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It has been eight years since the Northridge earthquake jolted millions of Southern California residents from a peaceful night’s rest 4:30 a.m., Jan. 17, 1994. Although there have been many aftershocks that have rattled peoples’ nerves, none of them have come close to the initial quake’s 6.7 earth cracker effects. The biggest aftershocks though are not measurable on the Richter scale, because these temblors come in the form of claims.

Currently the running total in money paid out to satisfy claims related to the quake is around $15.5 billion. This number, though not final, already positions Northridge as the second most costly natural disasters in U.S. history. And with the passage of Senate Bill 1899 in 2000 that enacted Code of Civil Procedure (CCP) Section 340.9, the total cost for the disaster will continue to grow as a new generation of claims rumbles through the courts.

Stephen Erigero and Stephen Hayes of Ropers, Majeski, Kohn & Bently have been involved in the litigation of many Northridge earthquake claims. Their presentation at the Combined Claims Conference provided a unique perspective of the contributing factors that have shaped the claims associated with Northridge.

They emphasized the significance of the passage of CCP Section 340.9 and how it revived certain Northridge earthquake claims that would have otherwise been barred by contractual limitation provisions. The statute opened a one-year window from Jan. 1, 2001 to Jan. 1, 2002 for people to have a second chance to file Northridge earthquake claims.

Hayes said that before the timeframe established by Section 340.9 expired, there was a mad rush for the courthouse in the 11^th hour. “1000 lawsuits were filed. So many were filed in fact that the Superior Court in the County of Los Angeles has entered a stay—staying all these claims while they sort through and figure out procedurally and administratively how they are going to deal with the enormity of lawsuits filed.”

Hayes said the reality is, these are a new generation of the same claims. Everything you thought you put to bed back in '94, '95 and '96 is back.

Section 340.9 has resurrected the debt, said Hayes. “It has breathed new life into claims that most people thought were long dead on both sides—both the insureds and their lawyers and the industry.”

California has experienced three defining disasters since 1988, beginning with the Loma Prieta earthquake that struck the San Francisco Bay area. Then in 1991 the scenic hills above Oakland were consumed in fire. And three years later the Northridge earthquake rocked the San Fernando Valley, Los Angeles and surrounding areas.

According to Hayes, professionals progressively learned how they could squeeze every last possible cent out of insurers from each disaster.

“You had a traveling road show of experts, adjusters and lawyers who at each of these disasters have done their best to maximize the claims of their clients or insurees. And at each stop along the trail they’ve picked up a little more knowledge, found a pressure point here or there.”

The payout for the Loma Prieta quake was approximately $900 million, versus the $15.5 billion and still climbing price tag on Northridge. There were very few trials associated with Loma Prieta as compared to Northridge.

The problem that arose out of the Oakland Hills fire was it provided many insureds an opportunity for some overreaching. Hayes used the example of a case that involved a dentist who claimed he not only lost $130,000 in automatic weapons and ammunition, but he also lost bars of gold bullion. People claimed lost art, electronics and overstated the degree finish work in their homes, explained Hayes.

The two disasters proved to be a training ground. Then said Hayes, everybody (public adjusters, contractors, general contractors, engineering experts and plaintiff lawyers) moved from Northern California to Southern California to deal with the Northridge earthquake.

Because the majority of the San Fernando Valley’s housing stock was built before 1971, many of the code upgrades required by builders after the Sylmar earthquake weren’t in place. The general make-up of the housing stock was wood frame, stucco or wood siding and drywall. This was the kind of housing stock that would naturally sustain damage in the event of an earthquake the magnitude of Northridge.

Also leading up to Northridge, earthquake insurance was marketed heavily at modest prices throughout Southern California. Many condo and homeowner associations require earthquake insurance. So both personal and commercial lines had enormous exposure to claims after the earthquake hit.

Immediately following the quake, there were many claimants who were not bashful about asserting their rights. Plaintiff attorneys were taking out ads and holding town meetings. Initially there was an insufficient supply of qualified engineers to help insurers get a full grasp on the scope of damage and associated costs to fix the problems. Those handling the claims were working 14-hour days, doing their best to get to insureds in a timely manner. There was also a lack of qualified general contractors and structural engineers available to fix the problems.

The earthquake in many respects jump-started the construction industry in Southern California, which had been enduring a series of slumping years prior to 1994. In many cases contractors were doing repairs they weren’t qualified to do or that they were qualified, but it was the first time they had done such repairs. Engineers were brought in from out of state. Overall though, there was limited availability of the needed knowledge to address the task at hand, said Erigero.

Adjusters were brought in from out of state also, said Hayes. Some of the files he’d seen had as many as 14 fingerprints on them. There’s going to be slippage with this many people handling one claim, he explained. This creates a huge problem when one is building a defense against bad faith litigation because there are few witnesses or the documentation is limited. Since the quake occurred in 1994, many of the electronic claims management systems, and E-mail systems that are an integral part of business today weren’t in place then.

