Quake Claims Linger

Sunrise came two hours after the Northridge earthquake struck in January 1994, and the morning light showed what looked like bomb blast wreckage at 20th Century Insurance’s headquarters in Woodland Hills.

Computers had crashed through the floor. More than 100 windows were shattered and office curtains--blown out by a rush of air--hung over window sills like laundry set out to dry. The building was so badly damaged that 20th Century set up tents in its parking lot the next day to field the first in a torrent of damage claims.

But the physical damage to 20th Century’s headquarters paled compared to what would happen inside the company. More than three years later, 20th Century faces more than 100 lawsuits by customers who say it shortchanged policyholders.

The full story of the company’s plunge into disarray and confusion is contained in thousands of pages of new papers and depositions from current litigation. They provide a detailed inside look at how a regional insurance company survived--barely and at great cost--the most expensive natural disaster in U.S. history.

They document for the first time allegations by 20th Century’s top claims executive at the time that the company bent rules, cut corners and violated some unfair-claims practices regulations as it handled 46,000 quake damage claims. Acrimony and squabbling broke out in its executive suite as officials raced frantically to keep the company solvent at the same time it was paying out about $1 billion in damage claims.

20th Century eventually refused to pay as many as 2,000 quake claims because of its controversial interpretation of a one-year time limit to file a claim.

20th Century insists that it followed proper and legal guidelines when handling quake claims. The Northridge quake triggered 10 to 20 times more claims than the company ever expected, so it had to modify procedures to get money out as fast as possible to policyholders whose homes had suffered the worst damage. According to spokesman Ric Hill, 20th Century settled 94% of its claims in the year after the quake, a feat he termed “nothing short of amazing.”’

The issues here, though, touch on more just one Southern California insurance company. The quake exposed serious flaws in the homeowners insurance system, ranging from murky laws concerning time limits for quake damage claims to questionable oversight by the state Department of Insurance.

As more Northridge quake cases come to trial, these cases--and likely rulings by appeals courts in the next few years--are expected to finally clarify the law over quake damage claims. The hope is that when future earthquakes strike, homeowners can avoid the uncertainties that have bedeviled so many 20th Century policyholders.

At the heart of the dispute is a standard clause in California homeowners policies that says a customer has one year to sue, which is also widely assumed to mean that customers have one year to file a damage claim.

In 1990, the state Supreme Court issued the “delayed discovery rule” in a case involving damage to an apartment building caused by gradual ground movement. The court said a reasonable person could not be expected to find all the damage within one year. But there is intense debate on whether this applies to earthquake damage and claims, and the time limit is being used by various insurers to deny thousands of homeowner claims.

Allstate, State Farm, Transamerica and Prudential, among others, were also sued by homeowners for denying their Northridge quake claims based on a time limit. But 20th Century seems to have been sued the most often.

George Kehrer, founder of the nonprofit homeowners group CARe, said that incomplete home inspections were common after the Northridge quake because many claims adjusters from out of state had no quake experience, so they failed to check for cracks in concrete slabs, foundations and inside chimneys. Many consumers who later discovered more damage had their “late” claims denied because of the time limit. 20th Century is the most aggressive in denying quake claims based on a time limit, Kehrer said.

Assemblyman Wally Knox (D-Los Angeles) introduced a bill to retroactively cover Northridge quake claims and prevent insurers from denying damage claims simply because they were filed more than 12 months after the quake. But his bill was rejected 41 to 29 last month. The insurance industry fought hard to defeat the proposed legislation, saying it would have led to frivolous claims and boosted rates.

Consumer advocates lay much of the blame for the unsettled quake claims on Insurance Commissioner Chuck Quackenbush, who took office in early 1995. He made no public comments about the time limit until two months ago when he sided with consumers, saying that some insurers were hiding behind an inexcusable interpretation of the law and were stalling to avoid paying legitimate claims.

If Quackenbush had taken a clear stand early on, many disputed claims would have been settled, said consumer attorney Glenn Kantor. Without that leadership, he said, 20th Century and Allstate have taken an aggressive stance to deny “late” damage claims. “They have made a business calculation that it is cheaper in the long run to deal with the lawsuits, than to pay off all the claims,” Kantor said.

Allstate says quake claims filed after the one-year mark were handled on an individual basis, and that in many cases it paid them.

