South County administrator left district uninsured

July 10, 2012

John Wallace


South County sanitation district administrator John Wallace’s failure to maintain errors and omissions insurance during a 2010 sewage spill could leave him financially responsible for a proposed $1.4 million fine.

In late 2009, following reports of environmental abuses to local and state water authorities from South San Luis Obispo County Sanitation District employees, the insurance company that carried insurance for Wallace said it was canceling his coverage.

Wallace, however, failed to inform the district’s board of directors of the cancellation and did not acquire another insurance policy. As a result, district officials plan to increase charges and pass the cost of any fines to the rate payers.

But because Wallace failed in his fiduciary duty as administrator of the plant, he could be found financially and personally responsible for the proposed fine.

The district, which serves the residents of the Oceano Community Service District, Arroyo Grande and Grover Beach, is governed by a three person board consisting of one representative from each community.

Former board member Jim Hill said the district had been paying for Wallace’s errors and omissions insurance.

“I expected him to have maintained insurance,” Hill said. “There was no reason for him not to have it.”

In a complaint filed last month, prosecutors for the Regional Water Resources Control Board accuse Wallace of failing to properly report incidents to regulators.

Regulators also contend Wallace’s failure to properly maintain the plant resulted in 1,139,825 gallons of sewage spilling into the community of Oceano, local waterways, and the Pacific Ocean in December 2010.

Wallace argues that the plant spilled only 400,000 gallons of raw sewage and has vowed to aggressively defend his claim. Apart from possibly having to cover the proposed fines, the rate payers are also funding the district’s mounting legal expenses.

During the 2011/2012 fiscal year, the district paid $232,500 to attorney Michael Seitz. In its 2012/2013 proposed budget, the district estimates it will pay $295,000 to Seitz and a Sacramento based attorney firm Wallace hired to defend him and the district.

Sewage plant administrators at other county plants report the costs for legal services run substantially less than those paid out by the South County district.

For example, Paso Robles has similar sewage needs as those at the South County district. Paso’s costs for legal services are currently budgeted at $22,000 for the year,  said Chris Slater, Paso Robles city waste water division supervisor.

Regulators have set a tentative public hearing on the complaint for Sept. 6 at the water board office in San Luis Obispo. At the hearing, Wallace will have an opportunity to argue against the complaint.

During the 2010 spill, sewage flowed into approximately 40 homes in Oceano. Unaware of allegations of mismanagement, none of the residents filed suits against the district before the statute of limitations to make a claim against the public agency ran out. However, if the hearing results in charges of mismanagement, those homeowners would have an opportunity to seek restitution from Wallace.

Water board investigators are currently interviewing Oceano residents whose homes were damaged from the sewage spill. Office of Enforcement investigator James Fischer is asking homeowners to call him at 916-341-5548 or email him at

The Gimlet Eye

Government corruption is a problem of long standing and takes many forms:

US: ‘Thrive’ filmmaker Foster Gamble explains how governments at all levels operate on two sets of books: one for the public and one for insiders. [The public books deal with budgeted operations and show revenue from taxes and fines. The confidential books relate to a ‘hush-hush’ fund that derives revenue from investments. Most of these hidden funds are awash in money while the governments that own them are pretending to be broke.] YouTube 2012 Jul 6


I would have disagreed with you on this issue at some of the local level but not so now. True one must be inside in order to find this out.


Allow me to put on my insurance agent’s hat for a brief comment (again).

The policy coverage would have been issued to the Sanitation District in the form of a Certificate of Insurance. For those who have no knowledge of what this is, it is a form that provides a brief abridged version of policy coverages for Liability insurance, Workers Comp, Commercial Auto, and “OTHER” types, such as Errors & Omissions coverage. It is one simple sheet of paper that packs A LOT of coverage information with it. The form gives the person, the Certificate Holder, right to file claim due to covered loss against the policy coverages indicated on the form.

Municipalities asking for the Certificate of Insurance will also ask for an Additional Insured endorsement to go alot with that Certificate of Insurance. This means the company issuing the policy has to release a special endorsement attached to the policy, naming that Certificate Holder (in this case the Sanitation District) as Additionally Insured. That endorsement carries with it something called “an endeavor to” clause. Simply put, the company issuing the Additional Insured endorsement will endeavor to mail a 30 day notice of cancellation to the named Additional Insured on the endorsement. There is a statutory 10 day notice of cancellation for nonpayment of premium in California. So, what this boils down to is, the Sanitation District SHOULD have requested that Additional Insured endorsement and then received the NOC for nonpay, giving them 10 days to contact Wallace for a “hey, what’s up with your coverage” chat.

