Property Insurance Suit Limitations Provisions: Pitfalls for the Unwary
April 2009
In the current economic climate, insurers
seem to be adjusting claims more slowly and taking a much harder and longer
look at every claim and every element of every claim. They seem to be more
aggressive in asserting that exclusions and limitations apply to reduce or
even preclude coverage.
by Jay M.
Levin
Reed Smith
Policyholders must respond aggressively, and one way to combat insurer delay
is to submit claims and supporting documentation as early as possible. In
addition, when insurance companies raise coverage issues, as opposed to
issues relating solely to the amount of loss, policyholders should seriously
consider retaining counsel experienced in property insurance at a much
earlier date so that coverage issues can be addressed more quickly and
insurance company delay reduced.
One important consequence of a longer
adjustment process is the need to pay close attention to the policy's suit
limitations provision. In most jurisdictions, property insurers are allowed
to insert into the policy contractual provisions significantly limiting the
time within which policyholders may file suit on a claim. While each
jurisdiction is different, many states permit a contractual suit limitations
provision which requires a policyholder to file suit in as little as 1 year
from the date of loss or lose coverage entirely. Policies have provisions
ranging from 1 to 3 years, compared to statutes of limitations of 4, 6, or
even 10 years within which one may file suit for breach of other types of
contracts.
In light of the potentially very short time frames presented by
suit limitations provisions, policyholders must pay closer attention to the
progress of claims and understand how courts enforce suit limitation
provisions. This article will discuss recent cases which highlight some of
these issues and, at the end, discuss some practical solutions to the
problems they present.
Suit Limitations Caselaw
Some states
actually hold that the suit limitations period begins to run on the date of
loss even when the insured does not discover the damage until after it
expires. SeeBorgen v. Economy Preferred Ins., 500 N.W.2d 419 (Wis. App. 1993) (12-month suit limitations begins to
run at "inception" of damage, even when insureds did not discover hail
damage to home until 14 months after hailstorm had caused damage).
The
rationale for this type of holding is that it protects the insurer from
stale claims and creates a strong incentive for the insured, as the party
with the most control over its own properties, to monitor them closely. In many
states, absent policy language specifically tolling the limitations period,
or caselaw which tolls the suit limitations period while the insurance
company investigates, the mere fact that the insurance company is continuing
its investigation, without more, is not enough to toll the suit limitations
period.
Davidson v. Brethren Mut. Ins. Co., 2007 U.S. Dist.
LEXIS 48525 (July 5, 2007) (applying Pennsylvania law), strictly enforced a
suit limitations period. There, the insured home burned down on February 5,
2004. The claim was denied on December 10, 2004, based on the insured's
alleged misrepresentation in a statement and failure to disclose a prior
fire loss on her application for the policy. On February 1, 2005, the
insured's counsel requested a copy of the policy, which was delivered on
February 21, 2005, after the limitations period expired. The insured finally
filed suit on July 20, 2005.
The court enforced the policy's 1-year suit
limitations period, rejecting the insured's argument that the defense was
waived because it was not mentioned in the denial letter. The court held
that, under Pennsylvania law, an insurer is not obligated to remind an
insured of a suit limitations period. The court refused to find waiver or estoppel because the insured's counsel was not given a copy of the policy
until after the suit limitations period expired. The court held that there
was no evidence of waiver and no evidence of misleading conduct which would
justify an estoppel against the insurer.
In some states, the suit
limitations period is tolled between the time notice is given and the time
the claim is denied. This leads to questions about when denial of the claim
actually takes place.
In Tiel Oil Co. v. Employers Mut. Cas. Co., 2009 Mich. App. LEXIS 82 (Jan. 15, 2009), that was precisely the
issue. Tiel Oil had suffered a February 6, 2004, loss and a March 17, 2004,
loss at two gas stations. It timely notified Employers Mutual and, on August
1, 2004, the insurer wrote to Tiel Oil notifying it that it had "determined
that the damage was caused by the soil freezing and causing earth movement
which cracked the pipe" and that "this type of claim is not covered by your
insurance policy." The letter invited Tiel Oil to submit additional
information and reserved the right to reassess its position based on any
such submission. Tiel Oil submitted additional information and, on October
8, 2004, Employers Mutual responded by stating that "our position of denial
remains the same."
However, the second letter also invited submission of
additional information. On December 21, 2005, Tiel Oil's counsel accepted
that invitation and submitted additional information. On December 23, 2005,
Employers Mutual asked for even more information. That was provided in March
2006 and, 4 days later, Employers Mutual responded stating that "our denial
of this claim still stands." This last letter contained no language inviting
further submission of information.
The policy contained a 2-year suit
limitation provision and a clause tolling that period from the time of
notice to Employers Mutual to the date Employers Mutual "formally" denied
the claim. Plaintiff filed suit on October 10, 2006, because October 8 was a
Sunday and October 9 was Columbus Day.
The trial court granted summary
judgment to Employers Mutual stating that the October 8, 2004, letter was a
formal denial and, since Columbus Day was not a court holiday, suit was
filed after the 2-year limitations period expired. The Michigan Court of Appeals
reversed, holding that the determination of which of the letters from
Employers Mutual constituted the "formal denial" was an issue of fact
because the first three letters, while arguably denying coverage, all
indicated that additional information would be accepted and considered in
reassessing the availability of coverage. The Michigan Court of Appeals said
that this was sufficient to raise an issue of fact which precluded summary
judgment on suit limitations.
Practical Solutions
The most
important practical lesson to learn from these cases is that policyholders
and their counsel must determine the applicable suit limitations period set
forth in the policy and determine whether, under applicable state law, that
period is tolled while the insurance company is investigating and before it
denies coverage. In a state where the suit limitations period is not tolled,
the insurer should be contacted 60 or 90 days before the suit limitations
period expires and asked to extend the suit limitations period for a reasonable
amount of time. Most insurers will extend the suit limitations period,
particularly where it has not made a determination of coverage. If the
insurer extends the suit limitations period, the claim should be re-diaried
and the process repeated if the claim has not been resolved. If the insurer
does not agree to toll the suit limitations period, the policyholder knows
that it must file suit.
Even if this procedure is not followed, the mere
fact that an insurer relies on a suit limitations provision to deny coverage
does not mean that all is lost. There is law in most states which will
preclude the insurer from enforcing a suit limitations provision based on
theories of either waiver or estoppel where the insurance company has
indicated in some way that it is not going to rely on the suit limitations
period, i.e., by paying a portion of the loss after the suit limitations
period has expired, or, as in Tiel above, where its letters are unclear.
However, overcoming suit limitations based on waiver or estoppel is usually
a difficult burden. It is much better to address the issue
before the suit limitations period expires.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.