Department Staff Called For Penalties For Mishandling Of Northridge Quake Claims.
Los Angeles Times
Insurance Commissioner Chuck Quackenbush rejected recommendations from his own legal team that some of the biggest insurance companies in the state be fined hundreds of millions of dollars for mishandling claims in the aftermath of the devastating Northridge earthquake.
A series of confidential reports by his department concluded that three insurance companies–State Farm, 20th Century and Allstate–had repeatedly low-balled claims, failed to inform policyholders of their benefits, forced some earthquake victims to sue to get full payment and improperly deducted the cost of wear and tear on possessions.
Staff lawyers found the evidence presented by the reports so compelling that they not only recommended fines but also proposed that the companies contribute hundreds of millions of dollars to a special fund to repay earthquake victims whose claims had been improperly handled.
The fines, coupled with the contributions to the special fund, would have been among the largest penalties ever assessed against insurance companies.
Quackenbush ignored the recommendations, deciding instead to settle with the companies by requiring them to contribute to a research and education foundation. Some of the foundation’s funds were later used to pay for public service announcements featuring the politically ambitious commissioner that aired on Los Angeles television stations last fall.
“The whole thing seems to be a sweetheart deal for the insurance companies rather than the policyholders of the state of California,” said Assembly Insurance Committee Chairman Jack Scott (D-Altadena). “It’s outrageous that internally it would be recommended that these insurance companies be fined for their failures following the Northridge earthquake but all they get is a slap on the wrist.”
Scott has said he is opening an inquiry into the commissioner’s enforcement practices and has demanded that Quackenbush appear at an April 26 hearing.
The companies and a Quackenbush spokesman said donations to a foundation were appropriate because the money would be used primarily for research into how to better assess damage after a catastrophic event like an earthquake.
“I think what the commissioner ended up doing was very smart,” said Ric Hill, vice president of corporate relations for 21st Century Insurance Co., formerly 20th Century.
The settlement resulted in State Farm‘s paying $ 2 million to the foundation instead of the recommended $ 2.38 billion in fines and $ 114.7 million to the repayment fund.
A fine of $ 100,000 was assessed against 20th Century, and the firm was ordered to give $ 6 million to the foundation. Department lawyers had suggested a civil penalty of $ 819 million and a $ 44.2-million donation to the repayment fund.
The third company, Allstate, was required to give the foundation $ 2 million, even though staff recommendations were for fines of $ 172 million and a $ 73.7-million contribution to the special fund.
The insurance companies and Quackenbush‘s office are sharply at odds about the purpose of the contributions. Deputy Insurance Commissioner Dan Edwards said the contributions were really fines against the companies to punish them for infractions uncovered in the confidential reports.
“I can certify to you that these are very significant fines. Almost $ 12 million was enforced on these companies, and that’s rather unprecedented,” Edwards said.
The companies vehemently disputed his contention, saying that they never would have agreed to pay fines. Officials from State Farm and 21st Century said they believed the reports were riddled with errors and gave a distorted picture of their actions in the chaos that followed the earthquake. The only fine, they said, was $ 100,000 assessed against 20th Century.
“We had grave and deep disagreements with some of the conclusions that they had reached,” said William Sirola of State Farm. If the reports had resulted in fines, he said, State Farm would have taken them “to any public forum for a judicial hearing to show how wrong it was, how deeply flawed it was.”
Random Reviews of Quake Claims
The confidential reports, obtained by The Times, provide the first comprehensive view of how major insurance companies in California responded to the devastation of the Jan. 17, 1994, earthquake. The reports were part of a periodic review the department is required by law to make of insurance companies’ claims practices.
The three companies were among the hardest hit by requests for payment from earthquake victims whose homes and condominiums had been demolished or severely damaged in the temblor. State Farm, the state’s biggest insurer, made about 117,000 settlements with payments totaling nearly $ 3.5 billion, while 20th Century paid out $ 1.2 billion to more than 46,000 policyholders. Figures for Allstate were not available.
Department lawyers and examiners combed through hundreds of files they had selected at random to determine if there were any violations of the state’s Unfair Claims Practices Act, a law that prohibits companies from improperly denying, delaying or undervaluing claims. It also requires that customers be given accurate information about their entitlements under a policy. Each violation can be subject to fines of as much as $ 5,000 and, in some cases, $ 10,000.
The findings showed widespread mishandling of claims by Woodland Hills-based 20th Century, reporting that violations of the Unfair Claims Practices Act were uncovered in 75% of the 431 files reviewed. In the case of State Farm, the examiners found “a pattern of failing to thoroughly investigate” claims and reported that violations of the act appeared to have occurred in nearly half of the 825 files they investigated.
