BILL ANALYSIS SENATE JUDICIARY COMMITTEE Adam B. Schiff, Chairman 1999-2000 Regular Session SB 1899 S Senator Burton B As Amended May 9, 2000 Hearing Date: May 16, 2000 1 Code of Civil Procedure 8 JMR:pjs 9 9 SUBJECT Statute of Limitations for Insurance Claims from the Northridge Earthquake DESCRIPTION This bill would provide that, notwithstanding any other provision of law or contract, any insurance claim for damages arising out of the Northridge earthquake which is barred as of the effective date of this bill solely because the applicable statute of limitations has expired, is revived and a cause of action thereon may be commenced provided that the action is commenced within one year of the effective date of this bill. (This analysis reflects author's amendments to be offered in Committee.) BACKGROUND The January 1994 Northridge earthquake resulted in billions of dollars in property damage in Southern California, exposing insurance companies to significant liability. In many cases, claims arising out of the earthquake were not immediately made to the insurer. Delayed claims often resulted from an insured not realizing that there was damage, or the full extent of the damage. In other cases, claims were apparently made in a timely manner, but denied on the basis that they did not exceed deductibles, or the claims were paid, but the homeowners discovered more damage later. These subsequent claims were denied as untimely. (more) SB 1899 (Burton) Page 2 In addition, there has been an ongoing dispute as to the Department of Insurance's response to complaints by homeowners resulting from the earthquake. Insurance Commissioner Chuck Quackenbush is under investigation for waiving potentially billion-dollar fines against insurance companies that allegedly mishandled Northridge claims, settling for less than $12 million in donations to a nonprofit foundation he created. According to various reports, none of the money has gone to compensate Northridge earthquake victims and a Sacramento Superior Court judge last week froze one foundation's remaining $6 million in assets at the Attorney General's request. CHANGES TO EXISTING LAW Existing law specifies a standard form fire insurance policy to which property insurance policies must conform. These policies may cover other subject matter and risks, including earthquakes. Within that statutory form, existing law provides that no suit or action on the insurance policy shall be sustainable in any court unless, among other things, it is commenced within 12 months after inception of the loss. (Insurance Code Sections 2071 and 2079.) Existing law provides that inception of loss is "that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered," but that to take advantage of such a delayed discovery rule, the insured is required to be diligent in the face of discovered facts. (Prudential-LMI Commercial Insurance v. Superior Court (1990) 51 Cal.3d 674.) This bill would provide that notwithstanding any other provision of law or contract, any claim for damages arising out of the Northridge earthquake which is barred as of the effective date of this section solely because the applicable statute of limitations has or had expired is hereby revived and a cause of action thereon may be commenced provided that the action is commenced within one year of the effective date of this section. SB 1899 (Burton) Page 3 This bill also would provide that any action pursuant to this section commenced prior to, or within one year from, the effective date of this section shall not be dismissed based upon this limitations period. This bill also would provide that nothing in this section shall be construed to alter the applicable limitations period of an action that is not time barred as of the effective date of this section. COMMENT 1. Stated purpose for the legislation The author has introduced this bill to bring needed relief to the victims of the Northridge earthquake. According to him, the one-year statute of limitations that is current law under Insurance Code Section 2071 has barred victims from being fairly compensated for their losses. He claims that numerous homeowners and homeowners associations were mislead about the extent of damage done as a result of the earthquake, and that once they learned the truth they were prohibited by the statute from filing a claim. 2. Does public policy support the revival of otherwise time-barred claims where due process does not so prohibit ? This bill would provide that, notwithstanding any other provision of law or contract, any insurance claim for damages arising out of the Northridge earthquake which is barred as of the effective date of this bill solely because the applicable statute of limitations has expired is revived and a cause of action thereon may be commenced provided that the action is commenced within one year of the effective date of this bill. As for changing a statute of limitation to revive a claim, the United States Supreme Court has stated that: if the lapse of time merely bars a personal claim for money or damages, there is no denial of due process in disappointing the hope of a complete defense. . . . SB 1899 (Burton) Page 4 Statutes of limitation find their justification in necessity and convenience rather than in logic. They represent expedients, rather than principles. . . . They are by definition arbitrary, and their operation does not discriminate against the just and the unjust claim, or the voidable or unavoidable delay. . . . Their shelter has never been regarded as what now is called a 'fundamental right' . . . the history of pleas of limitation shows them to be good only by legislative grace and to be subject to a relatively large degree of legislative control. (Chase Securities Corp. v. Donaldson (1945) 325 U.S. 304.) Subsequently, in Liebig v. Superior Court (1989) 209 Cal.App.3d 828 and Lent v. Doe (1995) 40 Cal.App.4th 1177, the courts cited Chase Securities and clearly affirmed the Legislature's power to revive civil common-law causes of action, even if the action was otherwise barred by the running of the statute of limitations. In