Executive Director’s Report
Dear Friends:
Never a dull moment in California. Governor Davis’ signature on a new law to increase insurer accountability was barely dry when a coalition including State Farm, Farmers and Allstate declared war to overturn it.
Suddenly, our airwaves are being inundated with ads making outlandish claims about higher premiums due to frivolous lawsuits and evil lawyers. Is it possible that the millions insurers are spending to run these ads might contribute to higher premiums?
Ah…the elusive truth. In this issue, you can learn the facts about the new law and another new law from Arnie Levinson, United Policyholder’s legislative advisor. Arnie participated in the negotiations that led to the passage of compromise versions of both measures. Several major insurance companies support them.
Also in this issue we focus on earthquake insurance, a topic that has gotten a lot of media attention lately, but remains a quandary. It’s expensive, the deductibles are high, and the coverage is bad. We don’t blame the majority of property owners who’ve concluded it’s just not worth it. However, for Californians in fault zones, we advise against "going bare", (i.e. not having insurance), for such a major risk. Please use the information we’ve put together to make the financial decision that’s right for you.
Our Amicus Project victories are cause to celebrate. We’re making a small amount of resources go a long way, but we’re looking ahead and need your help. If you have connections with a large commercial entity, or a trade association, help us forge an alliance with them. If you have the ability to support us financially, there’s no time like the present.
Amy Bach, Executive Director
UP AMICUS PROJECT SCORES ANOTHER MAJOR VICTORY
The California Supreme Court adopted key points from United Policyholders’ Amicus brief in the recent pro-policyholder decision in Vandenberg v. Sup. Court 21 Cal.4th 815, 838-842 (1999). Our brief was written pro bono by Carmel attorney Scott Turner and submitted on behalf of UP and fifty-two trade associations and individual businesses. Earlier this year, another UP Amicus brief was specifically cited with approval by the United States Supreme Court in the pro-policyholder decision; Humana v. Forsyth 525 U.S. 299 (1999).
The Vandenberg decision is great news for California businesses that stood to lose millions of dollars in CGL benefits. Insurance companies were seeking the right to broadly deny coverage for all damages assessed on any type of contract theory. The court turned them down and adopted our reasoning over the arguments of the parties. In its decision, the California Supreme Court held that a coverage determination for property damage losses depends on the property itself and the nature of the risk causing the injury.
Scott Turner’s hard work in writing the Amicus brief and getting so many commercial insureds to co-sign with UP were clearly decisive factors in the favorable result. He overcame a daunting line of legal precedents that supported the insurance industry’s arguments.
Scott is the author of the treatise; "Insurance Coverage of Construction Disputes" West Group 2nd Ed. 1999. You can contact Scott Turner, Attorney at Law, at P.O. Box 1671, Carmel, CA. 93921. (831) 626-5626.
WHAT IS AN AMICUS BRIEF?
Amicus Curiae is Latin for "friend of the court". Interested groups and individuals who want to educate judges on specific issues can file "amicus" briefs in important cases. Amicus briefs often have a major impact on the law that is created when a final opinion in a case is published. That is why insurance companies and their trade associations routinely file amicus briefs in every major case.
Since Eugene Anderson initiated UP’s Amicus Project, we have had outstanding success in securing important rights for insurance consumers and refuting insurance company arguments that had previously gone unanswered.
NEW BAD FAITH LAW
By Arnold Levinson, a policyholder attorney practicing in San Francisco and Legislative Advisor to UP
Auto Insurer Accountability
For many years, the law in California has allowed an insured to sue his or her own insurance company for the unreasonable failure to pay their insurance claim. However, sometimes it is someone else's insurance company that has an obligation to pay a claim. For example, if you are injured in an automobile accident caused by another driver, it is the other driver's insurance company that has the obligation to pay for the damage to your car and your personal injury damages. (While your insurance company may pay for the damage to your car and limited medical expenses, your insurance company will not pay for your pain and suffering.) A California statute (Ins. Code §790.03(h)) requires the other party's insurance carrier to treat you fairly in those circumstances. However, if they fail to do so, there was no procedure to permit you to file suit against that carrier for violation of the insurance code. One could complain to the Department of Insurance, but it would be mostly a useless gesture.
The new bad faith law provides certain persons the right to sue the other person's insurance company under specified circumstances.
Those who suffer bodily injury or wrongful death in any circumstances or property damage arising out of a motor vehicle accident are persons who may potentially sue under the statute. Persons who suffer property damage arising out of an incident other than an automobile accident (such as damage to one's house or condo) are not within the scope of the statute.
