Los Angeles Business Journal

In the first major decision as insurance commissioner, John Garamendi is trying to scuttle agreements that insurers cut with his discredited predecessor over the handling of Northridge Earthquake claims.

Garamendi has appealed a Los Angeles Superior Court ruling that upheld agreements reached by State Farm Insurance Cos., 21st Century Insurance, Allstate Corp. and two other insurance companies with former commissioner Chuck Quackenbush.

The 1999 agreements allowed the companies to each contribute $6 million or less to nonprofit “educational” foundations he established rather than pay fines that in one case could have totaled more than $2 billion for allegedly low-balling policyholders and engaging in other illegal tactics to minimize claims losses.

“Quackenbush cut a bad deal, a rotten deal, that benefited him and was to the detriment of thousands of policyholders. Those settlements cannot be allowed to stand because they are wrong on their face,” said Garamendi, who added that if he prevailed in court he would reopen investigations into the companies’ claims conduct. Any monetary penalties as the result of the investigation could be returned to shortchanged policyholders.

The settlements were at the heart of the scandal that drove Quackenbush from office in 2000 after it was revealed department regulators had pushed for big fines, and that some of the foundation money was later used for ads featuring Quackenbush, as well as for other questionable purposes.

Attorney General Bill Lockyer and interim Insurance Commissioner Harry Low filed suit to have the agreements overturned in 2000, arguing that Quackenbush acted illegally in entering into them. However, a decision finally rendered last October by Judge Victoria Gerrard Chaney concluded Quackenbush had broad authority to enter into them.

Industry responds

Bill Sirola, a spokesman for State Farm, which faced the largest fine, totaling $2.4 billion, and is the largest homeowner insurer in the state, criticized Garamendi’s action. “We have absolutely no desire to see this thing further litigated,” he said. “We didn’t do anything wrong.”

An internal insurance department study leaked during the height of the Quackenbush scandal found that the company mishandled nearly half of the 825 files surveyed by examiners. But State Farm has disputed the accuracy of the report and consistently argued that the vast majority of its policyholders were satisfied, with some $3.8 billion in claims paid.

The scandal prompted the Legislature to pass a law giving property owners a second chance to seek payment for damages, arising out of the Northridge Earthquake. State law at the time gave policyholders only a year to file claims after the 6.7 magnitude temblor.

Sirola said 35,000 property owners had policies with the company in the Northridge area yet only a few hundred took advantage of the law, which gave property owners until Dec. 31, 2001 to file new claims. “It was truly a nonevent’ he said.

Candysse Miller, executive director of the Insurance Information Network of California, a non-profit insurance industry education and advocacy group, agreed, saying State Farm‘s experience with the law was not unusual, questioning the need to reopen an investigation.

“It’s literally like 99.6 percent of all claims are resolved,” Miller said. “The commissioner has the right to look into whatever upon coming into office, but when you look at how the workers compensation market is in disarray and the homeowners insurance market is near crisis there are greater issues.”

Consumer groups applaud

Consumer advocates and trial lawyers question whether there were only a few property owners disgruntled by how their claims were handled.

Brian Kabateck, a Santa Monica attorney who helped draft the law giving property owners a second chances at filing Northridge claims, said 1,000 lawsuits currently are pending in Los Angeles Superior Court against 21st Century alone.

“It’s a remarkable number that thousands of people have asserted claims against their insurance company,” said Kabateck, who estimated he has handled 500 cases brought against Northridge insurers, including 200 active cases against 21st Century, State Farm and others.

21st Century, which had a high concentration of policy holders in the San Fernando Valley, paid out $1.2 billion in damages to 46,000 policy holders, an amount that nearly bankrupted the company.

It also paid a $100,00 fine and contributed $6 million to a foundation, despite the recommendation of insurance department investigators it pay an $819 million civil penalty.

Company spokeswoman Fiona Hutton said 21st Century conducted itself properly after the earthquake, and that despite the lawsuits currently pending resolved 98.6 percent of all claims without litigation.

Meanwhile, The Foundation for Taxpayer & Consumer Rights, a consumer advocacy group that has been highly critical of the insurance industry, is also suing State Farm for its handling of the earthquake claims, alleging it amounted to unfair business competition. The lawsuit, if successful, could allow disgruntled homeowners yet another avenue to seek compensation.

State Farm has sought to have the lawsuit dismissed, and is currently asking the state Supreme Court to consider granting that motion.