Very few people are “good” at dealing with financial problems following the loss of the foundations of their lives, their homes and possibly their loved ones. Unfortunately the initial payouts are usually a relatively small amount compared to the large scope of the problem. The question then becomes who should – or should be required – to step up to the plate and how fairly will they handle their responsibility?

Before an airplane taxis down the runway, the pilot and co-pilot go through a carefully scripted checklist to make sure that all systems are in order and that each person knows his job duties. They want to make sure that when the plane gets to take off speed, neither one ends up looking at the other wondering whose job it was to make sure the flaps are down. When a disaster such as the San Bruno natural gas explosion and fire strikes, sadly there is no prepared checklist of responsibilities to follow to ensure that the victims are fairly taken care of. Should the victims rely on their own insurance company or should they rely on the creator of the problem to take care of them and make them whole? Where does government assistance come into the picture? And, how does an injury or death affect the sorting out process.

The reality confronting the victims of a disaster are frequently far different than the public relations picture painted by the various potentially responsible players. At the outset, when media attention focuses on the scene of the disaster, insurance companies and potentially responsible parties are present with public relations assistants offering kind words and pledges of careful attention. Large money sums are frequently mentioned, often with an implication that these sums will readily be paid to the victims. And, some immediate living expense money is passed out right away. After the initial wave of concern and attention, the victims have to come to grips with the process of rebuilding and moving on. Very few people are “good” at dealing with financial problems following such significant loss. Unfortunately, the initial payouts are usually a relatively small amount compared to the large scope of the problem. And the question becomes who should, or should be required, to step up to the plate and how fairly will they handle their responsibility.

The cause of the problem ultimately will have the legal responsibility to pay all property damages suffered by the victim as well as any personal injury damages following a physical injury caused by the disaster. But this party has no fiduciary or good faith duty under the law and is not obligated to quickly or fairly settle these claims. Press releases aside, the obligation of a party responsible for causing a loss ultimately rests upon proof that is presented in court and judged by a jury of community members. This makes it difficult to rely on the party that caused the disaster to quickly and fairly pay all claims.

Government disaster assistance can be life saving and immediate, but it is not designed to make a victim whole or replace the obligation of a wrongdoer or an insurance company who has been paid in advance to provide disaster protection. When a home is destroyed, the victims will usually turn to their own homeowner insurance company who does owe a good faith duty directly to the victim to promptly and fairly adjust claims. This does not apply however to personal injury damage losses that are typically not recoverable from a policy holder’s own policy and must be recovered directly from the party at fault.

The good faith duty to pay property damage claims is governed by the terms of the insurance contract, which always contains many limitations on the payout obligation. For example, the standard “upgraded” homeowner insurance policy in California no longer contains a “guaranteed” replacement cost provision ensuring that the policy holder will be paid enough to replace the structure and its contents. Full guaranteed replacement cost homeowner insurance policies went out the window following the Oakland Hills firestorm of 1991. And, insurance companies have their own formulas and favored processes for adjusting claims that often come into conflict with the insured’s belief of what is fair. The opportunities for disagreement on adjustment costs are numerous. A typical home has many components that need to be carefully priced to arrive at a fair repair estimate. There may be more than 15 interior doors, numerous windows, light switches and electrical outlets and a wide variety of fixtures and finishes. Disagreements on the scope of repair, square footage, construction techniques and requirements, labor, overhead, architect and engineer costs occur. And what constitutes “like kind” or “similar” are frequent friction points between homeowners and their insurers. Most policies have language that only pay over the difference between the depreciated value and the cost of repair or replacement if the expense is actually incurred within a specified time period (although there may be exceptions). All of these “friction points” are compounded if policy limits are not adequate.

Underinsurance has been reported to be the most common and formidable impediment to financial recovery for disaster victims in California today, with homeowners underinsured by an average of $240,000. See, “Recent News,” and “Wildfires heat up debate on rising building costs” in the June 6, 2008 edition of the Los Angeles Times,

There is an ongoing conflict between insurers and victims about legal liability for fairly estimating proper insurance limits prior to a loss. Insurers, agents and brokers insist that the homeowners are solely responsible for picking the correct policy limit amount and cite the recent state appellate decision, Everett v. State Farm Insurance Co. (2008) 162 Cal.App.4th 649 as authority. For several years, a number of insurance companies have attempted, through policy language, to limit or eliminate liability for replacement cost insurance that their agents have led homeowners to believe they had.

At the end of the insurance process, there may well be expenses and costs fairly associated with the loss that are not covered. This is true even in cases where policy limits were appropriately picked. These uncovered losses as well as the loss of life or limb must be asserted directly against the party that caused the loss. The insurance company that paid its homeowner also has a claim for reimbursement – a subrogation claim. This may evolve into a disagreement between the insurer and the policy holder about who gets paid first out of the proceeds received from the wrongdoer. Policy holders normally claim, absent a specific insurance policy provision to the contrary, that they are entitled to be made whole before the insurance company is reimbursed. It is wishful thinking to believe that the party at fault, government relief agencies or property insurance companies will fully reimburse victims of tragedy without careful and persistent shepherding and advocacy.

Lee S. Harris is a partner at Goldstein, Gellman, Melbostad, Harris & McSparran based in San Francisco including the North and South Bay Areas. He has represented injury and insurance clients in numerous disaster claims. He has also served as chair of the American Association for Justice, Insurance and Bad Faith Litigation groups and serves on the board of Consumer Attorneys of California.