The claimant must be a natural person and not a corporation or business entity. Thus, businesses cannot make a claim for bad faith and an individual claiming only economic loss cannot make a claim.
There are numerous subdivisions under Insurance Code Section 790.03(h). Most of those subsections can form the basis of a lawsuit. The most significant of those subsections are (3) failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under the insurance policies; (5) not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear; and (13) failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromised settlement.
The most important limitation is the obligation of the claimant to actually go to trial against the other party and obtain a verdict that is greater than the amount asked in settlement. For example, in an automobile accident where Party A was injured by Party B. Party A may sue Party B's insurance company. However, before doing so, Party A must first sue Party B and actually go to trial and obtain a verdict against Party B. In addition that verdict must exceed the amount of the final settlement demand which A made to settle the case and, that demand must have been sent by certified mail. Thus, one cannot "settle and sue." That is, Party A cannot settle his or her claim against Party B and thereafter proceed against Party B's insurance carrier -- no matter how bad the insurer may have acted.
In the event that all of the above requirements are satisfied, then one can sue the other party's insurance carrier. All damages are recoverable including punitive damages.
There is also a comprehensive arbitration provision in the act. For cases under $50,000, either the plaintiff or the insurance company can offer to submit the matter to binding arbitration. If the plaintiff makes the offer and the insurer accepts, or the insurer initiates the offer in a case valued at $50,000 or less, the insurer then cannot later be sued for bad faith under this act. There are rules for determining whether the matter is a $50,000 case or not. An insured may request arbitration if the amount in controversy is for a dollar amount that does not exceed $50,000 or is within policy limits exclusive of uninsured or underinsured motorists coverage if the limits do not exceed $50,000. The claimant must be represented by counsel. An insurer may request arbitration if the claimant makes a settlement demand against all potentially responsible parties of less than $50,000 or where the policy limits do not exceed $50,000. Where there is more than one responsible party, an insurer may request arbitration only if all parties agree or if the insurer offers to settle the action for policy limits. The only available arbitrators are retired judges and must be paid at the current judicial arbitration rates. In addition, there is a $200 filing fee and the arbitration costs shall be borne equally by the parties.
A party may remove the case from arbitration on a showing of good cause if (1) either party discovers that there is more than $50,000 in insurance coverage, (2) there is a change in the claimant's condition which was not reasonably foreseeable, (3) new evidence surfaces which exposes new potentially responsible parties, (4) there is a change in the law, (5) a party interferes unreasonably with the completion of arbitration, (6) it is in the interest of justice or (7) the insurer discovers the claim is a potentially fraudulent claim in violation of Section 550 of the penal code. Under those circumstances, the insurer may request that the court review the information in camera (i.e. in secret)
The statute will apply to all accidents, events, occurrence or losses that occur on or after January 1, 2000.
HMO Accountability
While it has been touted extensively in the press that Governor Davis signed a bill permitting people to sue their HMOs, the law which was passed, in fact, provides an extremely limited basis upon which to sue one's HMO. The bill does not purport to provide a right to sue an HMO simply for wrongfully denying healthcare based upon the wrongful claim by the HMO that the care is not covered under the terms of the policy. What it does do is provide that an HMO has a duty of ordinary care to arrange for the provision of medically necessary care and that it shall be liable for any and all harm caused by the failure of one enrolled under an HMO to receive necessary care, as long as that care is covered by the HMO plan.
Thus, there are three basic requirements.
(1) There must be a failure to exercise ordinary care, which resulted in the denial, delay or modification of healthcare which was furnished to or recommended for a subscriber or enrollee. This care may be recommended or furnished to the subscriber at any point either prior to or after the denial of care. It need not precede the HMO's actions.
(2) The subscriber or enrollee must suffer substantial harm. Substantial harm means loss of life or the significant impairment of a limb or bodily function, severe and chronic pain or significant financial loss.
(3) The recommended care must be a covered benefit under the HMO plan.
This law is sometime described as giving rise to a "quality of care" cause of action. In other words, when suing an HMO, the complaint must allege that necessary medical care was not provided, not that the insurer claimed that the type of care sought was not covered under the HMO agreement. The former is a quality of care decision, the latter is a denial of benefits. Quality of care violations are within the scope of the act. Denial of benefits are not.
A subscriber and enrollee will have a right to an independent medical review. This independent medical review must be exhausted prior to filing suit. Compliance is not required if substantial harm has or will eminently occur prior to the completion of the review. While the statute is silent on whether the independent medical review is admissible in court, one must assume that it will be admitted.
