Some Lessons Learned After Northridge

Quite aside from Chuck Quackenbush, the insurance-buying public certainly had every right to expect that the private institutions dealing with the Northridge earthquake’s aftermath--the insurers and the trial lawyers, particularly--would behave properly.

But six years after the disaster, it appears that proper dealing was in short supply. This situation cost some of those who suffered losses more than the quake itself did.

The secrecy of settlements that ran into billions of dollars, primarily demanded by the insurers but accepted without a peep by the lawyers, helped keep the truth from emerging for a long time.

In fact, at last week’s state Senate hearing in Granada Hills some witnesses refused to give their names for fear the insurers would come after them for violating the confidentiality of their settlements.

But now, in the midst of scandal, the truth is coming out, and I hope that the Legislature, the attorney general and the governor don’t stop with Quackenbush, but look at the institutional behavior, and, where inadequacies are found, act to prevent future misbehavior.

What has come to be known about the role of 20th Century (now renamed 21st Century) Insurance Co. is especially pertinent.

This company had the misfortune of having its earthquake insurance policies concentrated in the very area where the quake occurred. Its payouts, now reported at $1.1 billion, were so heavy that the company nearly went under.

So it was under pressure, but this does not excuse its poor adjusting of claims, vastly understating damage at the outset, and its maneuvers to keep its policyholders from asserting their claims when the full scope of their losses became evident.

Trial attorney Glenn Kantor testified last week how, when homeowners found they had more damage than 20th Century adjusters had said, they called for new inspections.

The company sent out new adjusters, who often vastly increased damage estimates and reported back to the company, which then sent letters out to about 1,000 of the policyholders saying, too bad, you have all this damage, but it’s too late to file a claim.

Kantor noted that about 200 of the policyholders didn’t accept this, and contacted lawyers. Virtually all of these insureds later received sizable settlements from 20th Century, although the amounts have been kept secret. The other 800, accepting the company’s word that it was too late, did nothing and got nothing more.

On Monday, Kantor and his partner, Daniel Gruber, asked Los Angeles Judge Marvin Lager for permission to bring a class action suit reopening those cases.

Lager was dubious, but reserved a decision, pending possible state Supreme Court or legislative action that could have bearing on whether it’s really too late.

This is a powerful lesson to consumers: Don’t necessarily believe it when an insurance company tells you that you have no remedy. Consult a lawyer to be sure you don’t.

The cases brought against 20th Century were greatly aided when a former high company executive, Paul Castellani, forced into retiring a year after Northridge, gave numerous documents he had taken with him to plaintiffs’ lawyers.

The company later sued Castellani and got a restraining order instructing him not to give out any more of the documents, but this had all the effect of locking the barn door, as one lawyer said, when the horse was already several miles down the road.

In a move that has generated much talk among other lawyers, 20th Century settled all the cases brought by David Prestholt, the attorney with the most success representing earthquake victims against it, and then hired Prestholt as a consultant, ending any threat he would bring new suits.

Ric Hill, a company spokesman, confirming that Prestholt “is a consultant to us,” said he obviously had to finish all his preexisting cases or fall afoul of a conflict of interest.

“Part of our interest . . . is trying to understand the concerns of customers, and often the opposing counsel or investigators can help us understand ways that we can improve,” Hill said.

Robert Fellmeth of the University of San Diego’s Center for Public Interest Law rejoined, “Give me a break. Pay the claims; that’s how a company can improve.”

Fellmeth also questioned the propriety of Prestholt’s change of sides. It is sometimes hard to know that a case is definitely over, and given attorney-client privilege, he said, Prestholt’s former clients are “entitled to fidelity.”

But Erwin Chemerinsky, a USC Law School expert on ethics, said he felt that if Prestholt “had wound up all his cases and wanted to change sides, there’s no problem. . . . It’s simply that he can’t work for both sides at once.”

Prestholt did not return several calls for comment.

Meanwhile, Dan Dunmoyer, an industry lobbyist in Sacramento, recently said that, since the beginning of 1996, two years after the quake occurred, insurer payouts for Northridge have increased by $2.8 billion, from $12.5 to $15.3 billion.

Much of this had to be settlements of various kinds, although no one outside can say how much resulted from actual litigation.

Often keeping the settlement amounts secret leaves people who might otherwise pursue claims in a state of naivete about the opportunities they have.

Fellmeth recalled that in 1993 the present attorney general, Bill Lockyer, then in the state Senate, authored a bill asking the Supreme Court to set new rules that would make more settlements public. It was vetoed, however, by then-Gov. Pete Wilson, a big insurance industry supporter.

The insurers, often devoted to keeping their policyholders in the dark, are the prime movers in keeping settlements secret. But the trial lawyers frequently go along out of fear that, without secrecy the insurers might not be as quick to settle.

It may be too much to hope that our Legislature will act again against two such powerful lobbies, but it should. Settlement secrecy facilitates bad behavior.

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