Anastasiya Collins | SDV Insights
How much time do our clients have to bring a bad faith action against an insurer? Although we are not frequently asked this question, it is one that we constantly analyze before asserting a bad faith claim.
To answer this question, we look to the statute of limitations, which is a law passed by a state legislative body that sets the maximum amount of time for a party to bring a claim based upon a particular cause of action. For policyholders, knowing which statute of limitations applies to their bad faith claim is critical because it indicates whether it is possible to initiate legal proceedings. In addition, it determines the amount in damages available in case of a successful resolution.
Statute of Limitations in Breach of Contract vs. Tort Claims
One key determinant of a statute of limitations for bad faith is whether the claim is brought as a tort or a breach of contract action. The consequence of framing bad faith as a tort is that a policyholder is not just limited to contract damages. The policyholder can also receive recourse for emotional distress, pain, suffering, punitive damages, attorney’s fees, and other damages that the court may consider appropriate. Unfortunately, however, not every jurisdiction allows plaintiffs to bring bad faith actions as tort claims. While, for example, courts in California, Colorado, and Connecticut allow bad faith claims sounding in tort, courts in jurisdictions such as Tennessee do not.
This background information is very important to keep in mind as different statutes of limitations may apply to common law bad faith claims sounding in tort as opposed to those sounding in contract. For example, if bad faith is brought as a breach of contract claim in California, plaintiffs have four years from the date they were denied in bad faith to bring action against the insurer. If, however, bad faith is brought as a tort claim, that opening narrows to two years. The length of these time periods and the moment when the statute of limitation in a bad faith claim starts to accrue, significantly vary across jurisdictions. However, the window on a contract claim tends to be longer than that of a tort claim.
Common Law vs. Statutory Bad Faith Claims
When pursuing a bad faith claim, it is also important to keep in mind any state laws that may be relevant. Bad faith claims can broadly be categorized as either: (1) common law bad faith claims; or (2) statutory bad faith claims. The first category stems from case law, while the second is based on laws enacted by state legislatures that deal with insurer bad faith. For example, many states have passed laws based on the National Association of Insurance Commissioners’ “Unfair Claims Practices Settlement Act.” While most states in the country have adopted versions of this act, including California, Connecticut, and Florida, some, like Mississippi, have not.
In states that allow for a private right of action based on a statute, the laws may specify a limitations period. For example, in Connecticut, while a common law breach of contract bad faith claim must be brought within six years, and claims based on the state’s Unfair Trade Practices Act must be brought within three.
Contractual Modification of a Limitations Period
Statutes of limitations for bad faith claims can also be context-dependent. Many courts across the country will allow for contract modification of a limitations period, but typically for purposes of shortening the permitted time period for bringing a claim. Some courts have allowed for a contractual lengthening of a statute of limitations. For example, a court in California has held that the three-year statute of limitations for tortious bad faith specified in a health insurance policy trumped the state’s two-year period prescribed by the California statute.1
Due Diligence for Statutes of Limitations
Bad faith litigation and applicable statutes of limitations are more complex and require more attention than other claims since they are dependent on the nature of the cause of action asserted. Because a bad faith claim may be brought either as a tort or as a breach of contract claim, and because state statutes may apply to give a right of action, policyholders must be mindful of the different deadlines and requirements that may be relevant to each type of claim. Any contractual modification of a statute of limitations may also be relevant. Thus, it is imperative, that policyholders work with an experienced attorney who can advise them on their jurisdiction’s unique rules if they have faced a bad faith handling of their claim.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.