Thus, in order to sue under this HMO act, one must satisfy the following:
- It must be a quality of care and not a denial decision;
- One must have suffered substantial harm as defined by the act;
- The recommended care must be a covered benefit; and
- One must have gone through and obtained an independent review, or satisfied the provisions for avoiding such a review. Thus, it is likely that before suing, one will have received a denial of care by the HMO and affirmation of that HMO decision by an independent reviewer, whose decision might be admissible at trial.
This is a long way from the unfettered right to sue an HMO.
Comparison Shopping for Insurance
The California Department of Insurance (CDI) has released its 1999 Homeowners Insurance Premium Comparisons. Call 1-800-927-HELP or go to the CDI web site at www.insurance.ca.gov to get a printout of comparison premium prices for homeowners, condominium, renters and earthquake insurance. You won’t get an exact quote for your home, but this is a good starting place for comparison-shopping. You can also find other information at the Department’s web site such as: comparison auto insurance rates; the license status of an agent; insurance company profiles; and a list of companies authorized to sell insurance in California. This site has good links to other sites and you can use it to access the entire California Insurance Code and Regulations
EQ INSURANCE: THE BOTTOM LINE
With the 10th anniversary of the Loma Prieta earthquake shaking the memories of California Bay Area residents, the specter of a "big one"- like those in Turkey, Greece and Taiwan- hovers. It’s a good time to revisit the earthquake insurance question, especially if you dropped your coverage after the CEA took effect.
California EQ Market Loosening Up
The EQ insurance market is finally loosening up. Options for businesses and homeowners are expanding. More companies are selling earthquake insurance and offering a wider variety of policies. While most companies are still selling "mini" EQ policies with low limits and will only sell EQ as a package with HO or business owners policies, the relatively new GeoVera and Pacific Select insurance companies are selling a variety of "stand alone" earthquake policies. Stand-alone means you can buy the policy without buying HO or business coverage from the same company. As we predicted, the California Earthquake Authority (CEA) has developed new policies that supplement their basic policy so consumers can buy increased earthquake insurance limits in certain categories.
Evaluating Your Options Still a Challenge
Evaluating your options is still a challenge. For starters, review your EQ policy, if you have one, and determine what your limits are for the three main categories: Dwelling, Contents/Personal or Business Property, and Loss of Use. ("Dwelling" covers the structure, "Contents" covers furniture, clothing, etc., "Loss of Use" covers expenses you incur because you can’t use all or part of your home; typically rent, increased transportation and food costs, etc.)
Check your deductible. It’s probably 15%. Generally speaking, your goal should be to pay a reasonable price for higher limits than the basic CEA or mini EQ policy and a 10% deductible. For help determining what a reason able rate is, you should contact at least two insurance agents and the California Department of Insurance .Call 1(800) 927-HELP or go to www.insurance.ca.gov .
CEA and the Mini Policy
The CEA and most non-CEA insurers selling EQ coverage are offering the state-mandated minimum limits of $5,000 personal property; $1,500 "loss of use" coverage, with a 15% deductible. This is known as a "mini-policy" because the limits are minimal. You can generally buy a mini-policy outside the CEA for less than you’d pay for a comparable CEA policy, and you may be able to get better coverage. Some non-CEA insurers are offering 10% deductibles and higher limits for personal property and loss of use coverage. You need time on the phone or Internet or with a knowledgeable agent to help you wade through the possibilities and arrive at the decision that’s right for you.
If you’re satisfied with your Home/Business owners policy, but you can’t get a good EQ policy from the same company, you should check out competing companies offering a "stand-alone" policy, (see above), that don’t require you to buy both types of coverage just to get EQ coverage.
Stand-Alone EQ
There are many insurers offering non-CEA EQ coverage, but the most high profile are "GeoVera" and Pacific Select. We strongly encourage our readers to explore companies other than those with the biggest advertising budgets, but make sure to check their financial status before trusting them with your property. A.M.Best is the standard insurance industry rating system. Their website is www.ambest.com. The CDI is another resource for researching the strength and integrity of an insurance company.
Geo Vera sells a "mini" policy generally priced below a comparable CEA version, and Comprehensive EQ Coverage that is a single limit policy for your home, other structures, personal property, and loss of use. You should work with an agent to decide how much insurance to buy. Under the single limit policy, the maximum benefits you can recover for all categories combined will be no more than the single policy limit. You can opt for a 10, 15, 20, or 25% deductible. You can call GeoVera or check out their website at www.geovera.com
"Pacific Select" offers five stand-alone policy options. They include Comprehensive EQ Coverage with a 10% deductible; a condominium policy with 10% deductible; a policy based on equity rather than replacement cost (deductible as low as 5%,); a basic 15%, $5,000, $1,500 mini policy, and a supplemental policy to reduce the deductible percent in a mini policy. You can call Pacific Select or check out their website at: www.pacificselect.com.