Quackenbush said at a recent news conference that every disaster teaches new lessons, and hidden quake damage is one of them. It’s hard for his department to get involved in individual lawsuits, he said, but he hoped his recent statements would help get the money owed to consumers.

Attorney Debra Wegman, who has filed eight quake damage suits against 20th Century, said the Department of Insurance “is the sole policeman of the unfair claims practices act. But in fact they never do anything. They will not discipline the carriers who are their prime constituents. If the policeman refuses to make arrests, the crimes continue to happen.”

Inundated With Quake Claims

The Northridge quake left behind about $40 billion in damage. Nearly 450,000 insurance claims were filed, and insurers paid out $12.5 billion.

When the quake hit, 20th Century was the eighth-biggest home insurer in California, with a heavy concentration of policies in its backyard, the San Fernando Valley. It was not alone in getting swamped by quake claims: Allstate had 46,000; Farmers 36,000; and State Farm 120,000. But those insurers were multibillion-dollar operations that did business all over the country. 20th Century was a home-grown company, writing mostly auto insurance. It did business only in California and was the sole major insurance company almost killed off by the quake.

Among the allegations in the 20th Century lawsuits:

* The then-head of the company’s claims department, Paul Castellani, said he was ordered by the chief executive not to inspect every quake damage claim, but to handle some over the phone to save money. This was a change in 20th Century’s long-standing claims handling policy, and it violated the company’s quake catastrophe plan it had filed with the Department of Insurance.

* As 20th Century’s quake damage bills soared, angry board members criticized Castellani at a directors meeting. “The only thing they wanted to know [was] why don’t we deny all these claims here,” he testified.

* By June 1994, as 20th Century sought a $175-million loan to help keep it afloat, company officials assured bankers that the cost of its quake claims would not exceed $685 million. But the company’s claims department warned the president that claims costs could reach $1 billion.

* Although Castellani issued an internal order saying 20th Century would consider paying claims filed after the quake’s one-year anniversary, it eventually denied between 1,500 and 2,000 “late” damage claims.

Castellani, a 30-year insurance industry veteran, had been with 20th Century for a decade, having been hired from Allstate to help improve the claims department.

In July 1995, he filed a wrongful termination suit against 20th Century, alleging that he was pushed into retirement for not taking part in illegal insurance practices. Six months later he settled out of court.

Castellani now lives in Las Vegas, where homeowners’ attorneys subpoenaed him last winter. He testified for five days in depositions, and he produced hundreds of pages of company documents, some that 20th Century tried, and failed, to keep under court seal. Since then, 20th Century has portrayed Castellani as “a bitter old man.”

Lawyers for policyholders believe that the court documents show the company vigorously tried to avoid paying many damage claims. “20th Century’s statute of limitations defense is baloney,” said attorney Tom Girardi, who in April won a jury trial for a North Hills woman whose quake damage claim was refused by the company.

“20th Century sent out inexperienced, incompetent appraisers,” said attorney Kantor, who is handling 30 quake suits against 20th Century. “Later, a homeowner discovers more damage and files a new claim. 20th Century then sends out another claims adjuster who finds, ‘Yes, you do have quake damage. But we’re not going to pay it. You relied on our first opinion, and now it’s too late.’ ”

Some attorneys see other motives. Before the quake, 20th Century’s board of directors owned roughly a quarter of its stock, valued at almost $370 million. By summer, the board’s stock had lost nearly $250 million in value as doubts grew about the company’s ability to survive.

“The company was in financial trouble. It helped give them an excuse to [deny claims] overtly, rather than covertly. It’s greed by a bunch of businessmen, and that’s why they lied to banks, lied to shareholders and lied to policyholders,” homeowners’ attorney Wegman said in an interview.

20th Century said it kept its stockholders posted on how things stood, spokesman Hill said, even as the company teetered near financial collapse. 20th Century’s board members may have owned a lot of stock, he said, but there “has been no policy . . . to do anything but pay what we owe.”

Change in Procedure

On the morning of the quake, Castellani immediately contacted an outside appraisal firm, which started flying in claims adjusters. He wanted to have enough adjusters on hand to inspect every damage claim. Customers, Castellani testified, “were telling us, ‘Please come over here. I need you.’ And we . . . started doing that before Mr. Ashley stopped me.”

