The Delaware Supreme Court recently addressed an issue of first impression: “When does a claim that an insurer acted in bad faith by failing to settle a third-party insurance claim accrue for purposes of the statute of limitations?” The Superior Court previously concluded that the statute of limitations begins to run at the time of the wrongful act, when the Plaintiff was made aware that her claim would be denied, and thus dismissed Plaintiff’s claims as untimely. Plaintiff appealed.
Common to the insurance industry are third-party insurance claims. There are different types of claims within this area of the law, but all share a common characteristic: At one point, the insured held the right to bring a claim against their insurer for one reason or another and the insured assigned away that right to a third-party, generally one who was injured by the insured’s conduct. The question here is when does the third-party’s right to bring that assigned claim begin to run for the purposes of the statute of limitations?
Arguing on appeal, Plaintiff/Appellant, Connelly, contended that a claim of this type accrues only when the insured suffers a final and non-appealable judgment in excess of policy limits. Plaintiff drew largely on policy arguments to support her position. If her reasoning is followed, Plaintiff asserted both litigant and judicial resources will be conserved, the insurer and insured can better work together to defend such a suit as an early conflict of interests between the parties can be avoided, and damages, which must be pled in an action for breach of the implied duty to act in good faith, are not available before there is a final excess judgment.
Conversely, State Farm argued that the claim against it for bad-faith failure to settle accrued either when it refused to accept Connelly’s settlement offer or thirty days later when the offer expired. State Farm primarily cited to case law outside the insurance context to support its position that the statute of limitations begins to run when the act in question occurred. State Farm noted that Plaintiff repeatedly referred to May 10, 2011, the date of the settlement offer, in her complaint as the date when State Farm breached its duty and acted in bad faith in refusing to accept her offer.
The Supreme Court found Plaintiff’s reasoning convincing and reversed. Chief Justice Strine, writing for the Court, drew on opinions from sister jurisdictions establishing the majority rule, which is that a bad-faith failure-to-settle claim accrues when the excess judgment becomes final and non-appealable. The Court also relied on policy from indemnity law to find that Plaintiff’s claims were not time barred. The Court stated: “Insurance claims are a type of indemnity claim because in both cases, the obligation to cover the indemnified party’s costs arises only once … in the context of a bad-faith suit against an insurer, a final and non-appealable excess judgment [is entered on] the third-party claim.” Therefore, the Court found indemnity policy rationale applicable to the insurance law context.
The Court adopted Plaintiff’s policy arguments in their entirety, noting the majority rule reduces the possibility of a conflict of interest between the insurer and the insured, saves courts time and the insured litigation costs, damages are available at the proper pleading stage, and protects insurers from bad faith claims for failing to settle even the most frivolous claims if the third-party claimant was willing to settle within the policy limits. The Court held that “a claim that an insurer acted in bad faith when it refused to settle a third-party insurance claim accrues when an excess judgment against an insured becomes final and non-appealable,” and thus reversed in favor of the Plaintiff.
Read the full opinion here.