The state Insurance Department sought a fresh start under new leadership on July 10, but the legal fallout resulting from former insurance Commissioner Chuck Quackenbush's departure intensified on two fronts.

Quackenbush, a Republican, resigned on June 28 as commissioner as lawmakers investigated his creation and use of funds financed by his department's settlements with insurance companies. A court-appointed department watchdog urged a judge to throw out Northridge earthquake settlements at the heart of the scandal, and federal authorities negotiated with state officials over what role the U.S. government should play in the case.

Superior Court Judge John Dearman took no action, agreeing with the department that acting Commissioner Clark Kelso should be given time to study the agency's problems and take action. Dearman scheduled another hearing for August.

Quackenbush, whose resignation took effect on July 10, has denied any wrongdoing. The settlements he brokered allowed insurance companies facing complaints about their claims practices to give millions of dollars to funds the department created rather than face the potential of billions in fines.

Special Master Ray Bourhis, appointed in 1991 to oversee the department's claims practices, argued the agreements were legally invalid because Quackenbush stood to gain from them.

Quackenbush used the money "for his own personal, political agenda and interests," Bourhis wrote in a recommendation to Dearman. He noted that one fund paid for TV commercials featuring Quackenbush.

"I don't see how we can have a situation in California where the law is mocked like this," Bourhis says. "It's corruption at its worst."

Bourhis is asking Dearman to void pacts between the department and Allstate Insurance Co. and Allstate Indemnity Co., Farmer's Home Mutual Insurance and Western Home Insurance Co., State Farm Fire and Casualty Co. and State Farm General Insurance Co., and 20th Century Insurance Co. and 21st Century Casualty Co.

Bourhis also seeks a court order that would force the Insurance Department to freeze the money in the California Research and Assistance Fund, created by Quackenbush from the Northridge settlements, until the department finishes an investigation of quake-related claims practices, presents it to the judge, and takes action in response to the report.

The department would have to recommend how the $6 million in the fund should be spent. It would have 30 days to complete the report. Acting Commissioner Kelso declined to comment on what should happen to the settlements or the remaining money, saying he needs to "get a better sense" of the agreements.