Pacific Select will not sell you insurance if your property is built on piers or poles or a slope of more than 26%.
Supplemental Coverage
If you have homeowners insurance with a CEA member company such as State Farm, Farmers or Allstate, you may be able to supplement your CEA mini-policy coverage through a very new and strangely priced program. (See "EQ Insurance Math" in this issue for details on the pricing of these supplemental policies). The program offers nine options to reduce deductibles from 15% to 10% and/or to increase the coverage for contents (from $5,000 up to $100,000) and living expenses (from $1,500 up to $15,000).
These supplemental policies are backed by Reinsurers; not the CEA fund. Renters and condo owners can’t reduce deductibles, but can increase coverage.
Four companies are currently offering this new supplemental coverage to CEA policyholders: State Farm, Liberty Mutual, USAA and Armed Forces Insurance. Don’t be surprised if your agent doesn’t know about the supplemental policies. Insurance companies are not required to offer the supplements. Some CEA member companies don’t plan to implement the program until the first or second quarter of 2000.
Staying Put
If you had a hard time finding comprehensive coverage because of the location or age of your property, or if you have guaranteed replacement or other benefits that companies are no longer selling, you should probably stay with your current carrier. If you can’t get a stand alone policy, the next best option is to buy supplemental or wrap around coverage with a mini-EQ policy. EQ insurance availability is still restricted. If your property was built before 1930; or if you live on a steep slope on poles, piers or posts; or your house has more than three levels (including a basement); or you live in a condo with parking on the first level; your choices are still quite limited, so you may have to buy less coverage for more money than you’d otherwise want.
Retrofitting Will Help.
The bottom line according to independent insurance agent Iris Lynch: "People ask me if they should get or drop earthquake insurance and I say to them ‘ There is no one answer. It depends upon your relative investment in your home, your other financial resources, and your degree of risk acceptance knowing that you live in a volatile earthquake region.’" Insurance is a business of wits analyzing risks.
- Comparison shop and buy the EQ policy that offers the broadest coverage and the lowest deductible for a reasonable price you can afford.
- Do basic retrofitting to reduce the likelihood that your home will suffer serious damage.
- If your options are limited because of the location or construction of your property, try to buy supplemental or "wrap-around" policies to broaden your coverage.
- If you go with a lesser known insurance company, make sure they’re financially sound and will be able to pay claims after a major quake.
- Maintain a comprehensive fire policy with limits tailored to your property and needs.
THE REALDEAL ON THE CEA’S NEW OFFERINGS
By Arthur Haskell, Oakland firestorm survivor and UP Board Member
We rebuilt our home after the 1991 firestorm and learned more about insurance than we’d ever wanted to know. When the earthquake insurance market erupted in confusion last year, I began researching the situation and joined the Board of United Policyholders. Here’s what I’ve found out about the availability and cost of earthquake insurance through the State of California Earthquake Authority, ("CEA").
The market changed drastically when the Legislature created the CEA. 14 companies controlling 70% of the homeowners insurance market elected to participate, including Allstate, CSAA, Farmers, Prudential, State Farm and USAA. The cost of the CEA policy more than doubled what most homeowners had been paying. The coverage under the CEA policy is very limited. Consumers can still buy non-CEA policies, but they must do so either through their homeowner’s insurer or one of two companies: GeoVera or Pacific Select.
The most criticized reduced coverage in the CEA policy is for personal property, (PP), and additional living expenses incurred through the Loss of Use (LOU) of your home. The basic CEA policy, as initially offered, provides only $5,000 for PP and $1,500 LOU. (See "EQ Insurance — The Bottom Line" in this issue)
In January 1999, in response to consumer complaints, the CEA announced it would be offering the option to buy higher PP and LOU limits. Consumers can now buy up to $100,000 limits for PP and $15,000 for LOU. The rub is, unlike most policies where the premium charged is based on the amount of coverage provided, the new CEA options are packaged in fixed amounts but priced according to the insured value of the home. This means that homeowners with differing value homes pay differing prices for exactly the same fixed dollar amount of personal property coverage. This writer’s efforts over a six-month period to obtain a satisfactory explanation of this pricing inequity have been unsuccessful.
