117 POLICYHOLDERS SUE OVER QUAKE COVERAGE

Chicago Tribune

LOS ANGELES, CA — State Farm Insurance Co. quietly paid $100 million to a small number of policyholders in California to settle a lawsuit brought against the Illinois firm for allegedly reducing earthquake coverage without clearly notifying clients.

Although the money was paid last September, news of the settlement surfaced only Thursday when attorneys for the plaintiffs and State Farm executives confirmed that a deal had been struck while a California court was considering an appeal of an earlier ruling against the company.

In that decision, Superior Court Judge Harvey Schneider found that State Farm had not given policyholders adequate notice that the company had changed the scope of the earthquake insurance.
The suit by Irene Allegro and 116 other policyholders who suffered losses as a result of the January 1994 Northridge earthquake alleged that Bloomington, Ill.-based State Farm secretly restructured policies in 1985 to limit the amount of coverage it would provide.

Many of the clients said they first discovered the change in the scope of their policies when they filed claims after the quake.

Michael Bidart, one of the attorneys for the plaintiffs, refused to comment on the settlement because of a confidentiality agreement that was reached between his clients and State Farm. “All I can say is that the settlement was acceptable to all of those involved,” he said.

But a lawyer close to the case, who asked not to be named, said there were an estimated 25,000 State Farm clients who held pre-1984 earthquake policies who could be in a position to pursue separate suits against the company. It was unclear how many of those 25,000 policyholders were still insured with State Farm.

The suit alleged that State Farm concealed the implications of the changes by issuing notices that spoke only of “new” or “different” coverage, not noting clearly that the changes actually reduced the amount of the coverage.

Last May, Schneider wrote that the company “failed to give specific notice in clear and understandable language,” thus violating state law.

State Farm appealed that decision, but settled with the help of a private mediator while the appellate court was considering the case.

Company spokesman Bill Sirola said that the settlement was not related in any way to the way in which State Farm handled more than 100,000 claims related to the 1994 quake and that it did not represent any admission of wrongdoing by the company.

“This lawsuit combined claims from more than 100 policyholders and involved numerous properties damaged in the Northridge earthquake,” Sirola said in a statement. “The settlement amount is confidential as agreed to by all parties, but represents a small part of the more than $3 billion paid by State Farm to more than 117,000 policyholders whose properties were damaged by the earthquake.
“We believe this settlement is in the best interest of State Farm policyholders and was done to avoid continuing litigation expenses and end this matter for these policyholders. The settlement in no way reflects any wrongdoing in State Farm‘s service to its policyholders,” he said.

Before 1984, insurance companies were able to limit their risk in seismically active places in California by restricting the number of earthquake policies they sold in the state. But a law enacted that year required any insurer doing business in California to offer quake coverage to any client who purchased a homeowner’s policy.

In the wake of that change, companies sought ways to reduce their exposure to potential earthquake claims, a kind of blanket coverage they never wanted to offer in the first place.

Lawyers for the plaintiffs suggested that the settlement could expose State Farm to a flood of new suits by other policyholders who were unaware of the changes in their coverage that might have affected the amount of money they received in quake-related settlements.

They suggested that about 25,000 other State Farm clients also were not clearly notified of changes in their coverage.

This is the second time this year that a major Illinois-based insurer has encountered problems related to earthquake coverage in California.

Federal and state officials are investigating Northbrook-based Allstate Insurance Co. in connection with numerous complaints and lawsuits filed by policyholders after the Northridge quake. Some of the suits allege that the company falsified engineering reports and provided false information to reduce the amount of money it would have to pay out in claims.

Like State Farm, Allstate has denied any wrongdoing.

Dana Spurrier, spokeswoman for the California Insurance Commissioner‘s office, refused to comment on the specifics of the State Farm case and would not say whether the commissioner is conducting an investigation into the company.

“We can’t discuss any ongoing investigations,” she said, “I can’t say if we are investigating any other insurer. Allegations are just allegations. We want to make sure we get the bad guys, but we want to make sure that people are considered innocent until proven guilty.”

Consumer activists in California were harshly critical of Illinois insurance officials.

“There is some problem with the regulatory officials in Illinois who are principally responsible for the conduct of these companies,” said Harvey Rosenfield, a Santa Monica-based advocate for insurance customers.

“They clearly are not enforcing Illinois regulations to protect policyholders in other states,” he said.