California high court to rule on insurer's denial of earthquake damage claim.

Nearly six years have passed since the 1994 Northridge earthquake rattled Southern California. Peter Vu is still on shaky ground.

The California Supreme Court has agreed to answer a certified question concerning Vu's case against Prudential Property & Casualty Insurance Co. The court will weigh whether a one-year statute of limitations bars Vu--and potentially other homeowners--from seeking coverage for earthquake damage that was not discovered by a Prudential employee during an initial inspection.

At the time of the earthquake, Vu had a homeowner's insurance policy that covered up to $300,000 in earthquake damage to his home and $30,000 to other buildings on his property. A 10 percent deductible applied to each coverage. California law required insurance policyholders to file claims within a year of the damage.

Within days of the Northridge quake in January 1994, Vu contacted Prudential to report cracks in the walls and ceilings of his house. A Prudential adjuster inspected the home and found that the damage totaled only $3,962, a sum below the deductible of his homeowner's policy, so no coverage was available. Vu was entitled to only $2,500 for damage to other buildings on his property.

Vu accepted Prudential's inspection as competent. But in August 1995, he discovered substantial additional damage to the house that the quake had caused. In September 1995, about 20 months after Prudential had denied Vu's claim, he hired an appraiser, who estimated that the earthquake damage exceeded the $30,000 deductible. Prudential rejected Vu's request for coverage because the one-year statute of limitations had expired.

Vu filed suit in federal court, and the court granted Prudential's motion for summary judgment.

Vu's appeal went to the Ninth Circuit, which has asked the state high court to determine whether an "insurer may be estopped from asserting the statute of limitations as a defense where the insurer's own conduct caused the insured not to bring a timely suit." The appeals panel said that to bar Prudential from invoking the statute of limitations, Vu must show that he "reasonably relied" on the insurer's assessment of the damage, which proved inaccurate. (Vu v. Prudential Property & Casualty Insurance Co., 172 F.3d 725 (9th Cir. Apr. 19, 1999).)

In turning to the state supreme court for a ruling, U.S. Circuit Judge Alex Kozinski wrote for the Ninth Circuit panel, "An insured who ... has suffered a loss is often unaware of the extent of the loss .... [T]he extent of the damage may not be discovered by an ordinary visual inspection; it may require a trained technician .... When the insured notifies the insurer and the insurer dispatches a trained investigator to inspect the claim, does the insurer have an obligation to conduct the investigation competently and fairly...? [I]s a competent inspection ... part of the ... policy? And is the insured justified in relying on the insurer's good faith and expertise, or must he incur the expense of hiring an independent expert to inspect the damage?"

The California court may rely on a case it decided previously, Neff v. New York Life Insurance Co. (30 Cal. 2d 165 (1947)), depending on whether it still considers the case good law. Neff said that an insurer is not prevented from using the statute of limitations as a defense even if its denial of a claim proved erroneous and the insured relied on it.