Northridge Redux

• Barbara Bowers
• September 2001
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by Barbara Bowers

More than seven years after the Northridge earthquake rocked the densely populated San Fernando Valley northwest of Los Angeles, its aftershocks are still rumbling through courtrooms and claims offices.

The 6.7-magnitude quake struck on Jan. 17, 1994, killing 62 people, injuring more than 9,000 and leaving 20,000 homeless. More than 200,000 homes, apartments and buildings were either destroyed, damaged or deemed uninhabitable. Early estimates put the insured losses at $800 million, but the actual tally has soared beyond that over the years. The Institute for Business and Home Safety, which monitors amounts of claims paid by insurers, reports that insured losses from Northridge have reached a staggering $15.3 billion, making it the second-worst U.S. catastrophe, after 1992's Hurricane Andrew, which caused $15.5 billion in insured losses.

As sizable as the Northridge losses are, some predict they could grow significantly larger now that California has effectively reopened the book on these claims. Under a new state law that took effect Jan. 1, 2000--legislation that many see as political fallout from the Northridge-related scandal involving former Insurance Commissioner Chuck Quackenbush--the statute of limitations has been extended to the end of this year on insurance claims stemming from the temblor. This could result in policyholders suing insurers if they feel their claims were handled unfairly or they missed the initial one-year filing deadline.

"A whole new flood of lawsuits has been filed," said Brian S. Kabateck, a partner in the law firm Quisenberry & Kabateck and one of the trial attorneys instrumental in writing the new law. He alone is involved in at least a dozen of these lawsuits, including a proposed class action against 21st Century Insurance Co., formerly 20th Century Insurance Co.

And if a recent appellate ruling stands, he noted, an estimated 10,000 policyholders could take advantage of the law and initiate individual lawsuits or join class actions against insurers. "In my own experience, I've already had 300 to 400 phone calls" from interested property owners, he said. Over the next few years, this litigation could result in hundreds of millions of dollars in additional claims costs, Kabateck said.

"We have certainly seen lawsuits just because of the legislation being passed," agreed Joyce Kraeger, staff attorney for the Alliance of American Insurers, a national trade association that represents more than 325 property/casualty insurers.

No Class Actions Yet

But E. Jerry Davies, director of communications for the Personal Insurance Federation of California, pointed out that none of the largest earthquake insurers has seen a class action certified against it as a result of the new legislation. "We're looking at a few hundred single lawsuits, but not class actions," he said, adding that several were in the courts before the law was enacted. The federation represents five insurers--State Farm, Farmers, Safeco, Progressive and 21st Century--which collectively write about half the earthquake insurance in California. Progressive's earthquake coverage is for personal automobile damage through a liability clause in its auto policies.

As of January 2001, the insurance industry in California had received more than 600,000 claims resulting from the Northridge quake. Of that total, one-tenth of 1% were unsettled, divided among about 200 companies. "When you're looking at one-tenth of 1%, somehow you've got to figure out that we're only talking about a few hundred left, and the majority of those are in litigation," Davies said. These cases involve allegations of fraud or low-balling of damage estimates by insurers or claims that plaintiffs were not notified of the one-year statute of limitations, Davies said.

Davies maintains that insurers were dutiful in sending out notices to policyholders about the claim-filing deadline. "Of the 600,000, some walked away from their property, filed a claim, but have never rebuilt, and the claim remains open," he said. "It's not that we're denying the claim; it's just that there's disagreement over the amount and the actual damage."

Consumer advocates have defended the new law, saying quake victims have waited years for a fair hearing of their insurance claims. Years after the earthquake, some policyholders found damage to their property that was ignored or missed by the original adjuster, for which insurers have refused to pay, advocates say.

