Allstate to Review 9,000 Quake Claims

Allstate Insurance Co. will review at least 9,000 claims filed by policyholders whose homes were damaged in the Northridge earthquake as part of the settlement of a class-action lawsuit, The Times has learned.

The Northbrook, Ill., insurance giant has set aside $60 million to cover its participation in a court-administered program in which homeowners can seek a review of their claims by an independent engineer. The settlement sets no limit on the total amount Allstate will pay.

The firm will fund the review, to be overseen by private judges, and compensate the court-approved engineers and adjusters who may conduct new inspections of thousands of homes to determine if policyholders are owed more money.

The settlement, still subject to court approval, requires the firm to hire a consultant to evaluate its handling of catastrophe claims and to provide $5 million to create a charitable foundation dedicated to loss prevention.

The legal pact is designed to resolve two lawsuits--class-action litigation by policyholders who allege that their claims may have been mishandled by engineers hired by Allstate, and a second suit filed by consumer advocate Harvey Rosenfield, who will appoint the board of the new foundation.

“We know mistakes were made,” said Allstate general counsel Robert W. Pike. “We didn’t know we made mistakes at the time.”

The resolution of the Allstate cases may be one of the last echoes of the devastating 1994 quake, considered the nation’s costliest disaster. The firm says it has waged courtroom battles in nine cases, winning eight.

It has also suffered the embarrassment of having federal agents raid offices nationwide to seize documents, part of an ongoing federal probe into allegations that it systematically falsified engineering reports to keep down the cost of earthquake repairs.

Pike has said the investigation was triggered by whistle-blower Jo Ann Lowe, a 25-year employee who said in a deposition that engineers were instructed to alter their reports. Lowe is involved in an employment dispute with the company, Pike said.

Pike cast his company--which admitted no wrongdoing in the settlement--as the victim of a fraud carried out by at least two firms it hired to inspect homes after the quake. Allstate has sued Dunn-Rite Construction Co. and Western States Co., alleging that they inflated damage reports. Neither firm could be reached for comment.

Allstate officials said they had made payments on the vast majority of 740 claims that were based on work performed by the two companies.

Even if the outside engineering firms are responsible, Rosenfield said, Allstate should have been more vigilant in its hiring.

“Obviously, it broke down somewhere,” he said. “They obviously had to hire all these outside firms. Some of the people they hired shouldn’t have been hired.”

William M. Shernoff, speaking for a group of law firms representing homeowners in the class action, said: “From our point of view, if [Allstate] hired them, they’re legally responsible for their conduct.”

Pike likened the quake to a “second California Gold Rush” in which insurance companies were seeking freelance adjusters and engineers in a tense environment ripe for fraud.

In just the first three days after the earthquake, Allstate was inundated with calls from more than 12,000 customers. Its initial estimates for damages ranged from $300 million to $500 million. But it received a total of 46,000 claims and paid out more than $1.7 billion.

“We hope to make sure that nobody, at the end of the day, can say that we didn’t take care of our customers,” Pike said.

By the time the claims involved in the lawsuit are reevaluated and repairs made, the Allstate settlement could rank among the largest stemming from the quake. State Farm, the nation’s richest insurance company, secretly settled a lawsuit filed by 117 homeowners for $100 million last year.

Attorneys’ fees, typically high in class-action cases, were not fully determined as part of the settlement. Shernoff said the plaintiffs’ attorneys could apply for fees equal to one-third of the amount eventually paid to the homeowners. Allstate has agreed to pay $9,957 in fees relating to Rosenfield’s lawsuit.