The following are some of the most common issues which arise in advising clients in insurance coverage and bad faith matters. Because decisional and statutory law on any topic can differ somewhat from state to state and because insurance principles and regulations evolve and are often subject to multiple interpretations, the reader is cautioned not to rely on the principles set forth without undertaking additional research. Case citations used are to California law.
A. THE CONTRACT
1. Q: What general rules of construction apply to the interpretation of insurance policies?
A: a.The language of an insurance policy is to govern its interpretation if the language is clear and explicit. (Civil Code § 1638; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264.)
b. Any ambiguity or uncertainty in a policy will be resolved against the insurer and in favor of the policyholder. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 269; Delgado v. Heritage Life Ins. Co. (1984) 157 Cal. App. 3d 262; Safeco Ins. Co. v. Robert S. (2001) 26 Cal.4th 758, 763.)
c. Insurance contracts are to be interpreted to effectuate the “objectively reasonable expectations of the insured.” (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 822.)
d. Insurance industry publications are particularly persuasive as interpretive aids in determining coverage on behalf of the insured. (Prudential-LMI Commercial Ins. Co. v. Reliance Ins. Co. (1994) 22 Cal. App. 4th 1508, 1512.)
e. Indemnity in case of loss should be effectuated rather than defeated. (Insurance Company of North America v. Electronic Purification Co. (1967) 67 Cal.2d 679, 689.)
f. Words used in an insurance policy are to be interpreted according to the plain meaning which a layperson would ordinarily attach to them, not as they might be analyzed by an attorney or an insurance expert. (Delgado v. Heritage Life Ins. Co., supra, 157 Cal. App. 3d 262, 272; E.M.M.I., Inc. v. Zurich American Ins. Co. (2004) 32 Cal. 4th 465, 471; Jones v. Crown Life Ins. Co. (1978) 86 Cal. App. 3d 630, 639; Crane v. State Farm Fire & Cas. Co. (1971) 5 Cal.3d 112, 115.)
g. As a general rule, exclusions must be in clear and unambiguous language, consistent with the insured’s objectively reasonable expectations, and will be narrowly construed. (Cal. Ins. Code § 11580.1 (2013); California State Auto Association Inter-Insurance Bureau v. Warwick (1976) 17 Cal.3d 190, 194; MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 648; State Farm Mut. Auto. Ins. Co. v. Jacober, 10 Cal.3d 193, 207; Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 809; Cooper Companies v. TransContinental Ins. Co. (1995) 31 Cal. App. 4th 1094, 1106; Mez Indus. v. Pac. Nat. Ins. Co. (1999) 76 Cal. App. 4th 856, 869.) However, a significant weight of California authority held that an exclusionary clause in an insurance policy must be conspicuous, plain, and clear, regardless of the expectations of the insured. (20th Century Ins. Co. v. Liberty Mutual Ins. Co. (9th Cir. 1992) 965 F.2d 747.) An exclusionary clause that is not conspicuous will be strictly construed against the insurer. (Merrill & Seeley, Inc. v. Admiral Ins. Co. (1990) 225 Cal. App. 3d 624, 630.)
h. Policies are read as a whole with each clause lending meaning to others. (Titan Corp. v. Aetna Casualty & Surety Co. (1994) 22 Cal. App. 4th 457, 474.)
2. Q: Is an insurer required to advise claimants of contractual rights under their policy?
A: In many situations, yes. Where an insured’s lack of knowledge may potentially result in the loss of benefits or forfeiture of rights, an insurer is required to bring to the insured’s attention any relevant information to enable the insured to take action to secure rights afforded by the policy. (Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 14.)
3. Q: Does an insurance agent have a duty to advise a policyholder on the sufficiency of his/her coverage limits?
A: The agent’s general duty of care does not include advising a policyholder on the adequacy of his/her limits. (Jones v. Grewe (1987) 189 Cal. App. 3d 950, 956.) However, where agents assume additional duties by agreement, or hold themselves out as having specific expertise, a special duty may arise. (Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp. (1993) 12 Cal. App. 4th 1249, 1257.) Negligent misrepresentation may lie against an agent whose assurances of proper coverage turn out to be false. (Clement v. Smith (1993) 16 Cal. App. 4th 39, 46.)
