In a recent decision, Hawley v. Preferred Mut. Ins. Co., 36 N.E.3d 1284 (Mass. App. Ct. 2015), a Massachusetts appeals court affirmed a lower court's ruling that requesting arbitration (the Massachusetts equivalent of appraisal) does not operate to toll a property insurance policy's suit limitations period.
The dispute in Hawley began in June 2004, when a water leak in a property owned by the Hawleys caused the ceiling above a first floor bathtub to collapse. The Hawleys had a dwelling policy issued by Preferred Mutual, and promptly contacted their insurance agent to report the loss and notify Preferred. Preferred sent an independent adjuster to inspect the property, who reported water and mold damage in several parts of the house.
Further investigation determined the cause of damage was a shower door falling into the bathtub, which caused a hairline crack in the tub. Preferred concluded that continued use of the bathtub after the crack developed caused more water to leak, creating dangerous levels of mold.
Preferred ultimately made some payments for repair and cleaning. In November 2004, several months after making these payments, Preferred notified the Hawleys that it was denying their claim based on their failure to make repairs. The Hawleys responded by sending Preferred a demand letter in May 2006 accusing Preferred of unfair and deceptive insurance practices. On June 5, 2006, 5 days before the applicable suit limitations period was set to expire, the Hawleys followed up with a request for reference to arbitration. Thirty-four days later, Preferred denied any violations and declined the request for reference.
The Hawleys did not take further action for 2 years, but eventually filed suit in June 2008 asserting breach of contract claims, as well as state consumer protection statute violations.
In November 2012, after a 7-day bench trial, the Massachusetts Superior Court judge ruled in favor of Preferred. The court based its decision on two grounds: (1) the breach of contract claim was barred by the suit limitations provision; and (2) there were no facts supporting the allegation that Preferred was unfair or deceptive.
The Court of Appeals Affirms
The appellate panel began its analysis by discussing the statute of limitations, noting that "it is well settled that the statute of limitations starts to run at the time the loss occurred." Hawley, 36 N.E. at 1288. The panel then noted that the Hawleys' loss occurred on June 11, 2004, meaning that suit limitations would bar claims filed after June 10, 2006. Because the Hawleys did not file their claim until June 2008, their claim had been time barred for 2 years.
The panel acknowledged that suit limitations could have been tolled when the matter had been referred to arbitration, but noted that tolling can only apply once the "reference procedure" has begun. Though the Hawleys requested reference on June 5, 2006, 5 days before the suit limitations expired, Preferred was allowed 10 days thereafter to respond to the request. Because Preferred ultimately denied the request, the "reference procedure" was never initiated, and suit limitations was never tolled.
The court was ultimately unsympathetic to the Hawleys' request for tolling, reasoning that, because the Hawleys knew "that their belated request for reference might well take them past the 2-year statute of limitations," it was the Hawleys' responsibility to file a complaint before the statute of limitations expired. Id.
The panel also noted that, "[e]ven if . . . the request for reference did toll the statute of limitations, the Hawleys waited nearly another 2 years after being denied reference before filing the complaint." Id. Thus, because the Hawleys failed to commence an action "reasonably promptly" after Preferred denied liability, they could not recover.
Finally, the panel noted that, assuming the claim was not time barred, the Hawleys' claim of unfair and deceptive insurance practices would inevitably fail because the losses were caused by repeated water leaks from plumbing, which were specifically excluded from coverage by the Hawleys' insurance policy.
How Other Courts Have Ruled on the Issue
The Hawley decision mirrors a case decided by the same court in 2006. However, a Utah Supreme Court opinion suggests that other jurisdictions may decide the issue differently.
Nine years before Hawley, the Massachusetts Appeals Court decided in Wilson v. Merrimack Mutual Fire Ins. Co., No. 05-P-224, 2006 WL 931778 (Mass. App. Ct. Apr. 11, 2006), that requesting reference to arbitration does not act to toll the statute of limitations. In that case, the insurer, Merrimack, issued a standard fire insurance policy to the insured, Wilson, who suffered a loss at a covered property. Wilson requested reference to arbitration under the policy 2 days before the expiration of the 2-year statute of limitations. Twenty-five days later, Merrimack rejected the proof of loss and denied coverage. Wilson then filed suit to compel arbitration.
The Wilson court concluded that Wilson's "mere request for a reference, in the circumstances of this case, does not operate to toll the limitations period . . . ." Wilson, 2006 WL 931778, at *1. To reach its conclusion, the court delved into the language of the applicable statute, noting that a "reference procedure" is defined by statute as requiring: "(a) that there be a loss under the policy; (b) that the parties fail to agree on the amount of the loss; and (c) that the insured has appointed at least one of the referees." Id. The court noted that, though arbitration had been requested by the time suit limitations was set to expire, the matter had not yet actually been referred to arbitration, which would have triggered the "reference procedure." Because the reference procedure had not been triggered, Wilson's request for reference failed to toll suit limitations.
The Utah Supreme Court was presented with this issue in 2011 and, although it likewise held that suit limitations is only tolled when the actual appraisal procedure commences, the court had a different perspective about when the procedure begins. In Stone Flood & Fire Restoration, Inc. v. Safeco Ins. Co. of Am., 268 P.3d 170 (Utah 2011), Stone Flood's premises were destroyed by fire in 2000 and immediately sought insurance coverage from its insurer, Safeco. Years of litigation between Stone Flood and Safeco ensued, dealing principally with Stone Flood's allegations that Safeco was delaying payments under the insurance policy. All of Stone Flood's allegations were dismissed without prejudice.
Meanwhile, as the suits were ongoing, Safeco elected to invoke the policy's appraisal provision by sending Stone Flood a February 3, 2003, letter requesting appraisal. Safeco then filed an unopposed motion for the court to order an appraisal and stay the litigation, which the court granted on July 11, 2003. A final appraisal order was issued on January 9, 2007, concluding that Safeco had paid all but approximately $40,000 owed under the policy.
In May 2007, Stone Flood filed a new lawsuit against Safeco for breach of contract, among other claims. The district court dismissed all claims against Safeco after concluding that Stone Flood's claims were filed 3 days after suit limitations had expired. The court reached this decision by calculating the appraisal tolling period as occurring between July 11, 2003, and January 9, 2007—the time between the court's order of appraisal and the final appraisal order.
The Utah Supreme Court reversed, holding that the tolling period should have begun on February 3, 2003, when Safeco sent a letter indicating its intent to invoke the insurance policy's appraisal provision. The court reasoned that the appraisal procedure begins as soon as one of the parties requests the appraisal, not when the appraisal itself begins. Therefore, the court ruled that February 3, 2003, not July 11, 2003, marked the true date for when tolling should have commenced.
Conclusion
Hawley serves as a reminder to policyholders to demand appraisal well before suit limitations will expire. Insurers may take weeks to consider the request and ultimately deny it, which may leave policyholders with a time-barred claim and no legal remedy to recover from the insurance company. Though courts seem to come down differently on the issue of whether suit limitations is tolled as of the date of the appraisal demand or the date the procedure actually starts, it is best to play it safe and demand appraisal (or seek an extension of suit limitations) well in advance of the suit limitations deadline.
The author would like to thank and acknowledge the contributions to this Commentary by Kateri Tremblay, an associate with Reed Smith's Pittsburgh office.
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