Why this did not happen is a great mystery…or just another typical bureaucratic day at the South SLO County Sanitation District!

(Please forgive my not being so brief.)


Thank you for the insurance explanation, just what is needed. I recall some comments about past problems at the sanitation district that were cited and never taken care of. How about that issue?


Victoria, the Sanitation District is very good at smoke screening, as stated below by SLOChuck. Even the densist smoke must clear eventually. It will happen in time. CCN will no doubt be a watchdog over this issue.


New to Cal Coast News and online comments, so bear with me. I appreciate the information about the problems with the sanitation district and Wallace. Food for thought and if there is more out there please do not hesitate to share. The information will be very helpful. The “Wallace Show” will be presented in full color at the Grover Beach City Council Meeting on Monday July 16th. Be sure to tune in to channel 20 or on the live feed on the city website. it will be eye opening.


Victoria, welcome to CCN and online comments. : )


If by “if there’s more to share” you mean “related to Wallace’s past wrongdoing” I suggest you search for his name on this site’s archives and you’ll find more than enough. It paints a grim picture IMO of this man’s integrity and the District’s responsibility to it’s constituents.

If what you meant was “related to this story” good luck! The district’s smoke screens are among the finest in the world.


Thanks for the tip have been doing my own research. I hope to bring all of this to good use.


So wait. If the District lost its insurance coverage in late 2009, who paid the wrongful termination payouts for those three employees they fired? Was it the ratepayers?


Three terminated employees? The former super is still getting paid his wage sitting at home on leave. Word is here’s a multi year contract with the temp super until they figure out whats gonna happen with lawsuit #3 from the former super. The others who knows, but you pose a good question. I don’t recall seeing anything in the Warrant register that says payoff for losing whistle blower law suit, LOL. Of course we never will with the gang of non transparency behind the wheel.


It’s entirely possible that the employment and Errors and Omissions insurance were covered by two different policies.

It’s interesting to note that shortly after accusations of the monkey business concerning Wallace’s billing came to light, the District’s long time bookkeeper was forced to retire and Wallace installed one of his flunkies in the spot.

It looks like they’ve had some success with forming a citizens group in Paso Robles. Would anybody be interested in forming a similar group here in the Five Cities. This fiasco really is going to end up hitting everybody in the pocketbook and I’m afraid if we don’t DEMAND our city leaders to put an end to the madness we’re all going to end up (literally) paying for it.

Who’s interested?


EPLI (Employers Liability Insurance) and E&O (Errors & Omissions) are two different types of coverage and do require separate policies.

Lone, I am the Chair of the CPRN2012 group that formed in Paso. I do know of people interested in doing the same in the Five Cities area. Please feel free to email me at for more info.


It was very interesting to listen to the June 27th OCSD Board Meeting. John Wallace was pressured by a Board Member into revealing that he’s been calling all the shots at the Sanitation District and the District Board Members never even took a vote to allow him to push the ACL fine into litigation.

I guess since it’s become possible that he might be financially responsible for the fine (after letting the

District’s Errors and Omissions insurance lapse) it makes sense that he’s willing to spend hundreds of thousands of taxpayer dollars to try to defend his negligence and incompetence.

I find it even more interesting that during the “negotiations” with Water Quality, Wallace turned down a total fine settlement offer of $300,000. It makes even more sense when you realize there was no E&O insurance in place and the only escape he has left is to try to fight the fine in court. This will result in in increased sewer rates to all the users of the District. It might take a year or two “trickle down”, but trust me….you’ll soon be notified that the District doesn’t have enough money to fund some “important project” and they’ll apply for a loan. A loan that the citizens of Grover, AG, and Oceano will be on the hook for 30 years.

The only way this will change is if enough people show up at the OCSD, AG, and Grover Board meetings and demand and instant change in represtentation on the San. District’s Board (Nicolls and Ferrara must go), and immediatlely severe any and all ties with the Wallace Group. If Wallace was found negligent, then he should be the one paying the fine, not the ratepayers.