4. Q: Can an insured reasonably rely upon an insurance agent’s representations regarding coverage?
A: An insured cannot intentionally remain ignorant as to the terms of his/her policy, but need not independently verify the accuracy of representations made by the agent regarding relevant policy provisions. (Clement v. Smith, supra, 16 Cal. App. 4th 39.) If the insured can prove justifiable reliance, an agent may be liable for intentional or negligent misrepresentation. (Eddy v. Sharp (1988) 199 Cal. App. 3d 858, 864; Hadland v. NN Inventors Life Ins. Co. (1994) 24 Cal. App. 4th 1578, 1586 rev. denied.)
5. Q: Notwithstanding provisions of the policy itself, what are the restrictions on an insurer’s right to cancel?
A: A cancellation must meet the requirements of Insurance Code § 677 which provides that all notices of cancellation must be in writing, and must specify the reason for the cancellation. Insurance Code §§ 675 et seq. contain additional cancellation requirements applicable to certain types of policies. A cancellation that does not comply with statutory requirements is ineffective. (Lee v. Industrial Indemnity Co. (1986) 177 Cal. App. 3d 921, 924.)
6. Q: Beyond the possible effect of specific policy provisions, what are the principal restrictions on an insurer’s right to non-renew or effect a reduction in coverage in a policy?
A:The non-renewal of a property and/or liability policy, (excluding auto and worker’s compensation policies) is governed by Insurance Code § 678. A notice of non-renewal or reduction in coverage must be sent to the policyholder at least 45 days before expiration of the policy. If an insurer fails to provide such notice, the prior policy, with no changes in coverage, will remain in effect. If the insurer later complies with the notice provision, the prior policy will remain in effect for 45 days from delivery or mailing of the notice.
7. Q: What are an insured’s remedies where an insurer has used advertising and solicitation materials that are unfair or deceptive as to the coverage that was actually provided?
A: Insurance Code §§ 790.03(a) and (b) prevent insurers from engaging in such conduct. Although there is probably no private right of action in a first party case, these code sections establish standards of conduct for the insurance industry. Violation of these code sections may constitute evidence of bad faith.
8. Q: Who bears the burden of proving an excluded risk or condition subsequent which negates an insurer’s liability: the insured or the insurer?
A: The insurer. (State Farm Mut. Auto. Ins. Co. v. Partridge (1973) 10 Cal.3d 94; Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1188; Maffei v. Northern Ins. Co. of New York (9th Cir. 1993) 12 F.3d 892, 899.)
B. DISABILITY INSURANCE
9. Q: What are the principal types of individual disability coverage (not including state or federal disability insurance)?
A: The two main types of individual disability insurance policies are (1) Own Occupation policies (covering insureds who become unable to work in their own occupation) and (2) Any Occupation policies (covering insureds who cannot work in any occupation for which they are qualified by reason of education, training, or experience).
10. Q: Under an “Own Occupation” individual disability policy, how “disabled” does an insured have to be to qualify for Total Disability benefits?
A: Although the definitions of Total Disability differ from policy to policy and carrier to carrier, many states impose their own definition on the insurers. In California, for example, an insured is entitled to total disability benefits if he/she is unable to perform “with reasonable continuity the substantial and material acts necessary to pursue his or her usual occupation in the usual and customary way.” Moore v. American United Life Ins. Co. (1984) 150 Cal. App. 3d 610, 632. This standard for total disability was also recently reaffirmed in 2004, in Gross v. UnumProvident Life Ins. Co. 319 F.Supp.2d 1129 (C.D.Cal. 2004) and again inHangarter v. Provident Life & Accident Ins. Co. 373 F.3d 998, 1006 (9th Cir. 2004).
11. Q: If a disability policy contains both a “Total” and a “Residual (partial) Disability” benefit, how do the two interact.
A: Many policies attempt to define Total Disability as the inability of a claimant to perform “the important duties of their occupation.” Residual Disability is then defined as the inability of a claimant to perform “some” of their important duties. If this seems confusing and inconsistent to you, you are not alone. Suffice it to say that it would appear that one could not be Residually Disabled without also being Totally Disabled. This is especially so in states that impose their own definitions of disabled as set forth in the previous Question and Answer. Nevertheless, many insurers persist in trying to characterize disabled insureds as Residually and not Totally disabled. This allows the insurer to apply a formula for calculating benefits that results in significantly lower payments.