both cases, the court upheld against constitutional attack the retroactive application of Code of Civil Procedure Section 340.1 (relating to actions for child sexual abuse) to revive actions that had lapsed or technically expired under prior law. While the Legislature may be authorized to revive actions, the policy behind the statutes of limitation provide that they "are designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. The theory is that even if one has a just claim it is unjust not to put the adversary on notice to defend within the period of limitation and the right to be free of stale claims in time comes to prevail over the right to prosecute them." (3 Witkin, Calif. Procedure, Actions (4th ed. 1996) 408.) Yet, courts have acknowledged that "the need for repose is not so overarching that the Legislature cannot by express legislative provision allow certain actions to be brought at any time, and it has occasionally done so." (Duty v. Abex Corp. (1989) 214 Cal.App.3rd 742, 749, citing Code of Civil Procedure Section 348, which states: "To actions brought to recover money or other property SB 1899 (Burton) Page 5 deposited with any [financial institution] . . . there is no limitation.") Thus, the final inquiry should be whether the Legislature believes that there are sufficient public policy reasons to support reviving any otherwise barred claims under this bill, and whether such an extension would maintain the protections afforded by the statute of limitations, i.e., balancing the interests of the victims with the defendants' right to defend. Proponents contend that there are strong public policy reasons to protect the homeowners under the circumstances of this bill. Proponents argue that thousands of people who suffered damage to their homes did not receive the benefit of their insurance contracts because of the insurance companies' conduct. Proponents assert that ample evidence exists to show that insurers handling Northridge earthquake claims engaged in a systematic program of misleading consumers about the nature and extent of damage to their homes. Later, when it became clear that the problems were indeed significant, proponents assert that the insurers refused to pay claims on the basis that the claims were too late. To compound problems, proponents note that when homeowners complained to the Department of Insurance to obtain relief, the department afforded no help. Thus, based on the circumstances surrounding the Northridge earthquake, proponents argue that there are sufficient public policy reasons to extend the statute of limitations and allow the homeowners to seek justice on their insurance claims. It should be noted that author's amendments offered in Committee add the word "contract" to the "notwithstanding" provision of the bill to ward-off any potential defense claims that this bill would not apply to the limitation provisions in the policies because they are part of a contract and thus not subject to legislative change. However, proponents argue that since the earthquake insurance is part of the form fire policies, which are required by statute to contain the one-year limitation period, they are, in actuality, statutory limitation periods that are merely restated in the policies, and thus subject to retroactive modification by the Legislature. (See Insurance Code SB 1899 (Burton) Page 6 Section 2071.) 3. Opposition by insurers The Personal Insurance Federation of California (PIFC) opposes the bill, arguing that the bill is flawed for a number of key reasons, including: Notwithstanding all of the news media reports about the potential failure of insurers to properly handle the Northridge earthquake, there has been no factual and objective information provided that verifies any of these allegations. Claimants from the Northridge earthquake already have full access to legal redress because failure on the part of an insurer to properly pay claims is subject to first-party bad faith claims. Many citizens at the recent Senate Insurance Committee in Granada Hills blamed the judicial system for its failure to agree with them on their claims. Although privacy laws preclude insurers from responding, if a jury sides with an insurer, there may be far more to any one story than explained by the claimant. The bill would reopen claims that an insurer legally denied from Northridge claimants through the introduction of retroactive legislation. This raises serious constitutional questions, namely the violation of contracts, which would result in a taking without just compensation. 4. Related pending legislation SB 622 (Speier) is currently on the inactive file on the Assembly Floor. SB 622 would provide that, in the case of loss arising out of the hazard of earthquake, ''inception of the loss'' means that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured, being diligent in the face of discovered facts, would be aware that his or her notification duty under the policy has been triggered. This bill is sponsored by the Department of Insurance and is intended to codify the holding in SB 1899 (Burton) Page 7 Prudential-LMI Commercial Insurance v. Superior Court (1990) 51 Cal.3d 674. The bill also would provide that if an insured has complied with the notification requirements in the policy, the applicable period of limitations shall be tolled until the insurer denies the claim in writing. It should be noted that SB 622 would not provide relief to Northridge homeowners who discovered defects from the earthquake more than a year ago. Support: Consumer Federation of California; Consumers Union; Center for Public Interest Law; Consumer Attorneys of California; The Foundation for Taxpayer and Consumer Rights; Community Assisting Recovery, Inc.; United Policyholders; Gray Panthers of Northern California; Congress of California Seniors; California Pubic Interest Research Group; one individual Opposition: Personal Insurance Federation of California HISTORY Source: Author Related Pending Legislation: SB 622 (Speier, 1999), inactive file on the Assembly Floor Prior Legislation: None Known **************