CA Supreme Court Reaffirms: 7 Years After Northridge, Insurers Can Be Sued

The California Supreme Court recently upheld the new law that insurance companies can be sued for their failure to cover damage that their adjusters mistakenly overlooked, even when the legal deadlines for such lawsuits have expired.

The unanimous decision came down as a legal triumph for property owners who felt they were wrongly denied coverage seven years ago after the Northridge quake, which caused a staggering $15 billion in insured losses.

Pamela Dunn, a lawyer for the Sacramento-based Personal Insurance Federation of California, commented that insurance companies would be able to live with the ruling handed down by the court. She added that insurers were pleased that the court, in another part of the decision, reaffirmed a conclusion that was first reached in 1947, allowing that wrongful denial of an insurance claim, by itself, does not automatically extend the filing deadline.

The court ruled that a quake victim whose insurer discovered only small losses may now go to court to look for reimbursement for hundreds of thousands of dollars in damage discovered at a later date. Policyholders in such instances must prove only that they did not file a lawsuit or second claim sooner because they “reasonably relied” on the insurance company’s evaluation of the damage. Policyholders generally have a year based on California law to sue an insurer following a loss or denial of a claim.

According to city and county building inspector estimates, more than 80 percent of all structures deemed uninhabitable by the quake were residential. Of those, 77 percent were reported to be apartments and condos, with the remaining 23 percent single-family dwellings. Just one week following the Jan. 17 quake, more than 14,000 dwelling units were determined not to be livable.

Jerry Whitfield, assistant chief counsel with California Department of Insurance’s Compliance Bureau in San Francisco, commented that the ruling was significant because it will clarify that insurers may be sued if their adjusters mistakenly underestimate damage.

“The real result I assume will be seen in a number of cases being litigated where the same issues were raised as far as summary judgment,” Whitfield said. “This question came to the California Supreme Court as a certified question from the Federal Court. The Supreme Court has declared what California law is with regard to the certified question presented. It’s up to the Federal Court to take the answer to the certified question and use that or place that in cases before them.”

Whitfield said he was not surprised by the ruling. “I think the ruling followed substantialy questions that were asked by the court in oral argument,” he said. “In essence, what the court did was lay down a laundry list for earthquake. I see the decision as adopting for earthquake some of the same issues that the court established in Prudential LMI with regard to the reasonableness of delayed discovery.

“In connection with the Vu case, we have the question answered in context of particular circumstances. The insured presented a timely claim under the policy. The insurers’ agent inspects the property, but does not discover the full extent of the damage.”

The Vu case refers to Peter Vu, who claimed that a Prudential Property & Casualty Insurance Co. adjuster informed him several days after the 1994 Northridge quake that his residence had received less than $4,000 in damage, way below the policy’s $30,000 deductible level. Vu reported that he then in the summer of 1995 brought on an expert who discovered more than $300,000 in damage to the Vu residence. Prudential, however, denied Vu’s claim because it was filed more than a year following the event.

When Vu’s claim was denied, he filed a lawsuit in federal court, the federal district court holding that the one-year statute of limitations barred Vu’s breach of contract claim. Vu then appealed to the U.S. Court of Appeals for the Ninth Circuit.

Presented with the issues in the Vu case, the Ninth Circuit was compelled to seek further clarification, and it asked the California Supreme Court the following: “Where an insured presents a timely claim to his insurer for property damage under a policy, and the insurer’s agent inspects the property but does not discover the full extent of covered damage, does California Insurance Code Section 2071 bar a claim brought by the insured more than one year after the damage was sustained but within one year of his discovery of the additional damage? Or, to put the matter differently, does Neff v. New York Life Ins. Co. (1947) remain good law?”

The Neff decision referred to in the Ninth Circuit’s question held that an insurer is not estopped (impeded by a bar against an assertion or denial contrary to a previous assertion or denial) from invoking the statute of limitations as an affirmative defense even if its denial of the claim proved to be erroneous.

In May of 2000, the National Association of Independent Insurers (NAII) submitted an amicus brief to the California Supreme Court arguing that the Supreme Court’s ruling in Neff remained good law in California, stating that the Neff decision preserves the statute of limitations’ policy of assuring that evidence is fresh and witnesses are available.

Responding on Nov. 5, The Court concluded that the ruling in the Neff decision is still good law. Under Neff, an insurer’s denial of coverage does not prevent the insurer from raising the one-year statute of limitations as a defense. However, the ruling in Neff does not control in cases where the insurer made factual misrepresentations on which the insured reasonably relied.

“The Vu decision itself did not create a year’s statute of limitation,” said Dan Dunmoyer, president of the PIFC. “That was done by Senate Bill 1899 of 2000 that created a one-year window.”

Dunmoyer said that should a person file a first-time initiated filing for Northridge on Jan. 1, 2002, it is 99.9 percent certain it would be thrown out. “You have to have made a contact with a company; so that if you never talked to a company, without the contact, it would be difficult.”

According to CDI’s Whitfield, those who act in a reasonable amount of time are more likely to have a case.

“You go back to: what did your propety look like the day before the earthquake? What did your property look like the day after?” Whitfield said. “If your swimming pool no longer had any water in it or you had cracks running the length of your house and you failed to do anything for an appreciable amount of time, it’s a little hard to argue the reasonableness of delayed discovery. The further you get from the event itself, the more difficult it is for you to justify your delayed findings of substantial and appreciable damage.”

While Whitfield does not expect insurers to quibble greatly with this ruling, he wouldn’t rule out more legislation down the road.

“The Legislature has obviously been concerned, particularly with the treatment of Northridge policyholders,” Whitfield said. “If the Legislature sees the need for additional legislation in light of the court’s decision, I assume they will pursue that avenue.”

Sam Sorich, vice president western regional manager for NAII, noted that the association’s general reaction to the case was positive.

“Our general reaction was that we were pleased that the Supreme Court decision recognized the continued viability of the statute of limitations defense. We filed the amicus brief in this case [May 2000] advocating a stronger holding than what the Court ultimately came out with. In that, the statute of limitations applies in both situations where the claim is denied or the company makes a good faith representation that may be incorrect. We thought the rule should apply to both cases of claim denial and to incorrect representations. The court didn’t accept that recommendation. It said in essence the statute of limitations is a viable defense. When a claim is denied, the one-year statute of limitations runs from that date.”

Sorich said his impression is that companies will be careful about making representations and conclusions about claims. Secondly, companies will take steps to caution the claimant just what kind of reliance can be put on the claims representation. “The suggestion is going to be that this is our [insurer] assessment, perhaps you should get another opinion,” Sorich said. “The other leg of the Court’s ruling is that the reliance has to be reasonable. I think there will be factual disputes about whether a claimant’s reliance on what the insurance company conclusion was is ‘was it really reasonable reliance?'”

Sorich said the rule is you have to file a lawsuit on a claim one year from the inception of the loss. “Of course the question is ‘what’s the inception of loss?’ Under the Vu decision, when a claim is denied, it is one year from the date of claim denial.”