12. Q: Are provisions in disability policies providing for deadlines for the filing of a claim (e.g., within ninety days of the date of the onset of the disability), strictly enforceable by the insurer?
A: In most states, no. In California, for example, an insurance company must show that it was “actually prejudiced” by the late filing. This is a question of fact for the jury and the burden on the insurer is difficult to overcome. Shell Oil Co. v. Winterthur Swiss Insurance Co., 12 Cal. App. 4th 715, 760-1 (1993).
13. Q: Are disability insurers required to conduct an IME (Insurance Medical Exam) before denying a claim on the basis of its disagreement with the opinions of treating physician(s)?
A: Generally, no. In fact, many carriers use only the opinions of in-house nurses or other in-house medical experts as a basis for disputing the opinions of treating doctors. However, for an insurer to deny a claim on such grounds can be highly suspect to the jury and always provides fertile ground for cross examination in depositions and trial.
14. Q: Before qualifying to receive Total Disability benefits, is an insured required to undergo recommended surgery, take pain medication, retrain for other occupations, or attempt to use special equipment such as ergonomic furniture?
15. Q: If a claimant is at fault in bringing about their disability (e.g., by such things as becoming a drug addict, shooting themselves in a failed suicide attempt or striking a telephone pole at 90 mph while under the influence of nine martinis) does that have any effect on the claimant’s right to receive disability benefits?
A: No. Fault is not relevant. The question is whether or not the claimant is disabled; it makes no difference why the claimant is disabled.
16. Q: If an insurer unreasonably denies a valid claim do all future benefits become payable in a bad faith suit?
A: In many states, Yes. (Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 824 (1979)). And in some states, the insurer also becomes responsible for the claimant’s consequential financial losses, emotional distress, attorneys’ fees and punitive damages (see section D. Damages).
17. Q: What are some common reasons given for denying disability insurance claims?
A: 1. That merely having a medical condition does not prove the insured is disabled; s/he must have restrictions and/or limitations which prevent them from performing their substantial and material duties.
2. That the insurance company’s review of the insured’s medical records contradicts the conclusions of the treating doctors.
3. That secret video surveillance shows the insured performing acts inconsistent with the limitations reported (e.g., carrying groceries or getting into or out of a vehicle).
18. Q: Should a client try to settle his or her own disability case before hiring an attorney?
A: While it is easy to understand why a client would rather try and settle their own disability case, this is almost never a good idea for the following reasons:
1. There is a significant risk that the client will inadvertently give harmful information to the carrier regarding the claimant’s occupational duties or medical condition.
2. It is possible that the insurer may file a debt relief action, prohibiting the claimant from selecting a venue.
3. The high probability that the claimant will under settle their claim by inaccurately calculating the present value of the future policy benefits.
C. BAD FAITH
19. Q: How does the insurer-insured relationship differ from most other contractual relationships?
A: Every insurance contract contains an implied covenant of good faith and fair dealing. This covenant imposes a duty on the insurer to act in good faith and fairly toward its insureds in handling their claims. It further imposes a responsibility on the carrier to meet the reasonable expectations of the policyholder. (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 573.) In handling claims, an insurer must give at least as much consideration to the financial interests of its insureds as it does to its own.(McCormick v. Sentinel Life Ins. Co. (1984) 153 Cal. App. 3d 1030, 1043.)
20. Q: What is the basic standard or test of liability in an action for breach of the covenant of good faith and fair dealing?
A:”Unreasonable conduct” by the carrier. (California Shoppers v. Royal Globe Ins. Co. (1985) 175 Cal. App. 3d 1, 85.) Examples of unreasonable behavior include denial of benefits (McLaughlin v. Connecticut General Life Ins. Co. (N.D. Cal. 1983) 565 F.Supp. 434), paying less than what is owed (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809.), and delaying payments(Beck v. State Farm Mut. Auto Ins. Co. (1976) 54 Cal. App. 3d 347.). However, there is no exhaustive list of acts constituting bad faith. Any act breaching the implied covenant of good faith and fair dealing will give rise to a bad faith cause of action.
