High Court Extends Liability of Insurers

The California Supreme Court ruled Monday that insurance companies may be sued for failing to cover damage that their adjusters mistakenly overlooked, even if the legal deadlines for such lawsuits have expired.

In a case stemming from the 1994 Northridge earthquake, the court decided that a quake victim whose insurance company found only minor losses may now go to court to seek reimbursement for hundreds of thousands of dollars in damage the homeowner said he later discovered.

Policyholders in such cases must prove only that they did not file a lawsuit or second claim sooner because they “reasonably relied” on the insurance company’s evaluation of the damage. Policyholders generally have one year based on state law to sue an insurance company after a loss or denial of a claim.

Several attorneys predicted that the decision will make insurance adjusters more careful in evaluating losses.

Jerry Whitfield, a spokesman for California Insurance Commissioner Harry W. Low, said the ruling was important because it clarifies that insurers may be sued if their adjusters mistakenly underestimate damage. Evidence of fraudulent misrepresentation is not required, he said.

“I would hope that the decision will place insurers in a position where they do send qualified and knowledgeable adjusters to investigate claims,” said Whitfield, assistant chief counsel for the California Department of Insurance.

Attorney Glenn R. Kantor, who represented the plaintiff in the case, said the decision will affect thousands of insurance disputes.

“It solidifies the insurance company’s obligation to fully and fairly investigate claims,” he said. “If they don’t, they can’t hide behind the statute of limitations.”

Peter Vu, a Northridge resident who lived close to the epicenter of the earthquake on Jan. 17, 1994, filed a claim with Prudential Property and Casualty Insurance Co. a few days after the magnitude 6.7 temblor.

Vu reported that his home had cracks in the walls and ceilings. An adjuster for Prudential inspected Vu’s home and told him that the damage amounted to $3,962, far below the policy deductible of $30,000.

Nearly two years later, an appraiser hired by Vu estimated the earthquake damage to his home at more than $300,000. Kantor said the damage included cracks in the foundation and subfloor, and windows that were out of alignment.

Vu sued Prudential in U.S. District Court, but a judge ruled that Vu had missed the legal deadline for bringing such an action. Vu appealed to the U.S. 9th Circuit Court of Appeals, which asked the state Supreme Court to clarify state law in Vu vs. Prudential Property, S078271.

The state high court, in an opinion by Justice Joyce L. Kennard, affirmed a state law that gives policyholders only one year after a loss to sue an insurer.

But the court said policyholders can get around that deadline if they show that they genuinely believed an insurance company’s evaluation of a claim.

In deciding whether a homeowner reasonably relied on an adjuster, courts should consider whether the homeowner was qualified to assess the damage, what the homeowner told the adjuster about the potential losses and whether the homeowner knew the adjuster had made only a partial examination of the building, Kennard wrote.

An attorney for Prudential and a company spokeswoman declined to comment on the case. An attorney for an association of California insurance companies also would not comment.

The state Legislature passed a law that gave victims of the Northridge quake until the end of this year to sue insurers for failing to cover certain earthquake claims. Insurers estimate the quake caused $15.3 billion in property damage.

Vu’s lawsuit was filed before that law passed, and the state Supreme Court said it considered his case because it was not clear whether the extension would have applied to him.

The court also noted that the constitutionality of the Legislature’s extension has been challenged. A Court of Appeal upheld the law earlier this year, but the challenge of the extension has not yet gone to the California Supreme Court.

Monday’s ruling also will affect insurance disputes that are unrelated to the Northridge earthquake, including claims for fire and other kinds of damage.

James T. Linford, an appellate lawyer who represents policyholders, said the decision will encourage insurers to do thorough inspections.

“If they make a mistake on the facts--the extent of damage or the evaluation of the damage--then they won’t be able to cut off the time for the policyholder to sue them,” he said.