Failure to Sue Promptly Destroys Bad Faith Suit

Failure to Sue Within Policy’s Limitation Provision Fatal to Suit

As I have said multiple times: “insurance is nothing more than a contract.” It is, also, a contract of the utmost good faith that devolves equally on the insurer and the insured. In that regard the insured is required to fulfill the conditions of the contract of insurance or forfeit the insured’s right to the indemnity promised by the policy.

What is probably the most clear policy condition is the standard fire policy condition requiring suit be filed no later than 12 months after the loss which language is incorporated in every policy that insures against the peril of fire. Some policies extend the time to two or more years but require a prompt suit.

Carefully pleading a lawsuit is essential to avoid a judgment on the pleadings. All relevant facts and allegations must be pleaded in order to avoid dismissal motions or demurrers which require the court to take the allegations in the complaint as true.

In Eric Chase v. Nationwide Mutual Fire Insurance Company, No. 2015-368-Appeal, PC 14-5684, Supreme Court of Rhode Island, (May 23, 2017) Chase, appealed from a Superior Court order granting the motion of the defendant, Nationwide Mutual Fire Insurance Company, for judgment on the pleadings because his suit was not filed within the two year limitation period required by the policy.

FACTS

According to plaintiff, a property that he owned on Bosworth Court in Newport suffered a casualty loss on June 25, 2010 that caused extensive interior and exterior damage. The plaintiff timely reported the loss to defendant, which insured the property pursuant to a policy that it had issued to plaintiff. After investigating the loss, defendant accepted the claim as covered under the policy. The defendant then authorized plaintiff to repair the property and further authorized a partial release of funds to enable plaintiff to begin the repairs. However, the funds released were not sufficient to pay for the repairs and to cover plaintiff’s alternative living expenses. Plaintiff demanded that defendant release additional funds, but defendant refused.

After nearly four years had elapsed since the casualty loss plaintiff attempted to invoke the policy’s appraisal provision. Defendant rejected plaintiff’s demand for an appraisal, citing the passage of time and that plaintiff had failed to submit certain documentation that the insurer had requested under the terms of the policy.

Four years after the loss, plaintiff sued Nationwide alleging breach of contract and bad faith. Nationwide moved the court for judgment on the pleadings highlighting two provisions from the policy:

“3. Your Duties after Loss. In case of loss, you must:

“* * *
“c) as often as we reasonably require:

“(1) show us the damaged property; and
“(2) provide records and documents we request and permit us to make copies.
“(3) submit to examinations under oath and sign same.

“* * *

“8. Suit Against Us. No action can be brought against us unless there has been full compliance with the policy provisions. Any action must be started within two years after the date of loss or damage.” (emphasis added)

Nationwide argued that, even assuming everything that plaintiff alleged in his complaint were true, the claim must nevertheless fail because plaintiff did not fully comply with the provisions of the policy and because plaintiff brought suit more than two years after the date of loss. Plaintiff argued that Nationwide should be estopped from asserting the policy conditions, but failed to allege facts to support the claim of estoppel.

The hearing justice noted that defendant “admits the date of loss is June 25, 2010. The complaint was filed on November 11, 2014[,] which is four years and four months later.” Accordingly, the hearing justice granted defendant’s motion for judgment on the pleadings.

ANALYSIS

The Supreme Court has routinely upheld provisions in insurance contracts that require the insured to commence legal actions within a time period that is less than the legislatively enacted statute of limitations.

It is true that in exceptional circumstances, settlement negotiations can estop a party from invoking the statute of limitations if accompanied by certain statements or conduct calculated to lull the claimant into a reasonable belief that his claim will be settled without a suit. Mere negotiations between the insurer and a claimant cannot, alone, justify the application of estoppel.

Estoppel may occur only if (1) the insurer, by his actions or communications, has assured the claimant that a settlement would be reached, thereby inducing a late filing, or (2) the insurer has intentionally continued and prolonged the negotiations in order to cause the claimant to let the limitation pass without commencing suit.

Because this case came to the Supreme Court on defendant’s motion for judgment on the pleadings, the court was required to assume that everything plaintiff alleges in his complaint is true. The court, however, may look to the insurance contract to apply the facts, as alleged by plaintiff, to the contract.

Here, the insurance contract requires that plaintiff be in “full compliance with the policy provisions” before he may bring suit. It is clear from the pleadings that plaintiff did not comply with the terms of the insurance contract because he failed to bring suit within two years from the date of loss.

The plaintiff argued that the two-year clock should not begin to tick “until the [d]efendant insurer formally rejects the [p]laintiff’s claim because the causes of action for breach of contract and bad faith did not accrue until the insurance company breached the contract by refusing to pay the claim.” The Supreme Court noted that “As appealing as this reasoning may be on the surface, it is unavailing because the insurance contract clearly states that ‘[a]ny action must be started within two years after the date of loss or damage[,]’ and not from the date that the claim is rejected.” (Emphasis added.)

The plaintiff’s only possibility of extracting himself from the two-year limitation provision is if he were to succeed on an estoppel argument. However, as with the compliance issue, the plaintiff simply did not plead sufficient facts that would create a prima facie estoppel argument.

ZALMA OPINION

The plaintiff probably relied, unsuccessfully, on the California Supreme Court decision in Prudential-LMI Com. Insurance v. Superior Court, 51 Cal.3d 674, 798 P.2d 1230, 274 Cal.Rptr. 387 (1990) that concluded that the one-year suit provision begins to run on the date of inception of the loss, defined as that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered. The California Supreme Court found the limitation period should be equitably tolled from the time the insured files a timely notice, pursuant to policy notice provisions, to the time the insurer formally denies the claim in writing, and then the limitation period begins to run.

The Supreme Court of Rhode Island, unlike California, insisted on applying the clear and unambiguous language of the policy that required suit within two years of the loss. It refused to equitably toll the limitation provision of the policy. Since that time expired the suit was dismissed. Failure to plead sufficient facts to allow the complaint to survive and establish estoppel and sitting on rights can be, and it was for Mr. Chase, an expensive proposition as the result of his sloth.