Senator releases confidential audits of Northridge insurers

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Associated Press

SACRAMENTO — Insurance Department auditors found patterns of stalling and lowballed settlement offers by four insurers handling Northridge earthquake-related claims, reports released Monday show.

Sen. Martha Escutia, D-Montebello, released summaries of “market conduct” exams by the Insurance Department and of settlements between the companies and the department that let them donate to nonprofit funds to avoid fines for mishandled Northridge claims.

Insurance Department officials conducted the exams in 1997 and 1998 to review companies’ claims handling practices in more than 2,000 cases following the January 17, 1994, earthquake in Los Angeles.

“The settlement agreements state that insurers acted in good faith in adjusting Northridge claims,” Escutia said. “However, the market conduct exams and trained DOI examiners found numerous violations in the sampling of files reviewed.”

Lawmakers are investigating Quackenbush for letting six insurance companies avoid up to $3.7 billion in fines by donating a total of $12 million to the California Research and Assistance Fund.

The nonprofit foundation was created for earthquake research and consumer assistance, but none of its spending has gone to either purpose. Critics say the money was used on public service TV ads and other spending that benefited the elected Republican commissioner politically.

Insurers testifying at legislative hearings have said the Insurance Department used the market conduct exams to push them into giving to the fund. Quackenbush has denied any wrongdoing.

The exam summaries released Monday say that Allstate Insurance Co., Farmers Home Mutual, State Farm, and 20th Century Insurance Co. and their sister companies each:

-Offered unreasonably low settlements to many quake victims;

-Failed to pay settlements within required time frames;

-Failed to perform “necessary, proper, timely investigations”;

-Factored excessive property depreciation into settlements;

-Failed to explain settlement reductions to policyholders.

The four companies are cited for dozens of other allegedly improper actions and are sharply criticized in the reports.

Each company is accused of “grossly” underestimating damages by overlooking or giving “minimum inspection” to attics, crawl spaces, foundations and fireplaces.

Escutia said she was troubled by suggestions that three of the four companies were engaging in similar tactics in non-earthquake-related claims.

The reports indicate “there’s a pattern in practice of bad faith and deception on the part of the insurance carriers,” said Senate leader John Burton, D-San Francisco, a member of the subcommittee.

The earthquake happened in January 1994, and the law allowed claims to be filed within one year. A bill before the Assembly would allow those who failed to file claims, or who were unhappy with the way their claims were settled, to file again.

About 600,000 claims were filed after the earthquake, which caused $15 billion in insured losses and killed 72 people.

Ric Hill, spokesman for 20th Century, now called 21st Century, said the company did not break the law. It handled Northridge claims in a timely manner and in many cases gave policyholders more than they were entitled to, he said.

“To say any customer got shafted is just an insult,” Hill said.

Escutia’s release of the exams touched off allegations from Insurance Commissioner Chuck Quackenbush and the insurance companies that she acted illegally by distributing confidential documents.

“State law on the confidentiality of these market conduct examinations is very clear and that state law has no doubt been broken,” Quackenbush spokesman Scott Edelen said. “This is outrageous, illegal behavior.”

The commissioner will ask the California Highway Patrol to investigate the matter, he said. Quackenbush earlier asked the CHP to look into leaks from his office.

21st Century’s Hill said the reports are confidential and the company is considering what if any action it should take against Escutia.

“We disagreed with the preliminary market conduct report because it was filled with errors,” said Allstate spokeswoman Sharon Cooper. “We are deeply concerned by release of the report.”

Escutia declined to say where she had obtained the documents, but said it was not from the industry or the commissioner.

The Personal Insurance Federation, which fought efforts to release the audits, was considering legal action against Escutia, spokesman Jerry Davies said.

Jim Mattesich, a lawyer and lobbyist for State Farm, would not rule out legal action.

The allegations in the documents released Monday are “without merit,” Mattesich said, but declined to release the company’s rebuttal.

Consumer advocates applauded the release.

“The veil of secrecy on this investigation has been partially lifted by Senator Escutia today,” Sara Nichols, state director of the consumer group Neighbor to Neighbor, testified at a hearing of the Senate’s Bad Faith Liability and Consumer Rights subcommittee, where the documents were released.

The documents suggest “a rogue industry,” Doug Heller, an assistant director at the Foundation for Taxpayer and Consumer Rights, testified.

Escutia, chairwoman of the subcommittee, called the reports “very damaging in terms of an insurance company’s contractual obligation to its policyholders.”

Few if any of the corrective actions called for in the market conduct exams were carried out, she said.

The companies admitted no wrongdoing, the agreements released Monday show.

Farmers agreed to review its own claims policies and report back to Quackenbush, and extracted a promise from him that the company could review any press releases on the matter in advance.

State Farm‘s agreement states that it acted “in good faith” in adjusting Northridge claims. It too agreed to review its own policies and sent policyholders a letter citing Quackenbush‘s watchdog role.

California insurance law states that the insurance commissioner may release such documents, but otherwise they “shall be given confidential treatment.”

The senator said she does not believe the documents were shielded from release by that confidentiality law. In any case, the Legislature “has a higher duty that supersedes any confidentiality statutes,” she said.

“My right as a legislator, including the research and the investigation that goes into that, I believe that that supersedes any confidentiality statutes,” she told reporters.

Escutia said she planned to draft legislation that would make such company reviews public and said she would post the documents – which do not include policyholders’ names or other personal information – on the Internet.

Farmers did not immediately respond to a message left at its office by The Associated Press seeking comment.

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