The Price of Secrecy

State Farm’s secret $100-million settlement with 117 of its policyholders makes a strong argument for greater clarity in insurance policies and for more openness in the resolution of disputes over coverage. Earthquake insurance coverage for thousands of State Farm customers was stealthily reduced more than a decade before 1994’s devastating Northridge temblor. But most learned of the changes only when their homes lay in ruins and they filed claims.

When State Farm offered far less than many homeowners expected, a group of residents, mostly from the San Fernando Valley, sued. State Farm admitted no wrongdoing in the settlement, reached in September but revealed only this week in a Times report. Insurance companies rarely shell out $100 million unless they expect long-term litigation and high judgment costs.

The company lost a round in Superior Court a year ago when a judge ruled that State Farm erred by not revealing the 1984 policy changes in “clear and understandable language.” In other words, policyholders deserved plain descriptions of alterations in their coverage. State Farm appealed that ruling, but the case went to private mediation before it reached the appellate courts.

That’s unfortunate for everyone except State Farm and the 117 plaintiffs who reaped average gross payouts of $850,000--significantly more than most homeowners who battled their carriers after the quake.

More than four years after the nation’s costliest natural disaster, hundreds of insurance disputes remain unresolved. By shunting the case into private and secret mediation, State Farm and the plaintiffs imposed a virtual blackout on information that could well have helped other homeowners in similar situations.

Of course, that was the idea. Secrecy serves a select few. In 1984, the stealth with which State Farm implemented the policy changes clearly had a lopsided benefit for the company. And 14 years later, State Farm has benefited again by keeping information from the public. Many judges allow confidential settlements only in rare cases, arguing that public policy is served by the information that surfaces during open discovery, depositions and testimony.

Although the majority of claims following the Northridge quake were settled swiftly and fairly, a large number of homeowners and merchants with complex claims got the runaround-- and are still trying to get what they thought they paid for. They deserve better, both from their carriers and from the state bureaucracy ostensibly set up to police the insurance industry. Clearer language, openness and simple honesty would be a good start, but so would a little muscle from Insurance Commissioner Chuck Quackenbush, whose office offered only a simple “no comment” Thursday on the largest single payout stemming from a quake-related claim.