21. Q: Will unreasonable delay in the investigation of a claim alone provide sufficient grounds to support a general and punitive damage award?
A:Yes. (Kanne v. Connecticut General Life Insurance Co. (9th Cir. 1988) 867 F.2d 489, 493; Cal. Ins. Code § 790.03(h)(2).) An insurer has a duty to fully investigate claims and must inquire into all possible bases that might support an insured’s claim. It cannot deny a claim without thoroughly investigating the basis for its denial. (Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 817.)
22. Q: Does the filing of a lawsuit by an insured terminate the carrier’s duty of good faith and fair dealing for that particular claim in controversy?
A: No. (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 886, 221 Cal. Rptr. 509, 517.)
23. Q: May an insurer rescind a policy and refuse to honor a claim where the policyholder supplied incomplete or inaccurate information on the original form?
A: Yes, if (1) the language of the application is clear and unambiguous; (2) no modifications in the application were made by an agent of the carrier; (3) the applicant had present knowledge of the facts sought, and appreciated their significance; (4) the insured intentionally misrepresented or concealed the facts; and (5) the misrepresentation was a material one. The burden of proving misrepresentation lies with the insurer and according to some cases must be proven by clear and convincing evidence.(Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 917; Cal. Ins. Code §§ 330-361.) However, if the policy includes an incontestability clause, the terms of the clause will limit the time within which the insurer can challenge misstatements or omissions in an insurance application. (Amex Life Assur. Co. v. Sup. Ct. (1997) 14 Cal.4th 1231, 1236.)
24. Q: If the victim of bad faith dies, are there circumstances under which his or her estate may maintain an action for compensatory, general and punitive damages?
A: Yes. (Carr v. Progressive Casualty Ins. Co. (1984) 152 Cal. App. 3d 881, 892, 199 Cal. Rptr. 835, 841.)
25. Q: Is evidence of an insurer’s business practices admissible in a bad faith action?
A:Yes, if admitted to show “motive, opportunity, intent, preparation, plan, knowledge, identity or absence of mistake or accident.”(Evid. Code § 110l(b); Sprague v. Equifax, Inc., supra, 166 Cal. App. 3d 1012, 1034.) Also see question 30 below.
26.Q: Must the plaintiff prove that the insurer intended to cause harm in order to prove breach of the covenant of good faith and fair dealing?
A: No. Intent to harm is not a prerequisite to establishing a breach of the insurer’s duty of good faith and fair dealing. (Johansen v. California State Auto. Assn. (1975) 15 Cal.3d 9, 16; Neal v. Farmers Ins. Exchange (1978) 21 Cal.3d 910, 922.)
27. Q: In an action for breach of the covenant of good faith and fair dealing, can the insurer rely on subsequently obtained evidence to show its good faith?
A:Although there is some disagreement on this issue, the general rule is that the reasonableness of an insurer’s actions must be measured at the time the carrier was confronted with a factual situation to which it was called upon to respond. (Austero v. National Casualty Co. (1978) 84 Cal. App. 3d 1, 32; Wetherbee v. United Insurance Co. of America (1971) 18 Cal. App. 3d 266; McLaughlin v. Connecticut General Life Insurance Co., supra, 565 F.Supp. 434; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820-821.)
28. Q: In a bad faith action, is the insurer presumed to have knowledge of the insured’s emotional distress?
A:Yes. When a person buys an insurance policy, the very risks insured against presuppose that if a claim is made the insured will be under financial and/or emotional pressure. S/he would therefore be particularly vulnerable to oppressive tactics on the part of the insurance company. An insurance company is presumed to know that a denial of benefits may result in emotional distress to the insured. (Delgado v. Heritage Life Insurance Co., supra, 157 Cal. App. 3d 262, 277; Fletcher v. Western National Life Ins. Co., supra, 10 Cal. App. 3d 376, 404; Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal. 3d 809, 820-21.)
29. Q: Can an insured’s conduct which contributes to an insurer’s delay in investigating or processing a claim constitute grounds for a “comparative bad faith” defense?
A: No. (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal. 4th 390, 404-408.) Comparative bad faith does not apply to punitive damages. (Fleming v. Safeco Ins. Co. (1984) 160 Cal. App. 3d 31, 45.)
