Reprint of article appearing in the Los Angeles Daily Journal Verdicts & Settlements May 26, 2000
At Issue
Legal Aftershocks
Six years after the Northridge earthquake, two bad faith cases indicate that decisions
are going both ways: Sometimes insurance companies win, sometimes the clients win.
BY DEBORAH ROSENTHAL
VERDICTS & SETTLEMENTS STAFF WRITER

n Jan. 17, 1994, at 4:31 a.m., an earthquake that registered 6.8 on the Richter Scale rocked Los Angeles. According to the Insurance Services office, the Northridge earthquake was the second costliest insurance catastrophe in U.S. history.

Recent quake activity in the courtroom has been as unpredictable as the earthquakes themselves. In March 2000, North Hollywood sole practitioner Bernie Bernheim obtained a $20 million settlement for his client, Nordhoff Townhomes Homeowners' Association, in a lawsuit against Farmers Insurance Group arising out of its bad-faith practices in relation to the Northridge earthquake. Nordhoff v. Farmers, BC188792 (L.A. Super. Ct., settled March 6, 2000). Bernheim's victory is believed to be the largest settlement of a single bad-faith earthquake insurance claim in U.S. history.

However, across town, Long Beach attorney Michael Wade of the law firm of Demler, Armstrong & Rowland won a defense victory for his client, 20th Century Insurance Co., in another bad-faith case arising out of the Northridge earthquake.

Moreover, he also won $684,000 for the insurer when he prevailed on a cross-complaint against the insureds for fraudulent misrepresentation and punitive damages. Dunham v. 20th Century, BC173921 (L.A. Super. Ct., March 30, 2000). Their victories reflect the range of possible outcomes when insurers attempt unsuccessfully to offer adequate protection to homeowners against catastrophic events.

Dunham v. 20th Century

The Northridge home of plaintiffs Lawrence and Linda Dunham sustained substantial structural damage in the Northridge earthquake, from both the quake and from an ensuing flood that occurred when water from the swimming pool entered their home, damaging their personal property. The Dunhams made a claim under their earthquake insurance policy with 20th Century Insurance.


Defense counsel Michael E. Wade, above, found the use of demonstrative evidence was critical in Dunham because "plaintiffs' own photographs were in some sense their own worst enemy, and the jury recognized and commented upon that during the post-trial interviews."

The insurer initially retained an outside consultant to evaluate the claim, but the Dunhams were dissatisfied with the inspection, so 20th Century sent one of its own claims supervisors along with an engineer retained by the Dunhams. The two-hour inspection focused primarily on the home and yard, with little attention to personal property.

The plaintiffs' engineer and the 20th Century adjuster agreed that the home was not safe to occupy and that the dwelling required demolition and reconstruction. According to defense counsel Michael E. Wade, 20th Century paid more than $300,000 to the Dunhams to cover those costs as well as the cost of replacing numerous items of personal property that the Dunhams claimed were damaged.

According to Wade, the Dunhams provided 20th Century with an inventory of items that also listed their estimation of the value of the items, and 20th Century paid the full value claims, promptly and without question. Subsequently,

20th Century paid an additional $200,000 in living expenses to the Dunhams during the repairs.

Well after the demolition had occurred, the Dunhams requested an

additional $150,000 to cover the cost of what they alleged was newly discovered damaged.

"That's when 20th Century really started to look at the claim," Wade says.

The insurer's investigation allegedly revealed that the plaintiffs had not only made substantial improvements to the home during the repair process for which 20th Century was not financially responsible, but also that the plaintiffs had made material misrepresentations about the damages they sustained as a result of the 1994 earthquake.

"During the claim, the Dunhams were really remodeling the home, which certainly is permissible, but what they did that is not permissible was to claim that something was damaged when it wasn't, so they could use that money to remodel a part of the home," Wade says.

For example, Wade explains, the Dunhams' home at the time of the earthquake was a traditional ranch-style home. After the earthquake, the Dunhams' sought to have the home remodeled in a Southwestern style. As part of this transformation, the plaintiffs' architect advised them that two walls would need to be moved to make the rooms compatible with the Southwestern theme and that the insurance company might not pay for that expense.