Important projects? Your too late also as the same Board pack indicates the District has no money to pay for the upcoming projects Wallace wants to engineer and manage. Wallace has declared that a loan is necessary to remain solvent in 2012/2013 fiscal year


Unless I am missing something, this reevaluation of Wallace’s does not show up in the OCSD board meeting minutes. If it is there, can someone tell me where to find it. If it’s not, I’d be curious to know why the record of that meeting does not reflect such an issue coming to light.


One thing about which all should be aware is this:

If Mike Seitz follows the practices of his brother (and law partner) Jon Seitz, Mike Seitz will bill the SSLOCSD for the “specialist” attorney from Sacramento, Seitz will receive one check (which includes his own work for the SSLOCSD, as well as the specialist’s work), and Seitz will then pay the specialist attorney.

In this way, it is more difficult for the public to figure out how much is being paid to the specialist. It also allows for padding of the SSLOCSD specialist charges


Too late Mary as their “specialist” has already received a check for $10,137.65 which is shown on the 6-27-12 sslocsd warrant register under Downey Brand LLP for Legal services. Google Downey Brand LLP and follow the list of Attorneys where you’ll find Melissa Thorme as one of their staff.


Everybody is familiar with the statement, “The more you find out, the less you want to know”. Well… the City Councils of Grover Beach and Arroyo Grande have been observing this debacle from the side-lines wayyyy tooo long! There are already many tough, known questions that need to be be answered. Arroyo Grande and Grover Beach representatives have an obligation to rate-payers to find out other risks that may lie ahead. Surfrider has called this process an “Independent investigation into potential malfeasance”, while others might call it an “Independent study”. Here, an investment of thousands could save the district millions. Either way, nothing gets done without rate-payers coming forward and spelling out what they expect from their representatives.


Snooky, if you go to the SSLOCSD meetings you will see that the current three-member board, as did the prior three-member boards, are in place to protect John Wallace and themselves from litigation. They also go out of their way to support the exorbitant charges by SSLOCSD legal counsel, Mike Seitz, and the illegal no-competitive-bid practice of John Wallace, who just funnels any and all projects to his company, The Wallace Group.


From what I’ve read it seems that Johnny Wallace is another Kelly Gearhart type personality!

Both are narcissistic, self-conceited, egotistical, power hungry type personalities.

They believe themselves to be invulnerable and have a type of vanity or smugness that makes them feel they can get away with any immoral behavior.


Jon Wallace is old-school corruption. He very seldom over-reaches beyond the SLO County crony support system he has diligently built over decades. Therefore, he has been able to get away with it for a very long time.

Gearhart is more arrogant-nouveau-riche corruption. He shows (IMO) a true narcissist’s (nearly sociopathic towards the end of his crime run) sense of frat-boy/country-club, greedy entitlement. This is why he was unable to become a true old-school, corrupt power-broker, like Wallace.

Gearhart just didn’t have the patience or old-school savvy to build his empire of corruption in such a way that he could get away with it for decades.

P.S. When you hear of emprisoned sociopaths, just remember that they are the stupid ones who got caught and didn’t have enough family influence and money to avoid a conviction. The smart ones, especially the ones who have money,….those are the very dangerous onesand they are still out on the street.


I hear folks say not possible, he’s to nice of a guy with regards to Wallace’s current allegations. Don’t forget Gearheart won citizen of the year once. A wolf in sheep’s clothing, that’s all.


“Former board member Jim Hill said the district had been paying for Wallace’s errors and omissions insurance.”

If the District specifically allocated funds for E&O insurance and Wallace did not use the money to purchase insurance, what happened to those funds? Did Wallace keep the funds? Were the funds shown on the district’s warrants as being used for insurance?


The Districts warrants are included in every board pack and available for viewing on the website. Every warrant register is carefully reviewed, or are they? by Ferrara,Nicolls and whomever is the Oceano rep every meeting then signed off by Wallace’s bosses, the members of the board.

You pose a legitimate concern in that where did the money go. After 25 years of the the same charges insurance wise and suddenly its gone and nobody noticed? So we should ask if excluding such a important element as insurance is so easy for Wallace to hide, then it pretty safe to say the allegations of the two employees that were fried by Wallace, that he was over billing or needlessly charging for work, are most likely true.

As the world turns

Great questions and thought provoking. Thank you.