Skimming of Insurance Firm Funds Alleged

Key executives of firms affiliated with Coastal Insurance Co. told a legislative hearing Friday that company officials and agents skimmed millions of dollars, spinning Coastal earlier this year into a bankruptcy that will result in a $60-million surcharge on all California auto insurance policies.

Coastal became well known to television viewers for the advertising slogan, “It’s no problem,” selling about 200,000 policies by appealing to drivers with poor records.

Lurid Testimony

In nearly two hours of frequently lurid testimony, the three executives made these principal allegations:

--In an effort to build up cash flow and thus add to agents’ and executives’ commissions and bonuses, many extremely bad drivers were allowed to misstate their accident records and the values of their cars to permit sale of policies that were bound to lead to heavy claims.

--Some $40,000 cars were recorded on insurance forms as $20,000 cars under different model names, and some drivers with three accidents were said to have had no accidents. This allowed affordable premiums, but saddled Coastal with undesirable policyholders.

--Policies were paid for on a month-by-month basis, yet Coastal executives accounted for them as if they were paid up for a full year. This grossly overvalued the company in periodic financial reports to a gullible state Department of Insurance. Meanwhile, the company paid its agents a full year’s commission on new policies, many of which were canceled after a month or two. Some of these canceled policies were renewed a month later, and again falsely projected as if they were annual sales, thus “pyramiding” the fraudulent reports.

--Coastal spent $17.5 million to purchase a sales affiliate, FGS, even though FGS was badly in debt and its president had a restricted insurance license. It was the FGS agents who sold thousands of risky policies. Both the inordinately high commissions paid to FGS agents and huge numbers of claims on these policies helped drive Coastal into bankruptcy.

--As Coastal and its holding company, Advent, reeled into financial problems, their chief executive officer, Harry Miller, insisted on giving $5 million in contributions out of company funds to the campaign for an insurance initiative, Proposition 101, on the 1988 ballot. The initiative received only 13.3% of the total vote.

--While Coastal and its sales affiliates, FGS and Public Insurance Service, had huge numbers of sales agents, it had very few people to process claims. There were frequent long claims backlogs, and thousands of telephone calls that went unanswered. On some occasions, claims calls were even switched by operators to 900 “pay-for-porn” lines to further exasperate the people calling for help.

--A number of the executives and financial officers of Coastal and its affiliates were unqualified to be in the insurance business and intentionally followed practices that led to the debacle. Yet most of these people remain in the insurance business, sometimes changing the names of their businesses.

Those who testified at the hearing of the Assembly Committee on Finance and Insurance were Don McMillan, former sales manager of FGS; Stephanie Rager, former customer service manager at FGS, and Bob Pearlman, former comptroller of Advent Co.

$60-Million Surcharge

According to subsequent testimony by John W. Gates, executive director of the California Insurance Guarantee Assn., the agency charged with paying off claims against bankrupt companies, the surcharge resulting from Coastal’s bankruptcy will be more than $60 million. The policyholders of other insurance companies are required by law to pay any claims against companies that go bankrupt. The guarantee association is empowered to raise that money by levying surcharges.

After four hours of hearing witnesses, including two leading Coastal and Advent executives who did not challenge the testimony but claimed they were not personally responsible for what had happened, Assemblyman Patrick Johnston (D-Stockton), chairman of the committee, expressed shock.

He said he feared that unless state insurance regulators exert much closer scrutiny over such practices in the future, there will be more insurance company bankruptcies.

After Steve Avgeris, the top executive under Miller in both Coastal and Advent, had testified that he was only an “office boy” paid $400,000 a year but not responsible for any of the companies’ shortcomings, Johnston expressed consternation that Avgeris is already involved in a new company selling auto insurance to substandard drivers.

‘You’re Moving On’

“See, you’re moving on, and California policyholders may be stuck with new bills in the future,” the assemblyman said. “They’re the ones that will be hurt.”

Avgeris said that actually all he is doing with the new company, Summit Insurance Services, is directing its advertising. “Otherwise, now I can only go back to school or run a hamburger stand,” the 51-year-old executive said.

However, this did not impress Johnston, who remarked that the lesson of Coastal was that it was good only in marketing its policies, not in serving claims or performing any of the other functions of an insurance company. He noted that the new company Avgeris now works for does not yet have a state license but is doing business under license of an agent it has hired. The committee had attempted to subpoena Miller to appear, but could not find him. Johnston said Miller employees had told a process server that he was in Alaska at an undisclosed location and that he has not been in California for more than a month.

Another leading executive subpoenaed to appear, Sid Field of FGS, an executive who received $17.5 million in payments from Miller, sent a lawyer to the hearing to say he had not yet been able to consult with his principal attorney and would appear at a second committee hearing, Aug. 29.

However, Field called The Times after the hearing to say, “I was not responsible, not in charge” of FGS at the time, after its acquisition by Coastal, when its agents were allegedly selling risky policies in order to gain high commissions. “The only thing I was in charge of was advertising,” he said. “I had no ability to make decisions.”

The chairman of the board of Advent and Coastal, Gerald Milton, who did testify, also disclaimed responsibility for what had happened. He said that Miller had often done things without his permission. For instance, Milton said, he had told Miller that the terms for buying FGS were “a bad deal,” but that Miller had bought it anyway on the disadvantageous terms.