California orders home insurers to comply with state law

By Joe Frey

The California Department of Insurance has issued a directive requiring all insurance companies in the state to show the department proof that their homeowners policies conform to state insurance code.

Notice 99-1 comes on the heels of a department investigation into Safeco's policy language. Safeco was ordered to change its homeowners insurance policy language by U.S. District Judge Ronald Lew on April 28, 1999, because it denied coverage to policyholders who had not committed insurance fraud (known as "innocent coinsureds"), even when illegal acts were committed by a coinsured, such as a spouse. (For more on the case, see Are home insurers thwarting California law?)

Safeco filed a motion for reconsideration in mid-July but was denied by Judge Lew on July 27. Now the company, as well as all other home insurers in the state, must make sure policy language provides coverage for innocent coinsureds.

Le Roi Brashears, spokesperson for Safeco, says that his company complies with all California insurance laws and will comply with any future changes to the law.

The order is not likely to create significant extra work or cost for insurance companies because they regularly file documents with insurance departments.

The case of the innocent coinsureds

The language that caused this hubbub is found in the "concealment or fraud" section of every California homeowners policy. California's insurance code requires the following paragraph:

This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof . . . [emphasis added].

Sparking the change

A recent case in California provided the impetus for the insurance department's directive. After paying more than $800,000 in claims to the Robert "Skip" Rawstron, Safeco stopped paying when it found out that his wife, Carla, falsified $50,000 in receipts for damage from the 1994 Northridge earthquake. Carla Rawstron was convicted of insurance fraud and was sentenced to 60 days in jail on Oct. 6, 1998, and ordered to pay $43,000 in restitution to Safeco. Skip Rawstron is an insurance agent in Westlake Village, Calif., who had sought $55,000 in additional payments.

"It's a major victory. It's the crux of the entire matter," says Rawstron. "I'm pleased that all the effort and energy that's gone into making it happen hasn't been in vain."

Despite his victory, Rawstron thinks that the ruling might very well have a negative effect on the insurance industry as a whole. "I'm truly sorry that this litigation had to proceed to the point that it might allow some people to commit insurance fraud and get away with it," he says. That's because the change in policy language is more favorable to policyholders and doesn't allow insurers to deny coverage across the board when they believe fraud has been committed: Insurers might find themselves having to cover innocent policyholders on claims that were submitted fraudulently by family members.

Rawstron has maintained his innocence throughout the case and claims Safeco wrongfully denied him payment for the actual damages his property sustained. Rawstron's insurance agency, ironically, still sells Safeco homeowners policies. He is currently countersuing Safeco for about $2.5 million.

Brashears of Safeco asserts that Rawstron, since he benefited from his wife's fraudulent practices in claims that were paid, cannot be considered an innocent coinsured and therefore should not receive any more money.