30. Q: Can statutes such as California’s Unfair Claims Practices Act (Ins. Code § 790.03(h)) be used as a basis for establishing liability in either a first or third party case?
A: Yes. Even though California no longer allows a “direct” cause of action by a consumer for violation of the statute (Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287.), the statute still sets a “standard of care” for insurers. It is also arguable that a “negligence per se” cause of action can be pled in California. It applies whenever there is a violation of a statute intended to protect a class of persons (which includes the plaintiff) and where the damage suffered is of the type which the statute is designed to prevent. (Evid. Code § 669; Vesely v. Sager (1971) 5 Cal.3d 153; Daum v. SpineCare Medical Group, Inc. (1997) 52 Cal. App. 4th 1285.)
31. Q: What is the scope of damages recoverable for breach of the covenant of good faith and fair dealing?
A: The insured may recover all damages proximately caused by the breach. This includes consequential loss, loss of use of the insurance proceeds, acceleration of future benefits (as with a disability policy), general damages, attorneys’ fees, and in appropriate cases, exemplary damages. (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 432-34; Brandt v. Superior Court (1985) 37 Cal.3d 813, 817; Egan v. Mutual of Omaha Ins. Co., supra, 24 Cal.3d 809, 822 (punitive damages).)
32. Q: What is the standard for recovering emotional distress damages in a bad faith case?
A:The damage must have naturally ensued from the insurer’s conduct. (Gruenberg v. Aetna Insurance Co., supra, 9 Cal.3d 566, 579; Sprague v. Equifax, Inc., (1985) 166 Cal. App. 3d 1012, 1030.)
33. Q :Can an insurer limit its exposure for damages by terminating coverage while the peril insured against is still active?
A: Not usually. This would defeat the very purpose of the protection for which the premiums were paid. (Ibid.)
34. Q: Under what circumstances can an insured recover prejudgment interest in an insurance bad faith case?
A:Rarely. Prejudgment interest under Civil Code § 3291 is generally recoverable in personal injury cases where the defendant fails to accept a C.C.P. § 998 offer and the judgment exceeds that rejected offer. It is not recoverable in bad faith actions. (Gourley v. State Farm Mutual Auto. Ins. Co. (1991) 53 Cal.3d 121, 130.)
35. Q: Are plaintiffs’ attorney’s fees recoverable in successful bad faith actions?
A: In some states (including California), the answer is yes; fees incurred in obtaining wrongfully denied policy benefits are recoverable. (Brandt v. Superior Court, (1985) 37 Cal. 3d 813, 819.)
E. PUNITIVE DAMAGES
36. Q: What are the applicable standards for recovery of exemplary damages in a bad faith action?
A: Proof by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice as defined in Civil Code § 3294.
37. Q:What must the plaintiff establish in order to obtain punitive damages against an insurance company for the actions of an employee adjuster?
A: That the employee was a “managing agent,” i.e., the employee had the authority to do the things he or she did that formed the basis for the punitive damage claim. (BAJI Nos. 14.73, 14.73.1, 14.74.) If the employee was not a managing agent, then underCivil Code § 3294(b), a plaintiff must prove that: (1) the employer knew of the employee’s unfitness yet employed him or her in conscious disregard of the rights or safety of others; or (2) the employer ratified the wrongful conduct for which exemplary damages are recoverable; or (3) the employer was personally guilty of oppression, fraud or malice.
38. Q:Must a plaintiff introduce evidence of the insured’s financial condition in order to recover punitive damages?
A: Yes. A punitive damage award can be overturned where no meaningful evidence of a defendant’s net financial condition was submitted by the plaintiff. Evidence of the defendant’s income alone, absent a showing of net worth, may not be sufficient. (Lara v. Cadag (1993) 13 Cal. App. 4th 1061, 1064; Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal. App. 4th 1269 [where $11.25 million punitive damage judgment was reversed for an insured’s failure to prove the insurer’s financial condition, despite the insurer’s failure to object], rev. denied.)
39. Q: Must a plaintiff always prove despicable conduct in order to recover exemplary damages?
A: Not if the plaintiff proves by clear and convincing evidence that the defendant has been guilty of fraud, as defined in Civil Code § 3294 (c)(3).
