The Unwary Getting Stung on Insurance, Officials Say : Despite Payments, Some ‘Policyholders’ Not Covered

Patrick McMurray, owner of a small San Fernando steel manufacturing business, said he learned that his company’s trucks were not insured after he purchased an additional vehicle and tried to contact his Burbank insurance brokerage about adding it to his policy.

Unable to reach his agent at Welmar Insurance Services, but eager to get the new truck covered as soon as possible, McMurray said he telephoned his insurance company, Century National in North Hollywood.

Although he told the company that he had given Welmar money for premiums, a representative said his policy had been canceled for non-payment. McMurray Manufacturing’s three trucks were not insured.

McMurray contacted Los Angeles police, who arrested Welmar broker Clark Wells. Investigators said they subsequently found, however, that Gary Martin, president of Welmar, had paid business expenses, such as salaries and phone bills, with money given to the agency by McMurray Manufacturing and two other clients for insurance premiums.

Trial Begins Monday

Martin, 53, who has pleaded not guilty to three counts of grand theft embezzlement, is scheduled to go to trial in San Fernando Superior Court on Monday. But state insurance officials, who have the power to revoke his license, did not know that he was facing criminal charges until contacted by a Times reporter, reflecting the ease with which allegedly unscrupulous brokers can escape scrutiny.

California insurance officials said the licenses of about 50 insurance brokers and agents in the state were revoked or restricted in 1987 and 1988 after investigations revealed that they had spent money from insurance premium trust funds on personal items or other business costs, leaving clients without valid insurance policies.

But state officials said the number of licenses revoked only hints at the magnitude of the problem since dozens of other cases go undetected or unreported. And even if a broker or agent is implicated by a disgruntled client or insurance company, state insurance officials say they do not have the staff to investigate every complaint against insurance salespeople.

Audits are usually initiated only if there are multiple accusations against a salesperson or if huge sums of money are involved, said Jim Harrington, supervising investigator for the state Department of Insurance. But many policyholders never realize that they have been victimized, he said.

Calculated Risk

“After a year, if there haven’t been any accidents or claims, no one would ever find out,” said Steve J. Ipsen, the Los Angeles County deputy district attorney prosecuting Martin. “These agents take a calculated risk.”

Barry Nelson, a state insurance investigator, believes that grievances are increasing against brokers who failed to remit premiums for policies. He noted that the state has 685 investigations of such complaints under way. A state newsletter sent to all insurance brokers and agents this month warns them to keep detailed financial records of trust funds in case of an audit.

Although many of these accusations may be unfounded or stem from honest bookkeeping errors, others will reveal misuse of funds, Nelson said.

Harrington said officials are auditing eight Southern California brokers suspected of misappropriating money from insurance premium trust funds. One of the cases involves $800,000 in misappropriated premium funds, he said.

If state investigators uncover evidence of misconduct in any of these cases, the brokers or agents will be brought before a panel of administrative law judges, who will rule on whether disciplinary action, such as license revocation, is warranted, Harrington said. If there is sufficient evidence of criminal activity, it will be referred to a district attorney’s office, he said.

“I wouldn’t term the problem pervasive, in that it hasn’t gone through the entire fabric of the industry, but it is something that happens frequently enough,” he said.

A San Gabriel Valley broker, David Allen King, is facing an administrative hearing on charges that he embezzled more than $50,000 that clients paid in life and auto insurance premiums, said Risa Salat-Koln, an attorney for the Department of Insurance.

King, who could not be reached for comment, sometimes made initial payments on policies so that his clients would receive proof of coverage from the insurer, says an accusation by the state insurance commissioner. But he failed to make subsequent payments and policies were canceled, the state says.

Ipsen said he thinks that the Martin case--in which all three victims continued to believe that they had insurance, even after they received cancellation notices--demonstrates the ease with which a broker can deceive clients.

The prosecutor said he has documents to prove that between May and October, 1986, Martin transferred $24,000 from a trust fund, reserved for the purchase of insurance policies, into his operations account in an effort to save his financially ailing business. By law, money given to a broker to buy insurance policies must be kept in a trust fund until it is sent to the insurance companies. Martin was arrested in June, 1987, and faces a maximum sentence of four years in prison.

Made Call

McMurray said in an interview that after his manufacturing business received cancellation notices from Century National, he called Welmar and was told that the notices were paper-work errors because premiums were late in being sent to the insurance company.

Like most people, McMurray relied on his broker and did not contact his insurance company to check further, Ipsen said.

“They told the customer what the customer wanted to hear--that everything was fine, that there was no problem,” Ipsen said of Welmar.

Few cases in which insurance salespeople have lost licenses are referred to district attorneys’ offices since state investigators usually do not have enough evidence to support criminal charges, Harrington said.

Lack of Complaints

Cases such as Martin’s sometimes reach prosecutors through local law enforcement officials who have received complaints from consumers. But Deputy Dist. Atty. Pam J. Gelman of the Major Fraud Division said many victims never complain to officials because they get their money back.

“Insurance is such an amorphous area,” Gelman said. “Most people don’t understand it.”

Insurance companies frequently pay claims if customers can prove that they gave money for premiums to a broker or agent in good faith, Harrington said.

For example, Century National paid a claim to one of Martin’s clients even though the policy had been canceled for non-payment, said Wendell Langman, manager of the insurance company’s commercial auto insurance division.

But insurance companies eventually pass on the costs of such losses to consumers by charging higher prices for insurance policies, Langman said.

Guilty Plea

Langman is among the witnesses scheduled to testify at Martin’s trial, as are McMurray and Wells, Martin’s former partner. Wells, an insurance salesman, pleaded guilty in October, 1986, to charges of grand theft by embezzlement and insurance code violations. Under a plea agreement with prosecutors, Wells was sentenced to 30 months probation.

Because Welmar Insurance was in dire financial straits in 1986, Wells said in an interview, he gave Martin, his partner of 3 1/2 years, $20,000 to try to keep their joint venture solvent. But he said Martin told him that more money was needed. Wells said he will testify that he knew that Martin was raiding the trust fund containing policyholders’ premiums but did nothing because he did not want the business to fail.

After McMurray went to police, Wells, who sold the policy, was the initial suspect, but police determined that Martin masterminded the scheme, Ipsen said.

Martin, however, has a different point of view.

“Whatever he did, he did,” Martin said of Wells. “I feel I am not guilty of the charges. As far as I know, everybody got policies.”