Audit finds enforcement, conflict-of-interest and grant-monitoring weaknesses at DiFi; committee recommends continuation with revisions

The Arizona Senate Finance Committee heard the auditor general present a performance audit and sunset review of the Arizona Department of Insurance and Financial Institutions (DiFi) that identified inconsistent enforcement practices, shortcomings in conflict-of-interest disclosures, and gaps in monitoring Automobile Theft Authority (ATA) grant spending. Following the presentations and questions, the committee recommended continuing DiFi with revisions.

Leon Van Pelt of the Arizona Auditor General’s Office summarized the audit’s key findings and recommendations. The office reviewed enforcement actions, conflict-of-interest processes, ATA grant oversight, and complaint timeliness. Van Pelt said, "the department did not comply with some State conflict of interest requirements," and described instances in which the department did not document how it considered licensees’ prior complaints when determining enforcement actions.

Van Pelt told the committee his office reviewed 15 enforcement cases from October 2022 to April 2024 and found inconsistent consideration of prior disciplinary history in deciding enforcement levels. The auditor general’s report also found that DiFi’s conflict-of-interest disclosure form did not include required decision-making interests, that board members did not always disclose substantial interests in meeting minutes or disclosure files, and that the department’s special disclosure file was incomplete. Van Pelt said the audit did not identify undisclosed conflicts in the review but warned the gaps increase the risk of undisclosed influences and erode public trust.

The review also found DiFi did not sufficiently monitor ATA fund recipients to ensure monies were used for authorized purposes, noting the department could not demonstrate via documentation that monies appropriated to the Arizona Department of Public Safety’s vehicle-theft task force were spent to reimburse 75% of employee salaries and related expenses as required; the audit cited $4,500,000 in fiscal year 2023 in this context. Van Pelt said the office did not find funds were used for unauthorized purposes, but that files lacked supporting documentation to demonstrate compliance with appropriation requirements.

Van Pelt also reported that DiFi set a goal to investigate insurance complaints within 80 days but did not meet that goal for six of the sample complaints the auditors reviewed. The auditor general recommended that DiFi develop uniform written enforcement guidance for all license types, revise conflict-of-interest policies and disclosure forms to conform to state requirements, document grant reviews and supervisory checks, and strengthen complaint-timeliness monitoring. The Auditor General’s Office plans a follow-up on implementation in April 2025.

DiFi Director Barbara Richardson responded with steps the department has taken and plans to take. Richardson said the department inadvertently signaled it would not implement one recommendation but corrected that clerical error and now "DiFi fully intends to implement all of the other general recommendations." She told the committee DiFi has implemented 24 audit recommendations and has eight still in progress, with most expected to be completed by March.

Richardson outlined specific changes: revised enforcement policies adopted in December require staff to document mitigation and aggravating factors and apply a four-tier violation scoring metric to reach graduated administrative actions; updated conflict-of-interest policies and forms now align with statutory disclosure requirements and will be stored in a special file; the ATA coordinated with the Department of Public Safety (DPS) to verify that DPS reimbursed outside-agency detectives at 75% of salary and employee-related expenses for fiscal year 2023; licensing operations and fee-waiver verifications were tightened; product-filing procedures for long-term care were revised to reduce a backlog; and IT security policy updates are underway (DiFi reported work on 18 of 45 policies with a plan to complete the rest).

Senator David Leach (by name during questions) asked whether insurers were stopping sales in Arizona because of wildfire and other premium pressures. Richardson replied, "No company has yet said that they weren't going to write in Arizona, which is huge," and described DiFi’s resiliency and mitigation council and public-facing consumer resources to address rising homeowners insurance costs.

A committee member moved that the committee recommend continuing the Department of Insurance and Financial Institutions with revisions. The motion passed by voice vote with no roll call recorded. The Auditor General’s Office will follow up on the department’s implementation of recommendations in April 2025.