This article is from the California Driving (and Surviving) FAQ, by "George J Wu" email@example.com with numerous contributions by others.
from firstname.lastname@example.org (Otha Stubblefield III) on Oct 24 1992:
Today's Los Angeles Times (10/23/92) carries an article on unlicensed
insurers in its business section on page D1. This article does not apply
solely to car insurance. Summary:
The unlicensed insurance business is booming in California, with sales
increasing by a factor of 30 since 1988. However, complaints have also
increased by a factor of 100. Many consumers are finding that they have
been paying claims to nothing more than a PO Box operation, and it is almost
impossible to have a claim processed, especially if the company has
surreptitiously folded. Insurers using state-licensed agencies are
protected from insolvency by a fund. Also, the state has no power over
unlicensed companies, that are often found to be based outside of the U.S.
State law prohibits unlicensed insurers from selling in the state, unless
the policyholder cannot find similar coverage from a licensed carrier. Only
certain brokers (surplus-line carriers) are authorized by the state to sell
out-of-state policies, and that those brokers should be checking these
companies solvency. The State does acknowledge, though, that some people
are not checking due to negligence or that they just don't care. You can
find out if a certain carrier is ok by calling the Ca Insurance Consumer
line at 800-927-HELP.
The article does not mention the penalties for using one of these companies,
namely suspension of your license if you are found to be using one for the
financial responsibility requirement (liability insurance). The state and
DMV will consider you uninsured for the period that you were using them.
They also do not mention that a companies' status (licensed to unlicensed)
may change without notification to the consumer.