Is Settlement Secrecy Proper?

Lawyers will talk, so perhaps the only real surprise is that it’s taken so long for word to leak out of the $100 million State Farm Insurance secretly paid last September to settle the so-called Allegro suit, which was filed by 117 victims of the Northridge earthquake.

The settlement of the case, which was named after the first plaintiff listed, Irene Allegro of Northridge, was reached under a seal of “deepest confidentiality.”

But various attorneys began telling me about it after I wrote a column on some Northridge cases against Allstate two weeks ago. They said I was missing a much bigger case involving State Farm.

These lawyers said State Farm had paid the Allegro plaintiffs and their lawyers $100 million. They expressed confidence that once this became known, some homeowners not involved in the settlement would be able to capitalize on it by making their own claims.

Powerful forces still tried to keep the secret.

State Farm and the lead plaintiffs’ attorneys, William M. Shernoff and Michael Bidart, cited a pledge of secrecy and refused to confirm the $100-million figure.

“My opinion as a consumer advocate is that confidentiality agreements are not in the public interest and should be banned by the courts,” Shernoff said. But it was in the interest of his clients to get paid, and State Farm would not agree to that without a seal.

The private judges’ group JAMS/Endispute was reluctant at first to even confirm that retired state Supreme Court Justice Edward A. Panelli had mediated the case as settlement approached.

But, finally acknowledging his role, JAMS Executive Vice President Bruce Edwards said Panelli could not discuss it publicly, due to an agreement with the parties.

Even the plaintiffs, mostly from the San Fernando Valley, say they are barred from discussing what money they have received.

So, Allegro stands--among other things--as an example of the way in which secrecy is spreading tentacles through the legal system.

Fortunately, attorney Thomas Girardi, who participated in the case, has been talking about the $100 million. He alluded to it in a recent Daily Journal interview, and one of the state’s preeminent trial attorneys told me later, on condition of anonymity, that Girardi has mentioned the $100 million in connection with the Allegro settlement “10 times.”

Girardi is not the only one to spill the beans. Others are talking too.

But why are settlements of such importance to the public allowed to be kept under seal anyway?

We need only listen to State Farm’s lead lobbyist in California, Dan Dunmoyer, to recognize Allegro is indeed very important.

Dunmoyer said that judicial rulings in the case by public judges before Panelli’s private mediation had validated use of the state’s Business and Professions Code in insurance cases.

“It’s created a whole new area of tort [recovery],” Dunmoyer said. “It’s opened up a Pandora’s box that could cost us billions.”

No wonder State Farm wanted to keep the public from knowing about it.

Another Allegro ruling, by Superior Court Judge Harvey Schneider, upheld a complaint that State Farm violated the law by failing to clearly notify its policyholders of reductions in their quake coverage in 1985, and that Northridge victims whose coverage went back to then could recover damages on their original policy limits.

The Schneider ruling, which contradicted judicial decisions after the 1989 Loma Prieta quake, was under appeal when State Farm settled, however, and it was uncertain how that aspect of Allegro might finally have turned out.

Still, these are weighty issues, which the public--not just those in luck in a sealed settlement--should hear about.

This view is strengthened when it’s considered that Allegro is truly an “insiders” case.

Many of the plaintiffs belonged to the San Fernando Valley group Community Assisting Care, organized by George Kehrer, an attorney with disaster experience in the 1991 Oakland fire.

I once went to a Kehrer presentation at which he described at great length all the claims homeowners could make against their insurance companies.

I came away with the feeling that if everyone in the damage zone made every claim they could, according to Kehrer, the whole insurance industry would go bankrupt. Then we would have no insurance for the next disaster.

In the Allegro case, in short, a group of well-informed people who knew how to take advantage of the system, including a number of attorneys, sued to get a better-than-average recovery.

The 117 ended up receiving several-hundred-thousand-dollar settlements for the 200 properties involved, but since the settlement was sealed, no one else in the area was supposed to hear about it.

This strikes me as unfair.

State Farm, incidentally, claims that it agreed to the settlement simply to avoid long, costly litigation and out of a desire to, in the words of executive Warren Farrar, “put the Northridge quake behind us. . . .”

“As a business, you say to yourself, ‘How long do we want to be involved in it?’ ” he said.

He insisted that it was not out of any fear that juries hearing the claims might rule big against State Farm, and it was not an admission that the firm did anything wrong.

His was the same rationale used by Merrill Lynch recently to explain why it agreed to pay Orange County $400 million to settle bankruptcy litigation.

How believable is this as an explanation why a firm would agree to pay even $100 million to claimants, if it had done nothing wrong?

Perhaps, not very believable. But State Farm officials had the advantage that since theirs was a settlement with private parties--unlike Merrill Lynch’s with a public entity--they could demand the agreement be sealed. They probably thought they would never have to give any explanation to the outside world.

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Kenneth Reich can be contacted with your accounts of true consumer adventure at (213) 237-7060, or by e-mail at ken.reich@latimes.com.