IS THERE A STATUTE OF LIMITATIONS ON BAD FAITH?
"OR DOES THE POLICY OF INSURANCE CONTROL?"

Rick Hammond, CLU
Shareholder, Johnson & Bell

Background

Many states have enacted laws which provide an insured with the right to recover “bad faith” or extra-contractual damages from an insurer if the insurer has been vexatious and unreasonable in delaying or refusing to settle the insureds’ claim.  An issue often arises regarding whether a deadline exists for bringing a bad faith lawsuit.

Most property policies have a contractual limitation provision which typically states as follows:

Suit Against Us.  No action shall be brought unless there has been compliance with the policy provisions.  The action must be started within one year after the date of loss or damage.  This one year period is extended by the number of days between the date that proof of loss was filed and the date the claim is denied in whole or in part.

Thus, the question becomes whether a lawsuit alleging vexatious and unreasonable delay by an insurer will be subject to the contractual limitations period, or subject to some other limitations period, e.g., the typical ten-year statute of limitations for breach of a written contract.

Several states have assessed whether a claim for “bad faith,” as defined in their jurisdiction, should be handled within the confines of the insurance policy.  Although a few of these states have held that a policy’s contractual limitations provision does not apply, most states have firmly ruled that the contractual limitations provision must be relied upon.

This article examines a recent case that analyzes this issue.

Victor and Nancy Ingrim v. State Farm Fire & Casualty Company
U.S. Court of Appeals, 8^th Circuit
Case No. 00-2115,

When fire destroyed the home of Victor and Nancy Ingrim in August 1997, they filed a claim under their Homeowners Extra insurance policy with State Farm Fire & Casualty Company.  After investigating the matter, State Farm denied their claim.  The denial letter asserted that the loss “was not accidental in nature,” and cited policy conditions that void the policy if the insured causes a loss to obtain insurance benefits, or intentionally conceals or misrepresents a material fact relating to their insurance.

On August 2, 1999, the Ingrims filed suit alleging that State Farm’s denial was a breach of the insurance contract “in willful and wanton disregard” of their rights, and further alleging that the denial was made in bad faith.  State Farm moved for summary judgment, arguing that both causes of action were time-barred because the policy requires that any action “be started within one year after the date of loss or damage.” 

In response to that motion, the Ingrims moved for leave to amend their complaint.  The proposed amended complaint pled six bad faith causes of action.  The district court denied the Ingrims’ motion for leave to amend as futile, concluding that all six counts in the proposed amended complaint would be barred by the one-year limitations provision in the policy.  The court then granted State Farm summary judgment and dismissed the original complaint.  The Ingrims appealed only the denial of their motion for leave to amend.

Bad Faith - A “Claim on the Policy”

The issue in this case is whether the proposed six-count bad faith law suit was a claim “on the policy” under Iowa law.  If so, State Farm’s motion for summary judgment was properly granted.  In reaching its decision, the Iowa Court of Appeals relied on the Iowa Supreme Court’s decision in Stahl v. Preston Mutual Insurance Company 517 N.W.2d 201 (1994). 

In Stahl, the insured brought suit against their homeowners’ insurer for breach of contract and bad faith for denying their fire claim.  Preston Mutual filed a Motion and was granted  Summary Judgment based upon the contractual limitations period in the policy.  On appeal, the Iowa Supreme Court ultimately held that although there are certain instances when the conduct of an insurer may give rise to a collateral or independent cause of action, “most actions must be brought within the time allowed by the policy.”  Accordingly, a cause of action in bad faith should be considered an action “on the policy,” and is subject to the one-year limitations period contained in the policy.

As an aside, California courts have reached similar conclusions.  For example, in Prieto v. State Farm Fire and Casualty Co. 225 Cal.App.3d. 1188 (1991), the court ruled that the plaintiffs’ bad faith cause of action that was based upon the insurer’s failure to pay benefits, and their claim for intentional infliction of emotional distress was merely a theoretical restatement of the same claim and, therefore, governed by the one-year contractual limitations period for actions on the policy.

Similarly, the Court of Appeals in Arizona has also specifically held that an action for bad faith must be filed within the contractual limitations period.  In Home Federal Savings and Loan Assoc. v. Dooley’s of Tucson 716 P.2d 1042,1046 (1985), the court dismissed the insured’s claim for bad faith related to the insurer’s failure to pay proceeds on a fire claim.  The Court stated that a claim for bad faith can only be based upon the policy and thus is barred by the one-year contractual limitations period.

A Claim for Additional Damages is No Exception to the Rule

In this case, the Ingrims argue that their bad faith causes of action are not claims “on the policy” because they are not seeking to recover the policy proceeds, i.e., damages for the fire loss allegedly covered by the policy.  The Court of Appeals disagreed noting that although their prayer for relief sought recovery for damages such as mental pain and suffering, loss of reputation and other damages, their suit was merely “an exercise in artful pleading,” and an attempt to avoid the rule in Stahl by emphasizing the types of damages sought in addition to the policy proceeds. 

The court further held that a claim for additional damages is no exception to the rule in Stahl, because the Iowa Supreme Court expressly held that a bad faith claim that “seeks the policy benefits plus punitive damages for the alleged wrongful denial” was time-barred by the policy’s limitations provisions. 

It is interesting to note that the Iowa Court of Appeals “left the door open” for future cases that seek other types of damages:

If the [Ingrims’] proposed amended complaint had expressly disclaimed any intent to seek damages based upon the denial of policy benefits, the appeal would raise different issues . . .   To our knowledge, these issues have not been explored in prior Iowa cases, and we leave them for the future.

* * * * * * *

All we decide is that, when a bad faith cause of action arises from an insurer’s investigation and denial of a claim under the policy and seeks damages that may fairly be construed to include policy benefits, that cause of action, like a suit for breach of the insurance contract, is governed by a limitations provision in the policy.

Conclusion

There can be no question that the statute of limitations issues relating to bad faith damages will continue to arise.  Based upon the recent court interpretation in Iowa and in many of the other jurisdictions, it appears likely that these claims will be governed by the contractual limitation provision contained within the policy of insurance.  However, it is less clear whether the courts will apply the same reasoning to those claims which could be viewed as separate and independent causes of action.

Rick Hammond is an attorney with the Chicago law firm of Chuhak & Tecson.  He concentrates his practice on first and third-party insurance fraud matters.  He is the former head of the Illinois Department of Insurance’s Chicago office, Legal Counsel and former Executive Director of the Insurance Committee for Arson Control (ICAC), a Board member and officer of the Insurance School of Chicago, and a Board member of the Illinois Association of Defense Trial Counsel.  Questions or comments can be directed to Mr. Hammond at 30 South Wacker Drive, Suite 2600, Chicago, Illinois, 60606, (312) 855-4600, or at the e-mail address of RHammond@Chuhak.com.  For additional information on laws pertaining to insurance fraud, visit Mr. Hammond’s web site at www.InsuranceFraudLaw.com.