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)



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          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.

                                                                       




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           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. . . .   
                                                                       




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               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  
                                                                       




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            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  
                                                                       




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            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  
                                                                       




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            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
          
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