Quake Payout Won’t Help Others, Lawyers Say

Thousands of State Farm Insurance Co. policyholders allegedly misled by the insurance giant would have a difficult time successfully suing despite a $100-million secret settlement involving 117 families whose earthquake coverage was unfairly reduced before the 1994 Northridge temblor, plaintiffs’ lawyers said Thursday.

There may be 25,000 other policyholders whose insurance coverage was similarly reduced, lawyers said.

But the controversial clause in California homeowners policies that says a customer has only a year to sue an insurer over an earthquake claim may mute public outcry, the lawyers said.

“It’s going to be difficult to jump on the bandwagon now,” said William M. Shernoff, one of several lawyers who represented plaintiffs in the case against State Farm.

Insurance lawyers said there are exceptions to the statute of limitations, but they are rare and difficult to argue. Policyholders who can prove that State Farm denied their claim fraudulently, for instance, or that their claim was left open from the year of the earthquake might have a case, lawyers said.

In addition, there is the “delayed discovery rule” argued by lawyers in a 1997 lawsuit against 20th Century Insurance. Under that rule, hidden damage that a reasonable person could not be expected to discover within a year should also be exempt from the statute of limitations.

The State Farm settlement, which was reached with a retired state Supreme Court justice working as a private mediator and filed under a seal of confidentiality, was the largest known single payout by an insurer dealing with post-earthquake claims.

The lawsuit, which involved Northridge resident Irene Allegro and 116 other homeowners, stemmed from the company’s restructuring of policies available to customers.

In 1985, State Farm replaced two insurance plans with a less costly “combined limit policy” and eliminated “guaranteed replacement”--a commitment to replace homes destroyed by an earthquake even if the cost exceeded a homeowner’s coverage limit. The litigants claimed that State Farm failed to give them adequate notice of the changes and in May 1997 a Superior Court judge agreed.

The company appealed that ruling, but settled before the appellate court decided the case.

Many people involved in the settlement said they were upset that it was reported Thursday in The Times.

Plaintiffs’ attorney Jerry A. Ramsey said both sides agreed that the settlement would remain secret.

“This is serious business and I think it’s too bad that it came out,” Ramsey said.

Several lawyers said the Allegro case may have ramifications beyond lawsuits related to the Northridge earthquake.

The lawyers said the case could make it easier for individuals to file claims against insurers on a wide range of issues. A year before the settlement, an appellate court allowed the homeowners’ lawyers to use an unfair practices claim--a much broader standard than traditional bad faith or breach of contract claims traditionally used against insurers.

“Until Allegro, only the Department of Insurance could make an unfair practices claim,” said Robert Hagedorn, assistant chief counsel with the department.

Although plaintiffs cannot receive damages under an unfair practices claim, they can urge the court to issue injunctions and force insurers to pay restitution for wrongdoing--things only the state could do previously, lawyers say.

Whatever the options, homeowners like Charles Morris, 60, might not be able to take advantage of them.

He said he bought a guaranteed replacement policy in 1983 but discovered after the 1994 quake rocked his Northridge house that his coverage had been reduced by State Farm. The psychiatric hospital owner recently retained a lawyer but has yet to file his lawsuit against the company.

The lawyer has told him that it may be too late to win a lawsuit. And Morris, who is $400,000 in debt repairing his home, knows a fight won’t be cheap.

“It will cost a fortune to litigate my case and I don’t have bags of cash to invest in this fiasco.”