 

"The Dunhams wrote notes to each other discussing how to classify the move of these walls as earthquake related, to ensure that 20th Century would pay for something it otherwise wouldnąt have owed," Wade says.

These notes became documentary evidence of the plaintiffs' conspiracy to defraud his client.

"20th Century offered to walk away and not seek any reimbursement for any of the monies that they deemed to be overpaid and not due, but Mr. Dunham had his own agenda and filed suit. He sought millions of dollars of punitive damages, alleging that 20th Century had engaged in despicable conduct," Wade says.

The plaintiffs alleged that 20th Century intended to use the Dunhams' remodeling as a basis wrongfully to void their policy and improperly to avoid further payments of the $168,000 of contract damages that the plaintiffs claimed remained due under their policy. The plaintiffs also claimed emotional distress and asked for general and punitive damages.

20th Century denied wrongdoing and brought a cross-complaint against the Dunhams, claiming that much of the remodeling was accomplished by misrepresentations made by the plaintiffs with regard to the extent of the needed repairs.

20th Century further argued that the Dunhams' claim for additional living expenses was excessive and resulted

from the remodeling effort that the plaintiffs had undertaken. Defendant took the position that the plaintiffs' representations amounted to fraud that voided the policy.

"What was unique in this case was that the personal property alleged to have been damaged appeared to be the vast majority of that which was owned," Wade says.

"One example was a claim that there were $10,000 worth of books destroyed in the earthquake. The insureds took many photographs within a short time after the earthquake in an attempt to give an overview of the damages. What the photographs really showed were specific items or areas in the home that were alleged to have been damaged, but when you looked closely, were not damaged."

"So plaintiffs' own photographs were in some sense their own worst enemy, and the jury recognized and commented upon that during the post trial interviews," Wade says.

Wade found that use of demonstrative evidence was critical in this case, which involved 8,000 pages of documentary evidence. Numerous documents, such as spreadsheets prepared by the plaintiffs regarding the purported damage and correspondence between the plaintiffs and the insurer, offered critical proof of the plaintiffs' fraud.

Wade used an ELMO Projector to display these documents on television screens facing the jury, which "permitted the jury to see thousands of pieces of paper in blow-up form on a television screen

SIDEBAR
Dunham v. 20th Century
Case Type: Insurance bad faith; fraud
Case Cite: Dunham v. 20th Century BC173921 (Los Angeles Sup. Ct.):
Result: Defense verdict in favor of 20th Century on plaintiffs' complaint.
$684,000 verdict in favor of 20th Century on its cross-complaint.
Attorneys: Plaintiffs --- Al Clifton Hodges and Bret Shefter,
Hodges & Associates, Glendale
Defendant --- Michael E. Wade, Sean D. Beatty and David A. Ring,
Demler, Armstrong & Rowland, Long Beach
Experts: Plaintiffs --- Michael Carter, insurance claims handling, Downey;
Henry A. Ojendyk, civil engineer, Pasadena
Defendant --- Boyd A. Veenstra, insurance claims handling, Burbank
Judge/Dept.: Ronald M. Sohigian, Dept. 41

at the same time the witness was being asked about the same piece of paper," Wade explains. "It put [the jurors] literally into the case. They were participants rather than passive observers."

The plaintiffs did not use demonstrative evidence. The plaintiffs' counsel, Al Hodges of the Glendale law firm of Hodges & Associates, states that his decision was strategic.

Hodges reports that, although the parties engaged in "a number of different settlement conferences and mediations, we were always very, very far apart."

At the end of a month-long trial, the jury returned a unanimous verdict in favor of 20th Century on all theories in both the underlying action and the cross-complaint. In an 11-1 poll, the jury awarded 20th Century $634,000 in damages on its cross-complaint and awarded $50,000 of punitive damages against the insureds at the end of the second phase of trial.

"My impression was that this jury was scared to death about their insurance rates going up," Hodges says.

Hodges, who practices general plaintiffs' litigation and has handled a number of cases arising out of the Northridge earthquake, believes that the publicity generated by the insurance lobby earlier this year in an effort to defeat Propositions 30 and 31 "seemed to weigh heavily in these jurors' minds."

Hodges stated that the plaintiffs plan to appeal the verdict.