Neil Ashley was 20th Century’s chief executive, lured out of retirement four months earlier. Ten days after the quake, Ashley ordered Castellani to stop sending out adjusters to inspect every claim, court papers show. Instead, Ashley said, call customers over the phone, talk about their damage, and if the customer feels confident that their quake repairs fall under their deductible limit, don’t inspect that home. Tell them to contact us if they find more damage later.

Ashley, Castellani testified, was worried about the soaring costs of paying for hundreds of independent claims adjusters. “Mr. Ashley . . . said, ‘No, that’s going to cost a lot of money.’ ”

Castellani said that earthquake damage is often hidden and hard to find compared with damage from a fire or a windstorm. And he knew that 20th Century’s disaster plan said it would inspect every claim.

Handling claims over the phone, Castellani said, was “contrary to the unfair claim practices regulations . . . and we . . . were actually short-cutting our investigations,” he said. “We were not just doing what we were supposed to be doing for our customers.”

Ashley, now retired, defended his triage-like plan. “We had claims backed up by the thousands. . . . We needed to take care of . . . people that had the bad losses, that were out of their homes . . . and we didn’t have the troops to do it,” he said in a deposition. “We decided we should . . . handle the smaller ones” over the phone.

If anything, Ashley testified, he worried that not inspecting every quake claim “might cost us additional money in the long run” because damage from later aftershocks might be claimed as coming from the initial Northridge quake, with the company stuck for paying those claims. He also said that Castellani never raised any concerns that this change in claims handling would violate any insurance regulations.

“If you had those kind of resources available, obviously the optimum thing to do would be to send someone out to inspect every claim,” said Robert Armstrong, 20th Century’s outside counsel. But Ashley’s plan “was the best utilization of limited resources.”

By May 1994, the money was draining fast out of 20th Century. Wall Street had knocked off half a billion dollars from 20th Century’s total stock market value as the company’s quake damages piled up. At first, 20th Century said its total quake damages would be under $100 million; then its revised estimate was $160 million; then $325 million; then $475 million; and by May it was $600 million.

Meanwhile, a board member contacted Ashley about his fears that 20th Century was getting suckered into paying fraudulent claims. So Ashley told Castellani to talk at a May 1994 board meeting. (Other insurance companies were also worried about fraudulent quake claims. Later, a federal investigative unit was set up to track down those who fraudulently received federal loans or aid after the Northridge quake.)

At the meeting, 20th Century’s board members “were very angry. . . . They had lost and continued to lose a lot of their money,” Castellani said. “So there was a continuous pressure put upon me . . . as to what was happening in claims.” Castellani told the board that “I had to start from the premise that people are honest until proved otherwise. . . . That, of course, did not go across too well,” he said.

But in his mind, Castellani said, “I just did not cave in and tell them ‘Yes, from now, I’m going to deny every claim.’ . . I’ll continue doing my job. If they don’t like it, they have to find somebody else.”

By June 1994, “we were out of money,” Ashley testified. “I was afraid the [insurance] commissioner was going to move in and shut us down.”

One morning, 20th Century’s President James Curley walked into Castellani’s office and told him that several company executives would meet with bankers in an hour to try to get a loan, court documents reveal. According to Castellani, Curley said: “I have to tell [bankers] what our ultimate cost will be for this earthquake before I can get this loan. They want to . . . make sure the company doesn’t go under. . . . I’m going to . . . tell them that $685 million will be our ultimate.”

“I looked at him and said ‘No, it’s impossible,’ ” Castellani testified.

At that point, Castellani’s damage tab was already $630 million. An additional $55 million, Castellani said he told Curley, couldn’t possibly cover everything because new claims were still coming in and the final quake bill could be $950 million. Recalled Castellani: “He got furious on that and said: ‘Well, I’m going to tell them 685 [million dollars].’ I said, ‘Not with my blessing.’ And he took off.”

Company Turns Corner

20th Century did land a $175-million bank loan, after assuring Union Bank that $685 million would be the final quake damage tally.

That bank loan evaporated quickly, Ashley testified, and he was out hunting for a white knight to bail out the company.

In August, Ashley told Castellani that the board of directors wanted him to retire by the end of the year. The company had a mandatory 65 retirement age, and Castellani had turned 65 in March. At the time, Ashley was 71, and Louis Foster, 20th Century’s chairman, was 81. Castellani said he was stunned, because Ashley had told him earlier not to worry about the age limit.

