Homeowners Obtained More Rights in Quake Aftermath Guest Column By Brian S. Kabateck It’s been a decade since the Northridge earthquake. While new laws and regulations were enacted because of post-earthquake insurance misdeeds, Californians are still vulnerable to insurance nightmares when the next big disaster hits. Here’s a quick look back on what many homeowners discovered when filing insurance claims after the Northridge earthquake. Claim adjusters who where responsible for determining the extent of earthquake damage were not properly trained. Because the demand for adjusters was so great, adjusters were from other parts of the country where earthquakes are virtually nonexistent. They simply did not have the experience to properly determine damage. Even local adjusters were untrained. Untrained adjusters would look at cracks in a wall or chipped stucco and order a “patch and paint” job, not knowing that earthquake damage works from the inside out. A crack in a wall could mean problems with tweaked framing or even a damaged foundation. Insurance companies realized that they had grossly underestimated damage and had inadequately compensated their policyholders. Instead of admitting their mistakes and voluntarily reassessing damage, many tried to sweep the problem under the rug. As homeowners began finding additional, sometimes severe, damage to their homes, they approached their insurance carriers with amended claims, only to be told that they had no right to additional money because the statute of limitations for filing claims had expired. Hundreds of lawsuits were filed by angry policyholders who felt their insurance companies were cheating them. The outcry caught the attention of legislators in Sacramento where new laws and regulations protecting consumers against unscrupulous insurance carriers were enacted. An investigation also found that California Insurance Commissioner Chuck Quakenbush cut deals with insurance carriers that enabled them to avoid hundreds of millions of dollars in fines for mishandling earthquake claims. The investigation resulted in the ouster of Quakenbush and the enacting of a new law that gave Northridge victims a last chance to present their claims even though the statute of limitations had expired. ‘Bill of rights’ Laws enacted since the earthquake require insurance companies to tell policyholders how long they have to file lawsuits when unhappy with the way a loss was handled. A post-quake California Supreme Court decision holds insurance companies liable if they make misrepresentations in the adjustment of claims. The Northridge earthquake also prompted the passage of the “policyholders’ bill of rights,” which requires insurance companies to provide customers with all laws and regulations describing how claims are adjusted, and upon request, to provide policyholders with copies of claim files. While much of the insurance reforms benefited policyholders, insurance companies also made “reforms” of their own that put California policyholders in a precarious position. The earthquake made insurance companies painfully aware that they were exposed to too much risk. The earthquake was the world’s third most costly disaster in terms of insurance losses behind only 9/11 in 2001 and Hurricane Andrew in 1992. Companies paid out nearly $17 billion in insurance quake claims. To reduce this type of exposure, they have cut coverage. In fact, whenever insurance companies suffer a catastrophic loss, whether it is an earthquake or a rash of similar claims (i.e., mold claims), their response is to pull back coverage. Not surprisingly, insurance companies have taken away many of the benefits policyholders enjoyed prior to the earthquake. Most policies in 1994 included guaranteed replacement cost clauses that are rarely included in today’s policies. Earthquake insurance is hard to find or comes with huge deductibles. Claim limits have been reduced. Not enough The effect of these types of changes is being felt today. Many victims of the recent fires are already finding that the amount and type of coverage they carried on their homes will not enable them to rebuild as they thought. A 2,000 square foot house of moderate construction, for example, could cost between $150 and $200 a square foot to rebuild. That means homeowners may need as much as $400,000 in insurance for the house alone. The cost of personal belongings clothes, furniture, appliances, computer equipment, and jewelry could surpass $100,000. Renting a home for a year while the damaged property is being repaired could easily cost $25,000 or more. Yet if most homeowners review their policies, coverage would likely be much less than these figures and their insurance agent is not telling them otherwise. Most of us still put our faith and confidence in our insurance agent to sell us the proper amount of insurance. Although insurance carriers are in a superior position of knowing how much insurance a homeowner needs, they continue to write inadequate property insurance to protect themselves from another Northridge earthquake-like claims payout. Insurance companies should be honest with their customers and be responsible for setting the proper value of the insured’s property and providing adequate coverage. Consumers will then have a choice accept the coverage recommendations by the insurer, pay the necessary premiums and expect to be fully compensated when a claim if filed, or don’t accept the recommendations and understand that if disaster strikes they may not be fully covered. This way, when the next disaster hits, all parties will understand their rights and obligations and hopefully avoid the barrage of lawsuits and scramble for government fixes that took place after the Northridge earthquake. Brian S. Kabateck is a partner with the Los Angeles law firm of Kabateck & Garris LLP. He represented hundreds of homeowners in claims against insurance companies after the Northridge earthquake and helped enact earthquake-related laws. He can be reached at 213-217-5000, [email protected].