How much will the higher CEA limits cost?
Premiums for the new higher coverage amounts are quoted for combinations of $25,000/$10,000, $50,000/$10,000, $75,000/$15,000 & $100,000/$15,000. Using the CEA quoted rate of $185 (per $100,000 of house valuation), if your home is valued at $100,000 and you want to buy the maximum CEA limits, it will cost you $185 per year. If your home is valued at $200,000, these same limits will cost you $370 per year. If your home is valued at $400,000, these limits will cost you $740.
These varying rates for the same amount of coverage make it difficult to evaluate their cost-effectiveness. One approach would be to compare the effective rate for the additional protection to the rate for basic EQ protection. For example, the basic CEA "mini" policy with $5,000/$1,5000 PP/LOU limits, in the San Francisco Bay Area will cost between $1.90 to $4.41 per $1,000, based on location. Based on those figures, the effective rates for additional protection would be less, or at least comparable to the rate for basic protection for homes insured to approximately $200,000. The effective rates for additional protection for homes insured for more than $200,000 are generally higher than the rates for the basic earthquake protection.
It appears the CEA’s response to complaints about inadequate PP and LOU limits has been to offer increased limits that vary in price with house value but masquerade as a single rate. These increased limits are generally more costly than the already overpriced basic EQ insurance you can buy from the CEA and others selling "mini" policies.
Note: The figures and resulting calculations above are based on information that appeared in the San Francisco Chronicle on January 19, 1999. It may be modified by the CEA
Retrofitting Advice
If the only earthquake insurance you have is a basic CEA or mini policy with a 15% deductible, and you don’t want to shop for higher limits, better coverage and a lower deductible, you should definitely retrofit your property.
Many property owners have done the math for a 15% deductible and concluded they are better off canceling their coverage and retrofitting instead. UP does not recommend this approach for the simple reason that the type of structural damage major earthquakes can cause is very expensive to fix. Our recommendation is to read the articles in this newsletter, comparison shop, buy the best, least expensive coverage you can find and do some basic retrofitting.
For those of you interested in going beyond the basics, the following is a simplified discussion of more technical aspects of seismic retrofitting. The most damaging components of earthquake forces are side to side movements, (lateral load). Prior to 1938, most dwellings were built to withstand the up-and-down force of gravity but not the lateral stress than can be caused by major earthquakes. There are three basic types of lateral failure that may occur in older wood framed dwellings. Preventing each type requires a specific method of retrofitting.
Cripple wall failure occurs in older wood-frame houses where vertical 2x2 studs are found between the foundation and the floor joists. Plywood reinforcement on the inside face of the cripple-wall studs can save a house from destruction. Shear failure happens when the bottom of a building moves but the top doesn’t.
Sliding failure occurs when a house is not securely bolted to the foundation. Many houses built before 1983 have deficient or no foundation bolts. In an earthquake, the foundation starts to move before the roof does, so the top and bottom edges of your dwelling’s walls "shear", or move horizontally past each other. Ground motion can send houses sliding off their foundations. Have a reputable professional check the integrity of your foundation and the sufficiency of your anchor bolts
Many wood-frame houses built before the mid-80’s don’t have enough bracing and are subject to shear wall failure. This is particularly true when there is a second story above a garage. The narrow sections of wall on either side of a garage door need to be properly enforced and may require hold down anchors or "moment" frames.
Whether or not you carry earthquake insurance, you should:
- Consult with a reputable contractor who is knowledgeable about cost-effective retrofitting.
- Determine which measures are appropriate for your home given its method of construction, type of foundation, soil conditions and location.
- Contact your insurance agent and inquire about retrofitting premium discounts.
- Contact the CEA about their new low interest seismic retrofitting loan program.
BASIC RETROFITTING
STRAP YOUR WATER HEATER TO THE WALL
BOLT YOUR HOME TO IT’S FOUNDATION
HAVE SHEAR PANELS INSTALLED WHERE APPROPRIATE
Earthquake Insurance Websites
California Dept. of Insurance - www.insurance.ca.gov
CEA Rate Calculator - data.insure.com/states/ca/home/cea/tool.cfm
Pacific Select Insurance Co. - quakeinsurance.net/homequote.htm
GeoVera Insurance Co. - www.geovera.com
Beware Before Lending Your Car
Some insurers are changing their policies to reduce or eliminate coverage for non-listed drivers, such as friends, family members, babysitters, etc. Discuss this with your agent and review your auto policy where it talks about "designated drivers/permissive use".