In October 1994, Castellani was still running the claims department, and he was planning for claims that would come in after the one-year anniversary of the Northridge quake.

There were not enough engineers and contractors in Los Angeles to handle all quake repairs, he testified, and claims adjusters may have missed some damage. Homeowners may not have the money to pay for repairs immediately, so serious quake damage may not be discovered until a contractor finally lifted up carpets, removed wallpaper or looked under the basement.

Castellani issued a directive that claims filed after the one-year anniversary would be looked at case by case, and reasonable discovery would be the guiding principal on whether to pay. “I never believed in flat denials” of claims, he said. He directed that his orders be sent to 20th Century’s top management, court records show.

Then in December 1994, American International Group, a $10-billion New York insurer, officially agreed to pump in $216 million, and become 20th Century’s biggest shareholder. After losing a stunning $498 million in 1994, 20th Century turned profitable again after it basically stopped offering quake insurance and concentrated on its auto business. This year, it’s expected to earn about $90 million.

By January 1995, Castellani had retired. Not long after, 20th Century began refusing to pay “late” claims based on outside legal advice. “You have one full year to . . . look for damage, to walk around the house, look in your garage, to lift up carpets, check behind photographs,” said 20th Century’s attorney Armstrong. “To discover any additional damage that may have been missed in the initial inspection, and to bring that to [our] attention.”

One person inspecting quake-damaged homes was Guy Witt, a claims adjuster with Hartka & Co., a firm that 20th Century relied on to handle its quake claims. In a deposition, Witt said that he reinspected about 100 homes, many saddled with substantial damage that had been missed by 20th Century’s adjusters. Some East Coast adjusters, he testified, were “in a hurry to get home and they would . . . walk around, look at the damages and assume it was below the deductible.”

When Witt later discovered quake damage, 20th Century would deny the new claims because of the time limit. “Some people . . . lost a great deal in the earthquake, and they weren’t compensated for it when they should have been,” Witt said.

Meanwhile, 20th Century continues to settle many quake cases out of court: About 150 Northridge quake suits are still active, down from 400. Those cases that do come to trial are the legal equivalent of a high-stakes poker match. Some homeowners’ attorneys--who would pocket 30% to 40% of any settlement--are clearly betting that 20th Century will lose and be hit with a multimillion punitive damages award.

So far, two quake cases have gone through trial. Both suits were filed by homeowners denied additional damage claims by 20th Century because of the time limit. 20th Century lost both, though the jury awards were modest: $75,000 in one, $65,000 in the other.

John Bollington, 20th Century’s general counsel, said that some plaintiff attorneys “will roll the dice and believe they will get rich. And some of them will. We’re going to lose some of these cases.” Why? “Any lawsuit has an element of risk in it. [But] we think our position is right in all these cases.”

Despite all that has happened since the Northridge quake, Castellani said in his deposition that he still loves the company and hopes to be buried wearing his 20th Century service ring and watch.

Cases Stretch Into Future

The 20th Century quake litigation has dragged on for so long that, allowing for trials and possible appeals, it could be the next decade before all the cases reach their conclusion.

Richard Marsh and his wife, Eve, had lived 33 years in their Van Nuys home when it was rattled by the Northridge quake. In February 1994, 20th Century sent out a claims adjuster who concluded that although there was quake damage, their repairs fell under their policy’s $23,900 deductible.

The Marshes said the 20th Century claims adjuster was the expert, not them, so they believed him. But more than a year later they began to suspect their home had actually suffered major quake damage. They wanted a second opinion, so they called in an outside appraisal firm, who told them there was plenty of costly quake damage. The Marshes contacted 20th Century, who sent out another inspector, but the company denied their new claim because of the time limit. So they sued.

Last fall Richard Marsh had a contractor’s 30-page report, itemizing $116,784 in repairs needed for every room, from two chimneys that had to be demolished to the entryway that sat one-inch lower than his living room floor.

Marsh also had an advanced case of cancer and he lay motionless in his bed, the room light kept dim, although the quake cracks in his bedroom fireplace were visible. He recalled the first claims adjuster that 20th Century sent his way. “The guy was from brought in from the East Coast. He knew all about tornadoes and hurricanes, not earthquakes. I took 20th Century at their word. I relied on what I thought was a reputable company that would cover us for damages. I was naive.”

Marsh died a few weeks later. His widow is waiting for her trial to begin next April.