Tuesday, March 4, 2003
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Ninth Circuit Reinstates Homeowners’ Fraud Suits Stemming From 1994 Northridge Quake
By ROBERT GREENE, Associate Editor
Homeowners who say they were victimized twice by the 1994 Northridge earthquake—once by the quake itself, then by unscrupulous insurance companies who allegedly covered up the true extent of the structural damage they sustained—had their suits reinstated yesterday by a federal appeals court that upheld a California statute extending their time to file.
Reaching the same conclusion as the California Court of Appeal in a number of earlier rulings, the Ninth U.S. Circuit Court of Appeals rejected claims by Allstate Insurance Company that Code of Civil Procedure Sec. 340.9 was an unconstitutional impairment of contract.
The statute, passed in the wake of a scandal that drove state Insurance Commissioner Chuck Quackenbush from office, extended the contractual one-year limitations period in most of the insurance policies.
Sec. 340.9 applied only to cases in which the insured contacted the insurance company prior to Jan. 1, 2000 regarding potential Northridge quake damage, and gave plaintiffs until Jan. 1, 2002 to bring suit on the revived claims. Any claim “litigated to finality” before Jan. 1, 2001 could not be brought again under the statute.
Senior U.S. District Judge Robert Kelleher of the Central District of California found that the homeowners’ claims were time-barred and granted Allstate’s summary judgment motion.
But the three-judge Ninth Circuit panel, like the state Court of Appeal before, ruled that the heavily regulated environment of the insurance industry drops the impairment below constitutional dimensions.
Judge A. Wallace Tashima noted that the statute also accomplished a legitimate public purpose.
“Section 340.9 was introduced as Senate Bill No. 1899 ‘to bring needed relief to the victims of the Northridge earthquake,’” the judge noted. “The bill’s author believed that the one-year limitations period had barred victims from being fairly compensated after they had been misled about the extent of their losses. Protecting the rights of victims of the Northridge earthquake is a significant and legitimate public purpose.”
The court previously had a similar question before it, prior to enactment of Sec. 340.9, in the 1999 case Vu v. Prudential Prop. & Cas. Ins. Co. In that case, the adjuster determined that the level of home damage fell below the insured’s policy deductible, but the insured discovered additional damage nearly two years later. The homeowner argued that the insurance company should be estopped from arguing the statute of limitations as a defense, since he relied on the company’s adjuster.
The Ninth Circuit certified the question to the California Supreme Court, which ruled that an insurer could be estopped from asserting a statute of limitations defense when the insured relied on the representations of the carrier’s adjuster regarding the extent of earthquake damage.
Vu would do the plaintiffs in this case no good, since it applied to homeowners who filed claims, while Sec. 340.9 applied to anyone who contacted the insurance company.
Still, Allstate argued, in view of Vu, Sec. 340.9 no longer serves any legitimate state purpose and is obsolete. Tashima saw it differently.
“As demonstrated by this case, not all insureds will be able to take advantage of the Vu holding, even if they are alleging significant malfeasance on the part of the insurer,” he said. “Section 340.9 eliminates the need for an insured to present any evidence of the misrepresentations that are a base requirement for equitable estoppel under Vu and protects all insureds who were not fully compensated for their losses, so long as they meet the requirements of Sec. 340.9. Vu clearly reduced the need for Sec. 340.9, but we cannot say that it entirely eliminated it. Despite that decision, Sec. 340.9 is still based on a legitimate public purpose.”
Allstate also argued that Sec. 340.9 does not apply since the district court orders granting summary judgment for Allstate were filed prior to Jan. 1, 2002, rendering claims that had been “litigated to finality” and not eligible to be brought again. But Tashima said there was no finality, not would there be until there has been a final resolution on appeal, or the time for appeal has elapsed.
In the years after the Northridge quake, the state Department of Insurance began probing the conduct of insurance companies because of a large number of complaints. The probe found that several insurers had engaged in serious misconduct, underplaying the extent of damage found in the homes of insureds.
Quackenbush’s legal staff recommended imposing several billion dollars in penalties, but Quackenbush instead accepted less than $15 million in “voluntary donations” to organizations he selected—organizations that were found in various news reports to have furthered Quackenbush’s political career.
Gov. Gray Davis signed Senate Bill 1899 into law on Sept. 30, 2000, creating Sec. 340.9.
The case is Campanelli v. Allstate Life ins., 00-55466.
Copyright 2003, Metropolitan News Company