“Many investigations by State Farm turned up little covered damage until the insured brought in his or her own contractor to re-scope the loss,” the examiners wrote. “It is impossible to say how many insureds may have accepted State Farm‘s inadequate estimates and resulting low settlement offers without challenging them.”
Allstate, which donated $ 50,000 to Quackenbush‘s political account six months after he ordered the contributions to the foundation, was found to have had violations in nearly 24% of the 808 files scrutinized by the department’s examiners. (A $5,000 donation was made to the commissioner by 20th Century; State Farm officials say the company does not make political donations.)
Foundation for Research
“This kind of violation rate is unheard of. That is very serious,” said Bob Hunter, director of insurance for the Washington-based Consumer Federation of America after being told of the findings in each company’s report.
Hunter, a former Texas insurance commissioner, characterized as unusual Quackenbush‘s decision to address the problems by requiring companies to donate to a foundation. “In my experience, you either fine an insurance company or don’t fine them, depending on the evidence. You don’t set up something outside of government for collecting money,” he said.
Edwards said the commissioner had adopted an idea from Harvey Rosenfield, a consumer advocate who has established nonprofit foundations to push for insurance reform. He said the foundation would allow the money to be spent for research and education on earthquake preparedness and safety. He said $ 6 million would also be used to reimburse policyholders whose claims might have been handled improperly.
If the commissioner had levied huge fines, he said, the companies would have immediately appealed to the courts and the money would have been unavailable for consumers. “They would have locked this up in court for years and years with no tangible results for consumers,” he said.
The initial recommendations from the commissioner’s legal team for huge fines, Edwards said, were a “worst-case scenario” presented to the companies so “they would understand we mean business.”
“The strategy is shock value–you catch these guys’ attention,” he said.
Sirola of State Farm said the companies felt the recommendations made no sense, because they would have required fines that in some cases exceeded the companies’ value.
“We thought it was somewhat of a strange opening gambit,” he said.
All three companies said they were proud of the way claims had been handled after an event so destructive that there was no precedent for it.
“No one, not even our government, was prepared for a disaster of that magnitude,” said Hill of 21st Century. “We did not accept and we do not accept today that there were any violations by our company.”
He said the company had agreed to a settlement and fine because to carry its battle with the department any further would have been too costly and time-consuming.
Hill and Sirola said the vast majority of their policyholders had been satisfied with the company’s performance after the earthquake. “We did not see anything, nor would we accept anything, that would indicate our claims staff performed in anything but a professional and correct manner,” Sirola said.
The department’s reports however, cited numerous instances in which examiners believed claims had been improperly handled.
In many of the cases they cited, property owners were given initial estimates and offered settlements that later turned out to be far less than the actual amount of damage.
Sirola said earthquake damage, especially to foundations and walls, is often hidden, and the actual replacement costs can’t be determined until contractors begin tearing into a structure.
Long Delay Before Claim Was Rejected
One of several hundred homeowners listed in the Department of Insurance Market Conduct Examination Report on 20th Century was David Sloat, 53, a real estate appraiser who lives with his family in Sylmar, about six miles from Northridge epicenter.
The report shows that Sloat initially settled with 20th Century for $ 29,948.22. However, the state insurance policy officers who reviewed the claim determined that the insurance company had “failed to perform necessary and proper investigation” when agents assessed the damage. Moreover, the officers reported, the settlement was too low.
“The initial inspection did not reveal cracks in slab which were later discovered by the insured,” the report, conducted between Jan. 26 and March 17, 1998, concluded.
Contacted by The Times, Sloat said he had not discovered the cracks in the slab foundation of his two-story, Spanish-style stucco home until two years after the earthquake, when he and his wife decided to replace the downstairs carpet. Sloat said he reported the cracks to 20th Century but, after considerable delay, was told that the deadline for filing claims on Northridge damage had expired.
“They strung us out for months and then denied us,” Sloat said.
Sloat eventually got legal relief when he was contacted by a Los Angeles court and told that he was on a list of homeowners who might have been improperly denied settlement. Sloat said he hired attorneys to represent him in the court and in early 1999 was awarded a settlement that, after lawyers’ fees were deducted, totaled more than $ 125,000–more than four times the original amount offered by 20th Century.
Had he known about the Department of Insurance market conduct report, Sloat said, it could have been very useful in court. The state policy officers concluded he had been improperly denied compensation for the second claim. The report, marked “confidential,” was shared with the insurance companies but never made public so that Sloat and other policyholders could see it.
The experience has left Sloat with a bitter feeling about the state Insurance Department and its commissioner, Quackenbush.
“I think this could have all been resolved in a much quicker fashion if he Quackenbush had done his job,” Sloat said. “He’s an elected official who should have been working for the electorate and not for the insurance companies.”