Court Rules Couple Can Sue Insurer on Quake Policy

A federal court has broadened the liability of insurance companies in California, ruling this week that a San Fernando Valley policyholder can sue State Farm Insurance for failing to offer earthquake coverage prior to the 1994 Northridge temblor.

In their lawsuit against State Farm, Northridge residents George and Michelle Jacobellis allege that the firm, the country’s largest, failed to offer them earthquake coverage, a violation of the 1984 Earthquake Insurance Act. The law requires insurers to offer earthquake insurance to all homeowner policyholders.

State Farm attorneys had argued that the couple should not be allowed to proceed with their lawsuit because only the state insurance commissioner can enforce the Earthquake Insurance Act. The company has denied any wrongdoing.

But in a reversal of a federal district court decision supporting State Farm’s position, the 9th U.S. Circuit Court of Appeals in Pasadena ruled the Earthquake Insurance Act does not specify how it shall be enforced--whether by government regulatory bodies or through lawsuits brought by policyholders such as the Jacobellises.

State Farm attorneys argued that the omission of enforcement procedures in the law implied that lawsuits by policyholders were improper. As evidence, they cited the state Department of Insurance enforcing a similar interpretation of the statute when former Commissioner John Garamendi fined Farmer’s Insurance $100,000 in 1994 for failing to offer earthquake coverage to policyholders.

Although State Farm attorneys and plaintiffs’ attorneys disagree over the possible ramifications of the opinion, both parties agree that the ruling has opened a new angle of attack for angry policyholders.

State Farm’s attorney in the case, Mitchell C. Tilner of Horvitz & Levy, declined comment, as did State Farm officials in its regional office in Westlake Village.

Attorney Steven Kivo, representing the Jacobellis family, said the 9th Circuit opinion adds another layer of enforcement and recognizes the difficulty of enforcing insurance regulations faced by the commissioner’s office.

“The commissioner already has his hands full,” Kivo said. “He’s already said his office is embattled with all the cutbacks in his office, he’s short-handed. . . . His office is so busy I don’t think this decision undermines him at all--it helps him be more effective in the areas he has jurisdiction.”

Over the past decade, the state’s insurance industry has grown dramatically and the state Department of Insurance has failed to keep pace, according to state auditors.

Sabrina Kim, an attorney for the Proposition 103 Enforcement Project, hailed the opinion as a “pro-consumer stance” and a warning to wayward insurers.

“The 9th Circuit felt that consumers had to have some remedy,” she said.

The lawsuit filed by the Northridge family also claims the company forged a signature on customer forms to deny their claim after the quake. If the forgery allegations are proven, the couple would be entitled to punitive damages, the judge ruled.

State Farm, a $55-billion company based in Illinois, is the largest insurer in California.