Here's the connection: Northridge was the worst quake ever to strike the insurance industry. Insurers paid some $12.5 billion to victims, and some firms were almost bankrupted. In the confusion after the quake, lots of people got miffed as their insurance claims languished or were denied. People have long memories for injuries like this. When the dust settled, thousands of unresolved cases made it to the California Department of Insurance.
Is that excessive? Hard to tell. Insuring against quake damage is unusually risky. The odds are poorly known, not like the mortality tables that life insurers are used to. And big quakes are rare—decades or centuries apart—whereas insurers must manage their books on a year-to-year basis. The industry is still feeling its way in this field.
The complaints festered for five years until the insurance commissioner, Chuck Quackenbush, settled with the companies—he would let the cases lapse and they would make payments to certain foundations that would fund education and research on earthquake safety.
The insurance companies' penalties could have totaled more than $3 billion, but their payments to the foundations were a few million. Was that lopsided? Hard to tell: the state's evidence was confidential information. And Quackenbush worked hard and his reputation was good. So he got slack.
The foundations were set up in 1999, and contracts were let with the consultants who proposed the foundations. Soon it became clear that a lot of money was going into sweetheart contracts and advertisements featuring Quackenbush's handsome face. While some money went into to benefit "underserved communities," some of the groups served were more devoted to political influence than earthquake preparedness.
Legislators began to ask questions. Didn't these foundations resemble slush funds? In April 2000 Quackenbush admitted, "I believe that the earthquake research projects should have been prioritized. They obviously were not. For that, I take responsibility." (He had just explained that the foundations were set up to be out of his control.) And hadn't he let the insurers off easy, especially since tobacco companies, asbestos firms, and insurers of Holocaust victims had been made to pay dearly? He rebutted that "insurance companies, as they will be quick to tell those who inquire, have been held to very high standards and they have been penalized severely when they do not meet those standards." (What else would they say?)
Then troubling details, like odd signatures on large checks, began to emerge. Lawmakers posted the agency's confidential case studies on their official Web sites. Others were quiet in Quackenbush's defense. A high agency officer who resigned in April 2000 "pleaded the Fifth," remaining silent so as not to incriminate himself, when he stood before an Assembly committee. It was high summer drama in the capital, and Quackenbush announced his resignation on June 28th.
Big quakes test political systems as well as engineered structures; it's easy to imagine the pressures on the commissioner. After a quake people—and institutions—just want to cut their losses and get back on track. They want to rebuild their homes in perilous sites, for instance. Their resolve to do better—in Quackenbush's case, his resolve to seek justice for wronged citizens—erodes with time. The commissioner deserved his downfall, but what he did was all too human.
The Earthquake Engineering Research Institute has allowed me to let you download its primer on insuring against earthquakes. That group could have used Quackenbush's slush money.
