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SACRAMENTO — Then-Insurance Commissioner Chuck Quackenbush abused his discretion and may have broken the law in his handling of several settlements with insurers, a state audit released Thursday says. 

Quackenbush reached dozens of settlements with insurance companies accused of wrongdoing rather than fining them, and may have broken the law by agreeing to keep some of the settlement terms confidential, the Bureau of State Audits report says. 

“These practices misled the public,” the auditors said. “The department prevented policyholders and consumers from obtaining critical informatnt Insurance Commissioner Harry Low said Thursday that the state will cover the attorney bills Quackenbush accumulated during civil investigations of his activities by the attorney general and Legislature. 

Low said Quackenbush would have to tap his own pocketbook to cover any legal fees if he is charged with a crime. 

“The department will not provide any present or former employee with a criminal defense,” Low said. 

So far, the Insurance Department has received just over $300,000 in bills from attorneys for Quackenbush and other department officials stemming from the civil probes, department spokesman Scott Edelen said. 

He said department officials couldn’t guess how much the ultimate total would be, but he said the civil investigations “seem to have mostly concluded.” 

The Legislature’s inquiries focused on his decision to let a half-dozen insurers accused of mishandling claims filed after the 1994 Northridge earthquake escape up to $3 billion in potential penalties by giving about $12 million to a fund he created. 

Quackenbush was accused of using about $6 million of that on ads featuring him and on other spending that benefited him politically, rather than on the earthquake research and consumer aid the fund was supposed to finance. 

The Bureau of State Audits said it looked at 96 agreements that Quackenbush reached with insurers between Jan. 1, 1996 and May 31, 2000 to settle alleged violations of the insurance code. 

Some of the early settlements included fines, cease-and-desist orders and “outreach payments” from insurers to nonprofit organizations. 

Starting in 1997, the department “began a trend of negotiating away its enforcement powers on particular cases,” the report said. 

It also increased the use of outreach payments and reduced the use of fines. 

In 1997, outreach payments amounted to 60 of the total of fines and outreach payments. By 1999, they made up 87 percent, the auditors said. 

A 1997 memo from two department attorneys indicates the increased use of outreach payments was a “deliberate attempt to circumvent the state’s fiscal controls,” the audit said. 

The attorneys concluded that state law requires legislative approval for the department to spend money derived from reimbursements and fines. 

To get around that requirement, the attorneys recommended that the settlements involve direct payments from the insurers to the nonprofits. 

The attorney general’s office issued an opinion in July that said the commissioner could include payments to a nonprofit organization as part of a settlement but the money has to be used in a way that’s related to the violation. 

Quackenbush, who moved to Hawaii, has said he is innocent of any wrongdoing. 

State lawmakers dropped their investigations after Quackenbush announced his resignation. State and federal prosecutors are conducting a criminal investigation into the matter. No charges have been filed. 

Other findings by state auditors include: 

— Quackenbush allowed insurers to draft some settlements. 

— Keeping some provisions of settlements secret prevented insurance regulators in other states from finding out about unfair practices or code violations committed by the companies. 

— Allowing insurers to make payments directly to nonprofits prevents the departments from determining if the correct amounts are paid. 

The report recommends several changes in department operations, including a requirement that companies that commit serious violations be fined and issued a cease-and-desist order. 

Auditors also said the department should take other steps to improve its enforcement actions, including setting up an integrated tracking system and promptly assigning and resolving open cases. 

Low said he would implement the recommendations. 

He also said that he would abide by an earlier decision by acting Commissioner Clark Kelso, who served between Quackenbush’s resignation and Gov. Gray Davis’ appointment of Low, not to pay Quackenbush’s expenses from the Fair Political Practices Commission’s inquiry into the timing of insurer contributions to Quackenbush’s campaign. 

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On the Net: 

Read the audit at http://www.bsa.ca.gov/bsa/index.html