Placing Blame for Unpaid Quake Claims : The insured is sometimes guilty of inflating the extent of the damage, but if both sides are reasonable, they should be able to reach an agreement.

There is a popular notion that insurance carriers are reluctant to properly discharge their responsibilities to earthquake victims. If the public knew the difficulties faced by claims adjusters, it might serve to dispel that idea.

Earthquake damage, unlike other forms of insured losses, by fire for example, is often difficult to distinguish from damage caused by ordinary building settlement or, indeed, previous earthquakes. I have seen damage from the 1971 Sylmar earthquake that property owners claimed occurred during the 1994 Northridge earthquake, and knowingly so.

Even if certain damage is deemed related to the 1994 Northridge earthquake, there is often difference of opinion among repair experts as to the best method of restoration. Certain damage may be merely cosmetic in nature, while other damage may impair the structure of the building.

An additional difficulty facing adjusters is the presence of the deductible, equal to 10% of the insurance limit on the property. Even if the adjuster agrees that the damage is earthquake-related, the deductible will often preclude a recovery. To overcome the effects of the deductible, property owners are often tempted to inflate or exaggerate the extent of damage or the cost of restoration.

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Despite these difficulties, a reasonable approach by the property adjuster and the property owner can bring about a meeting of the minds and amicable settlement. Difficulties will arise when either side takes an unreasonable position.

Unreasonableness is not the province of the insurance industry alone. Since the Northridge earthquake, a legion of so-called experts has emerged, including attorneys, public adjusters and contractors, some of whom promise to significantly increase the value of insurance settlements through the use of their expertise. These “experts,” familiar with the difficulties facing company adjusters in these matters, will often exploit loss situations, cheerfully claiming that every crack or defect in the property is related to the earthquake.

When the insurance carriers attempt to protest these tactics, they are accused of bad faith dealing or unfair claims practices, buzz words designed to intimidate the insurance carriers into acceptance of the demands. The insurance carriers are in a no-win situation, which explains why they were reluctant to write earthquake insurance in the first place until the California Department of Insurance ordered them to do so.

If earthquakes were more common in, for example, Oklahoma or Iowa, perhaps these difficulties might not be as acute. However, in California, where litigation is rampant, where attorneys and public adjusters proliferate, the difficulties are exacerbated. Generally speaking, individuals and firms that represent the public consider they have only one responsibility, and that is to their clients. Conversely, independent or staff adjusters, working for insurance carriers, carry a dual responsibility and must be seen to be even-handed in their approach on insurance claim settlements.

This lopsided arrangement places the independent and company adjusters at a distinct disadvantage. In addition, attorneys and public adjusters operate on a fee basis, deriving a percentage of the settlement made for their services. Staff adjusters representing insurance carriers are salaried, while independent adjusters who work for many carriers operate on an hourly fee basis. Their fees, therefore, are not affected by the dollar outcome of the case. Despite some popular beliefs, independent adjusters are not rewarded for underpaying claims.

When Insurance Commissioner John Garamendi took office a few years ago, he established rules that ended many of the unfair practices exercised by a limited number of insurance carriers and adjusters and enhanced the rights of insurance claimants.

Insurance carriers were required to respond in more timely fashion on claims and to provide better explanations on what their policies covered. While these new regulations were first greeted with dismay by many claims handlers, they are now part and parcel of the everyday nature of doing business and are mostly a good thing.

If, in a perfect world, similar constraints could be placed upon those who knowingly make false or exaggerated claims, we would all be better off. We have seen some movement in that direction in the area of workers’ compensation insurance, and efforts are under way to discourage improper claims in the automobile accident field.

Property insurance is still relatively cheap compared to other forms of insurance. When the premiums rise beyond the capacity of the ordinary individual to pay, then I suppose corrections will be put in place. Until then, we, the insuring public, will continue to fund those who extract a disproportionate share of the funds available for settlements.