For his part, Davies noted how more than 5,000 claims adjusters from throughout the United States descended on the Northridge area soon after the quake. "Were there some mistakes? Of course," he said. But, he argued, if legislators' and lawyers' contentions that tens of thousands of people have valid, but unsatisfied claims, why isn't the industry seeing brand-new lawsuits now "left and right?" he asked. "Because there aren't that many people left who have legitimate claims," he countered.

Too Soon to Tell

As of yet, industry organizations watching California for further developments say it's too soon to tell what the outcome will be. "There are no current indications as to what impact reopened claims may have on insurers, and there are no clear indications at this time as to the number of claims that may be reopened," said Dave Dasgupta, a spokesman for Insurance Services Office Inc., a provider of information about property liability and risk. "We are monitoring this, but don't have anything definitive yet to share."

Meanwhile, the new law has left the insurance industry frustrated at the very least and, sometimes, fighting mad. Through the legislation, lawmakers have "told the insurance industry, in effect, that every contract written in California on earthquake insurance is no longer valid," Davies said.

In lobbying against the legislation--SB 1899--the insurance federation felt it was the closest thing to a "Salem Witch Hunt" that they'd ever seen in California, said President Dan Dunmoyer. Even the Legislature's own report, which was a result of hours of public hearings, stated that there was no real proof that they could detect of the insurance industry conducting a concerted effort to make mistakes in claims handling, he said.

"The actual passage of SB 1899 followed the one year of hype behind the Quackenbush debacle, and it was widely reported during the debates over Quackenbush that the insurance industry somehow got away with something," Dunmoyer said. He noted that the media concentrated on "the unfounded claims of so-called consumer groups who kept repeating that the insurance industry got away with not paying claims, even though it had paid more than $15.3 billion in claims," a figure that was not widely reported, he said.

First Appeal

In February, the federation joined the AIA, the Association of California Insurance Companies, the National Association of Independent Insurers and Century National Insurance Co. in asking a California appeals court to throw out the first lawsuit, Basich vs. Allstate Insurance Co., filed under the new state law. They contend that SB 1899 violates due process by destroying vested contract rights and that it isn't applicable in this case or any other case in which judgment was entered before Jan. 1, 2001.

The AIA said the case arose from a claim of loss submitted to Allstate by the owner of a three-unit residential rental property following the Northridge quake. Shortly after the lawsuit was filed in March 1997, Allstate paid the full policy limits for damage to the property. But the owner now has continued to pursue his claims for bad faith, based on Allstate's alleged delay in investigating the claims and paying the policy limits.

The case basically amounts to a dispute over the one-year statute of limitations for filing an earthquake claim, Dunmoyer said. While the court and appeals court "more or less" granted the judgment against the defendant insurance company, they didn't rule on the law itself. The case is on appeal to the state Supreme Court to specifically look at SB 1899 along with the judgment, Dunmoyer said.

Bob Daniels, an Allstate spokesman for the California region, said the company was disappointed that Gov. Gray Davies signed SB 1899 into law, but nevertheless, the insurer is fully complying with it. "When we receive claims, we investigate them in accord with SB 1899, as well as the California Claims Practices Act and relevant regulations, and in accord with the relevant insurance policy," he said.

In the days and months following the Northridge quake, Allstate agents and employees "did a truly outstanding job of meeting the needs of our customers, settling more than 46,000 earthquake claims with an incredible level of empathy, accuracy and speed," he said. The company so far has paid out more than $1.7 billion in claims related to the earthquake, Daniels said.

Last year, insurers and trade groups also tried to get the state Supreme Court to strike down the new law, but the court refused to consider the unusual motion, which didn't involve a specific dispute between a policyholder and an insurance company.

"Our main concern is the law violates the contract clause of the U.S. and state constitution," Kraeger said. "Every insurance policy says in a certain amount of time, a claim needs to be brought. In this case, it was a year. Now they've revived the one-year statute of limitations seven years later. It's a direct violation of contract law for no justifiable reason."

Since 1949, California state law has required insurers to include a one-year statute of limitations for filing claims, Kraeger said, arguing that reopening old claims after seven years "invites potential fraud and raises issues of proof."