The earthquake catastrophe loss of Northridge proved to be different than other natural disasters like hurricanes, floods and fires. Adjusters didn’t know to look for hidden damage, said Erigero. They didn’t know to open up the drywall to look for split studs. Because of this, there was a higher frequency of supplemental claims.

Many claims were denied because there was no visible damage. And what damage there was, a lot came in under the deductible, according to Erigero.

Another challenge was establishing causation of the claim. The adjuster had to determine whether the damage existed before the earthquake or not. Many claims have been paid twice because some original repairs needed to be re-repaired. In some cases the original repairs didn’t fix the problem and the damage actually got worse. This is especially true for water damage that has turned into a mold problem.

Hayes said, “What a bonanza for plaintiff lawyers in litigation—to be able to join two of the major hot buttons of the last decade together in one lawsuit. By that I mean bad faith arising out of the adjustment of an earthquake claim, and because of the inadequacy of the original repairs, that there has been water infiltration. And now they have the second best thing that has happened to the plaintiff’s bar, and that’s mold. So it’s a unique opportunity for an economic adventure.”

At the time when the Northridge earthquake occurred, there really wasn’t a lot of case law in California on how to adjust earthquake loss. One case on the books was a 1973 California Supreme Court case of Jefferson Insurance Co. v. Superior Court.

The import aspect of this case was the courts position on how actual cash value was to be determined. The holding was that actual cash value in California was synonymous with the fair market value, just prior to the loss, compared to the fair market value after the loss. The problem though is that fair market value is based on an appraisal. So at the time of the earthquake when there were 10,000 claims opened, there weren’t enough appraisers available. It was especially hard to get an appraisal on partial damage.

Many adjusters didn’t have a choice but to use the method of replacement cost, less depreciation to determine the fair market value. This method has given many claimants the opportunity to come back on the grounds that their actual cash value loss wasn’t adjusted correctly.

A case that applied the Jefferson ruling to the earthquake situation was Cheecks v. California Fair Plan (Calfair). In this case, the carrier paid the claimant the actual cost of repairs minus depreciation. The claimant said no, you need to appraise my total loss and sued Calfair. The trial court approved of the carrier’s method of calculating actual cash value. But the appeals court overturned the trial court’s decision. The appellate court’s opinion was that it was bound by the clear definition of determining actual cash value set forth in the Supreme Court’s decision in the Jefferson case. Therefore the carrier had improperly determined actual cash value.

These were the two cases lurking in the background before Section 340.9. Both cases referred to Insurance Code Section 2071 to determine loss calculations.

The intent of the Legislature was to deal with Insurance Code Section 2071. They thought the section unfairly barred victims from being compensated for their losses because many were tragically misled to about the extent of damage suffered as a result of the earthquake.

The Department of Insurance market surveys following the earthquake revealed that companies had repeatedly lowballed claims, failed to inform policyholders of their benefits and forced many claimants to sue to get full payment. They believed these Individuals were victimized twice—once by the earthquake and once by their insurance company. The Legislature thought that these people should be given a second chance to get what they are entitled to.

Once Section 340.9 was effective, a lawsuit had to be filed within a year between Jan. 1, 2001 to Jan. 1, 2002. There are a couple of conditions that would prevent a claim from being reopened.

A claim couldn’t be reopened if it had been litigated to finality in any court of competent jurisdiction and had received a final judgment prior to Jan. 1, 2001. Also, if there had been any written compromised settlement agreement between an insurer and its insured the counsel who represented the insured signed must have signed the agreement or the claim could be revived.

Already there have been cases interpreting Section 340.9. One such case is Campanelli v Allstate Insurance Co. Although it was a trial court case, a published opinion was issued Aug 24, 2000.

In 1996 the insured was notified claim was being closed and was given one year to bring suit. The insured waited until May 4, 1998 to file suit. Allstate then moved for summary judgment on the one-year notice requirement on the policy. On Sept. 20 Gray Davis just signed this bill, can we get a second chance. And the federal court denied the request and granted summary judgment in favor of Allstate.

20^th Century Insurance Co v. Superior Court is another case that has dealt with Section 340.9. 20^th Century sought a petition for a writ after a granting a summary judgment that the case had been litigated to finality according to Section 340.9.

Originally, Oct 3, 2000, a judge granted a holding that the one-year statute of limitations in the policy applied. Then Nov 28, 2000, 56 days after dismissal had been entered, the interested party made a motion to for the court to reconsider on the grounds that the statute was unknown to the court and was new law. The court then granted the motion in December 2001.

Even though the lawsuit was brought after the one-year limit, the court found that the intent of the Legislature was to allow such cases to proceed. They also disagreed with 20^th Century’s argument that the case had been litigated to finality because they believe the Legislature didn’t intend a trial court’s decision to be final because appeal rights hadn’t been exhausted.

This decision opened the door further to future claims that had been viewed as litigated to finality and exempt from reaches of Section 340.9.

Hellinger v. Farmers is an example of a classic earthquake case where the agent comes out and finds that there is no damage or that the damage is under deductible. Then gardening one day, the insured notices a cracked foundation below the surface of the soil around his house. A suit is then filed against Farmers. Initially Farmers wins on the one-year statute of limitations in Section 2071.

