to just $2 million even. "This is one of the best examples we've had lately of downsizing for political reasons," said Trinda Collins of the California State Employees Association, which is currently fighting privatization. "[Quackenbush] got $2.4 million from the insurance industry to get elected, and now he's paying back his buddies in the insurance industry."Many believe the cuts could have been prevented."A lot of us don't really believe there's a need for a layoff at this time," said Dave Okumura, a shop steward for the CSEA who spoke in his capacity as bargaining agent. He said many CDI employees feel the cuts are more a reflection that Quackenbush is in industry's "hip pocket."The Prop. 103 Enforcement Project's David Link claims there have been three instances where Quackenbush could have prevented the cuts by fighting more vigorously -- or just fighting at all.For example: Assemblyman George Miller's AB 3137, was set to hand over $40 million worth of unclaimed Prop. 103 rebates to support consumer services earlier this year. But on the last day before it was voted on, it was amended so that $26 million went to the state's General Fund instead."It was an extraordinary accomplishment to convince them to give us even $14 million," said Wiebe, who maintained the department has been victimized by circumstances beyond its control.Link said Quackenbush has also not fought to recover $10 million that the Legislature raided from his department's funds years ago. When a judge struck down part of CDI's fee system, the commissioner announced a fee boost of 62 percent to make up the lost revenue. The fees had not been raised since 1991. But after the insurance industry objected, Quackenbush dropped the idea."They crumbled," said former deputy commissioner Nettie Hoge, who is now the executive director of the consumer group Toward Utility Rate Normalization. The cuts could clearly have been avoided, she said. Quackenbush and his "inner circle" were made well aware of the looming budget crisis in January 1995, thanks to briefing papers left by Garamendi.Also, the new commissioner's subordinates held three special meetings with him to underline the urgency of the issue."They knew from the beginning what was coming down the pike," Hoge said. "The handwriting was on the wall 18 months ago."Hoge said that "industry was getting uncomfortable" because the unit had begun energetically looking into some dubious industry practices.The consumer cuts are "the last straw," said Harvey Rosenfield, head of the Prop. 103 Enforcement Project, a consumer group. "I guess I just think we're headed toward a tremendous showdown."But it's not as if the commissioner is doing nothing in the face of these cuts. The Quackenbush administration is telling CDI employees not to protest the layoffs, or file lawsuits to block it, said CSEA's Okumura -- or it will merely double the number of people laid off. And an e-mail sent to employees in June gave them advice how to handle it."When communicating with anyone, the fact that the department will be going through a layoff should never be mentioned," it said. "Anyone doing so may be subject to disciplinary action."GUESS WHO'S COMING TO DINNER?Chuck Quackenbush was the featured speaker of a Republican fundraising dinner scheduled last month -- but critics claim he was also the main course.David Knowles, chair of the Assembly Insurance Committee, sent out an invitation to the "exclusive" $7,500-per-table event to members of the insurance industry.The Assembly Republicans have been good to the insurance industry, voting its way 99.7 percent of the time on 11 "critical" anti-consumer bills since 1993, according to a August study put out by consumer groups."As you know, for many years the insurance industry has generously participated in activities to raise money for Republican Assembly candidates in future elections," Knowles wrote gratefully -- before again extending his palm, requesting the industry attend so that "the type of legislative leadership that we exhibited this year is to be continued into 1997 and beyond."For consumer groups, it graphically illustrated that money corrupts public policy -- and the California Department of Insurance."Everyone knows that the insurance industry calls the shots in Sacramento," said Dianne de Kervor, attorney for the Prop. 103 Enforcement Project. "But rarely do the politicians put the arrangement in writing as they have in their invitation, which features an opportunity for insurance companies to pay to meet with Insurance Commissioner Quackenbush."