Dunmoyer said the federation member companies "will explore all appropriate legal means to protect insurance contracts" but added that it's premature to say what they will have to do to protect themselves. "The bottom line is, if the insurance industry contracts can be rewritten by the Legislature, it's impossible for insurers to price and service their customers," he said.

Verdicts and Rulings

While the industry continues to battle the new law, a few related verdicts and rulings are beginning to surface. Last June, for example, a Los Angeles jury awarded about $7 million in repair costs and bad-faith damages to a Culver City, Calif., condominium homeowners association that had sued Scottsdale Insurance Co., a subsidiary of Nationwide. The group alleged that Scottsdale deliberately misled them by first advising them that they had suffered no earthquake damage and then by low-balling and underestimating the damage once the homeowners renewed their claim under the new law. The jury also found Scottsdale guilty of fraud against the plaintiffs, the Tara Hill Homeowners Association. Kabateck, the condo association's attorney, said this was the first jury verdict for earthquake insurance benefits under SB 1899.

Kabateck said the two sides are "in the process of trying to resolve this. It's in the discussion phase." Scottsdale could not be reached for comment.

But Kraeger thinks this battle is far from over. "Ultimately I think the case will reach the California Supreme Court," she said, noting the large verdict awarded in the Scottsdale case "could certainly spark additional litigation."

One of the cases already out there is the lawsuit that Kabateck filed in Los Angeles Superior Court in January on behalf of policyholders who, he said, filed timely property-damage claims stemming from the quake, but whose claims were allegedly mishandled by 21st Century. He is seeking class-action certification.

Of all the earthquake insurers, 21st Century Insurance Group was particularly hard hit. The company nearly went bankrupt after paying $1.1 billion in claims, then was saved by giant American International Group Inc., which pumped $236 million into 21st Century and later took control of it.

The complaint alleges that 21st Century took part in unfair and fraudulent business practices to minimize the amount of benefits it had to pay to insureds who incurred property damage. Kabateck said more than 4,000 policyholders may be part of the class.

He said the lawsuit alleges that 21st Century "deliberately low-balled policyholders" on the estimated damage from the earthquake or tried to attribute the damage to pre-existing conditions. Kabateck said the insurer also is alleged to have used unlicensed, uncertified or unqualified contractors, engineers and testing companies to assess and estimate damage and losses. When policyholders found more damage and contacted 21st Century to file additional claims, they were told the statute of limitations for filing had expired, Kabateck said.

In a separate action on July 24, also involving 21st Century, a state appellate court in San Francisco upheld the SB 1899 as an appropriate remedy for earthquake victims whose claims were previously denied by their carriers. The insurance company had argued that the statute is unconstitutional because it changes the terms of a contract by voiding the one-year deadline for lawsuits. This case also is expected to go before the state Supreme Court.

Scandal's Impact

Amid this legal skirmishing, there's one thing that Davies and Kabateck do agree on, even if from different vantage points. It's about the impact that the Quackenbush scandal has had in the evolution of SB 1899

Quackenbush, once a rising political star in the Golden State, resigned in June 2000 after the state Legislature began to investigate his dealings with insurers and began calling for his impeachment. One insurance department lawyer testified that she was outraged that Quackenbush allowed insurance companies to resolve accusations of mishandled claims following the Northridge quake by paying $12 million to a foundation that promoted Quackenbush's political career, instead of having them face as much as $3 billion in fines.

"Quackenbush was the catalyst," Kabateck said. "Legislators began noticing that people had been undervalued in their earthquake claims."

Davies noted that the uproar produced "a very heated, energized atmosphere" that not only swept Quackenbush from office, but helped pave the way for enactment of the controversial Northridge bill as well as a string of bills introduced this year aimed at reforming the commissioner's office.

"Sure, the Quackenbush scandal is a defining part of it," Davies said.