The Superior Court of Los Angeles later overturned the trial court’s decision and gave the following reasons. The court found that Section 2071 does not apply to a stand-alone policy covering earthquake damage only. Instead it only applies to a fire insurance policy. Also, the court interpreted the Legislature’s intent was to revive the Northridge claims and that the specific language of Section 340.9 applies to both contract and statutory limitations. The purpose of Section 340.9 is to give people a second chance. The court also ruled that the claim had not been fully litigated or litigated to finality. And finally it was the court’s position that the statute doesn’t impermissibly impair the insurer’s contract rights.

Bialo v. Western Mutual is an example of a case that was originally settled and later reopened under Section 340.9. The carrier closed the claim after it paid approximately $112 million to the claimant. The claimant then later obtained an estimate for additional earthquake damage discovered. The carrier asserted its one-year statute of limitation rights and initially wins. The decision is then overturned.

The Los Angeles Superior Court stated that Section 340.9 revives claims like the Bialo’s that fall within its provisions and would otherwise be barred by the insured’s failure to timely notify the insurer of potential claims within the policy’s reporting period. The court also said the case hadn’t been litigated to finality since both parties still retained the right to appeal.

“The legislature with 340.9 have created the second land rush in California, because every case is going to be subject to some variation that gets around the two requirements that would prevent that from happening.”

Also Erigero said that Section 340.9 is one-sided because it doesn’t open the subrogation rights in the policy to the carrier. It only opens the insured’s right to get rid of the statute of limitations. Since the subrogation rights have expired carriers will end up being responsible for payment of damages regardless of the causation.

One weapon adjusters have available to them is the effective utilization of experts in the claims process. Chateau Chamberay HOA v. Associated International Insurance Co. case demonstrates how experts can play a key role in containing the cost of claim.

The initial demand in this case was for about $6.7 million. The carrier then brought in its own experts who assessed the damages at a much lower value. Based on the experts’ opinions the carrier made an offer of $1.9 million to the insured. The insured then said they would accept $5 million.

The carrier’s actions had a significant impact on the case in court. Hayes said, “If you are in a situation and you have determined what you think is the amount that you owe, and whether you are going to appraisal or arbitration, or you are standing on it and it is what it is, write the check. Get the money out of your pocket, into the insured’s pocket, and you are buying yourself tremendous judicial goodwill, and jury goodwill.”

And that’s what they did in this case. The insurer cut a $1.9 million check and the insured took the check and immediately filed a bad faith claim.

The court then ruled that the carrier never misrepresented the nature of its investigation or claim. There were no false documents or testimony and no inconsistencies on the part of the insurer. Hayes warned adjusters that litigation experts have their own libraries of documents and can use your paper against you.

The court sided with the carrier because it had selected honest, straightforward experts. There were no hired guns. The opinions of the claims experts were reasonable. And finally, the court believed the carrier conducted a thorough investigation, and handled it in a timely manner.

Hayes stressed the importance of retaining qualified experts early on in an objective, expeditious claims evaluation. You can disagree and be wrong, he said, but that does not in itself mean you are unreasonable, if you have an objectionable third party opinion backing you up.

Erigero said the reality now is there are a lot of professionals available to you as a resource, compared to what you had in 1994.

Hayes and Erigero explained some of the challenges that carriers are going to have to overcome to minimize the financial impact of Section 340.9. What was firm and fresh in adjusters’ minds back in 1994 isn’t now. It is also likely carriers will be critiqued on their lack of supervision and training in the initial stages of handling Northridge earthquake claims.

Establishing causation is going to be a challenge. Was the damage caused by the earthquake, bad construction, poor repair or lack of maintenance? This is going to be a big issue and why it’s going to be important to retain experts.

“It is money well spent when you involve the independent on causation as to what you owe,” said Hayes. “And if its money you owe, get that out to them and in their pocket. Begin to get closure.”

“Now its 2002 and you have all these cracks,” explained Erigero. “You are going to have this whole efficient proximate cause issue where you have to give the benefit of doubt to the insured and creates a different type of causation analysis than a typical liability case.”

People are attributing mold to the earthquake. They are claiming leaks in roofs and windows because shifting. This is another reason it is important to get experts and to pay undisputed claims, said Erigero.

Keep an eye peeled for subrogation opportunities that aren’t time barred. The place you’ll find these opportunities are in homes or buildings recently constructed or from repairs that are under warranty. After 1994 you have the 10-year outside limit on late defects. Don’t let these opportunities slip by.

Section 340.9 has created an uncertainty for insurers regarding statute of limitations. The Legislature has set a precedent by opening up the statue of limitations for Northridge claims. Now claims from future disasters could have the potential for a second life if the Legislature decides the process was unfair. Hayes said, “Could they re-open the statute for the WTC? Could the Legislature re-open the statute up if they find there was asbestos?” The implications set forth by Section 304.9 has provoked these kinds of questions from those trying to assess exposure to future risks.