Insurers’ Court Victory Stirs Anger : Ruling Enrages Families Seeking Payoff for Cracks

Katherine Weatherill was leafing through the morning paper Tuesday when she saw the story and lost control.

“My first impulse was rage,� she recalled. “I couldn’t believe it. The insurance companies had won again at our expense.�

Weatherill and her husband, Bill, a retired aerospace engineer, are among several hundred homeowners who in recent years have waged a costly and emotionally draining legal struggle with insurance carriers to win compensation for damage to their homes in La Palma, Cypress and parts of southeast Los Angeles County.

Walls, Foundations Crack

Like many neighbors in the 27-year-old tract on La Palma’s west side, the Weatherills have witnessed the foundation of their two-story home bulge and break apart and seen cracks appear on interior walls.

Theories about the cause are as numerous as reports of damage in the upper-middle-class neighborhood of single-family homes.

But there is little disagreement among the Weatherills and their friends on Bellhaven Street as to who should pay to repair their homes: insurance companies.

That’s why Weatherill’s emotions boiled over Tuesday as she read the paper. In San Francisco, the U.S. 9th Circuit Court of Appeals had upheld a lower-court decision that denied insurance benefits to another La Palma couple who filed a claim after finding cracks in the foundation of their home.

The claim was denied by State Farm Fire & Casualty Co., which said the damage was caused, at least in part, by earth movement, specifically the expansion and contraction of the soil under their foundation--a condition excluded from coverage in their homeowners policy.

The couple argued that earth movement is the result of sulfates in the soil, allegedly a condition covered by the policy.

But State Farm maintained that because non-covered earth movement caused the cracks, it had the right to withhold benefits, no matter what other factors contributed to the earth movement.

This position has been widely adopted in the industry, with an estimated 90% of homeowner policies in California today incorporating the principle.

Monday’s ruling was widely viewed in legal circles as a significant victory for insurers because it may further limit the companies’ obligation to make good on claims of property damage. A federal court interpreting state law cannot bind state courts, but its rulings can be influential.

March 30 Ruling on Damage

On March 30, in another blow to policyholders, the state Supreme Court limited the ability of homeowners to collect property damage caused by landslides, earthquakes or other natural disasters by ruling that insurance companies must pay only when a policy covers the “predominant� or primary cause of the damage.

Coverage for disasters is excluded under most standard policies, also called “all-risk� policies.

But some lower courts have held that homeowners can collect benefits when damage results from a combination of covered risks, such as faulty construction, or uncovered risks, such as earthslides.

San Francisco-based attorney Patrick E. Catalano, who specializes in insurance litigation, said Monday’s decision could further erode the value of homeowner insurance policies.

“The court has taken the position that your homeowner’s policy is basically worth only the paper it is written on,� he said. “And that may not be much anymore.�

Representatives of several major insurance companies disagreed and characterized dire warnings of reduced coverage as political hype meant to rally the public against an industry already under fire on several fronts.

‘Bash the Insurance Industry’

“It has become fashionable to bash the insurance industry,� a State Farm spokesman said, “and there are those who will take this ruling and run with it, attempting to make great hay at our expense. In our eyes, the ruling simply defined a gray area in the law, and from that standpoint it was important.�

The significance of Monday’s ruling was not lost on Weatherill.

She and her husband bought their five-bedroom house 26 years ago. It was their ticket to retirement, an investment they hoped to cash out once their two children had grown and Weatherill’s husband retired from aerospace work. The children have grown, and Bill Weatherill quit work at Northrop last year.

But the couple said they cannot sell the house, not with a crumbling foundation and cracks throughout.

“It’s distressed property,� Katherine Weatherill said. “No one is going to buy it, not unless they are a gambler, a contractor or crazy.�

The Weatherills own one of 426 homes built by the Landmark Co. in the middle 1960s in La Palma. A decade later, many of the homeowners began to notice cracked tiles, bulges in the floors and fissures on walls.

In some homes, the damage was so severe the owners had to move out while extensive reconstruction costing up to $100,000 was completely.

200 Homes Rehabilitated

Ann Polonis, president of the development’s homeowner association, said about 200 homes in the area have undergone rehabilitation in recent years. But she said scores of homeowners such as herself have done nothing, because they have been trying to settle claims with their insurance carriers.

“It has been a long, long struggle for most of us,� said Polonis, who estimated that it will cost $130,000 to $150,000 to fix the foundation, plumbing and walls in her home. “The house needs paint on the outside. But I’m not going to put one dime into this place.�

Geologists, soil scientists and engineers have generally agreed that the problems stem from the soil. But the exact cause is still unknown.

Some say the soil contains too much clay; others believe it contains too much sand. Like a sand castle that crumbles when it dries, sandy soil may shift as it alternately becomes wet and dry.

Still others blame sulfates in the soil. Polonis said they have “eaten away� the concrete foundations, driveways and decks supporting the homes.

$350,000 Study of Soil

To pinpoint the cause and perhaps shed light on who is ultimately responsible, a $350,000 study of soil conditions in the area is under way by Cal State Long Beach scientists. Assemblywoman Doris Allen (R-Cypress), whose district includes La Palma, introduced a bill last year that paid for the investigation.

“It is about time we get some answers,� Allen said Tuesday from Sacramento. Reacting to Monday’s appeals court decision, she said it is unfortunate that people buy homeowner policies, believing that they are adequately covered, when they are not.

But Tustin attorney Robert E. Beekman, who is representing 62 La Palma homeowners in cases against insurance carriers, blames state lawmakers for failing to stand up to insurers. He said the Legislature, influenced by the insurance lobby, has not taken the initiative to make insurers respond to public needs.

“The courts,� Beekman said, “are not the appropriate place to decide disputes of public policy, like insurance questions.�

Times staff writer Michael Cicchese contributed to this story.