State’s Management of Failed Insurers Criticized

California’s Insurance Department suffers from “significant weaknesses” in the way its conservation and liquidation division manages failed insurance companies, state auditors said Monday.

The problems increase the potential for theft or misappropriation of funds and boost the chances that misdeeds or inadvertent errors could go undetected, the report by the Office of State Audits and Evaluations said.

In its report released Monday, the auditing agency said the division lacks proper controls over the real estate and other property owned by companies it manages, does not adequately pursue money owed the companies, has no annual budget nor written policies or procedures for many of its oversight duties, and lacks adequate controls over internal purchasing and cash disbursement.

Enrique G. Farias, chief of the audits and evaluations office, said the auditors found no evidence of wrongdoing.

The conservation and liquidation division handles more than 80 failed insurers with assets totaling about $750 million. However, the largest company under conservation--Executive Life Insurance Co., with assets of more than $7 billion--is managed separately.

Insurance Commissioner John Garamendi said in a statement Monday that the department has already addressed many of the problems spotlighted in the report and has begun working on the rest.

For example, Garamendi said, he has directed his staff to review all property sales by the division that have occurred since he took office to check for conflicts of interest or other irregularities.

The audit report said the division lacks proper procedures to account for sales of property or even to indicate how much property it controls. “As a result,” the report said, “theft or misappropriation of proceeds may occur without detection.”