40. Q: What is ERISA preemption?
A: ERISA is an acronym for the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001-1461). ERISA severely limits policyholder benefits as to group insurance offered through an employer. Remedies are limited to those administrative remedies found in the statute if the group insurance is offered as part of a “plan” within the meaning of ERISA. The issue of whether a group insurance policy is governed by ERISA has become a vital question in light of decisions extending ERISA’s preemptive reach and forcing claimants to bring an ERISA enforcement action in federal court, rather than a common law bad faith action in state court. (Kanne v. Connecticut General Ins. Co. (9th Cir. 1988) 867 F.2d 489, 493; Pilot Life Ins. Co. v. Dedeaux (1987) 481 U.S. 41, 45.)
ERISA preempts all state laws insofar as they may relate to any employee benefit plan. (Ky. Assn. of Health Plans, Inc. v. Miller (2003) 538 U.S. 329, 333.)
41. Q: What constitutes an ERISA plan?
A:Whether an ERISA plan exists is a factual question. The courts have generally found a “plan” to exist where the employer pays the premiums, even though the employer does not intend to create an ERISA plan and has little involvement in the administration of the benefit program. (Marshall v. Bankers Life & Casualty Co. (1992) 2 Cal.4th 1045.)
42. Q: When is an employee plan excluded from ERISA?
A: The Ninth Circuit in Kanne v. Connecticut General Ins. Co. (9th Cir. 1988) 867 F.2d 489, 499, held that all the criteria set forth in the Department of Labor regulations must be satisfied before a plan is excluded from ERISA. These are:
1) the employer does not endorse the program;
2) employee participation is voluntary;
3) premiums are paid entirely by the employee;
4) the employers sole function is to collect premiums and remit the same to the insurer; and,
5) the employer must receive no consideration other than reasonable compensation for collecting and remitting premiums.
Note: State, federal, and municipal employees are not governed by ERISA preemption. (29 U.S.C. §§ 1309(b), 1321(b)(2).)
43. Q: Who is a “participant” in an ERISA plan?
A :ERISA defines a “participant” as an “employee or former employee.” Plaintiffs who own their businesses or who are independent contractors arguably are not “employees.” The key consideration is whether the hiring party has the right to control the manner and means by which work is done. (Nationwide Mut. Ins. Co. v. Darden (1992) 503 U.S. 318, 323.)
G. STATUTE OF LIMITATIONS
44. Q: What is the statute of limitations in a bad faith case?
A: In most cases, a one-year statute for personal injuries (emotional distress) is applied. (C.C.P. § 340.) A two-year statute governing actions “upon a[n] … obligation or liability not founded upon an instrument of writing” (C.C.P. § 339(1) may also apply. (Smyth v. USAA Property and Casualty Ins. Co. (1992) 5 Cal. App. 4th 1470, 1476, 7 Cal. Rptr. 2d 694, 698.) **CAUTION** If the insurance policy contains a contractual statute of limitations clause, see Question 45 below.
45. Q: Is an insurance policy clause limiting the time “within which the insured must bring an action to recover on the policy” (e.g., one year), enforceable, and if so, how is the time period computed?
A:This issue is complex. The wording of the policy and the facts of the case are important factors. Some insurance policies attempt to require insureds to file actions on the policy within a specified period from the occurrence, rather than from the time the claim is denied. (Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal. App. 3d 565, 572; Abari v. State Farm Fire & Casualty Co. (1988) 205 Cal. App. 3d 530.) In Prudential- LMI Commercial Insurance v. Superior Court, supra, 51 Cal.3d 674, 678, the California Supreme Court held that the time limitation in the policy was enforceable, but tolled between the period of time that the insured gives notice of the loss and the time the claim was denied. For example: a loss occurs on January 1, 1991 and is reported to the insurer on February 1, 1991; it is denied by the insurer on March 1, 1992. The insured must file suit prior to February 1, 1993. The one month that elapsed between the loss and the notice to the insurer counts toward the limitations period. Based on the length of the delay in reporting the loss, the insured will have only an additional eleven months after denial to file the lawsuit. (Prieto v. State Farm Fire & Casualty Co. (1990) 225 Cal. App. 3d 1188, 1195, 275 Cal. Rptr. 362, 366.)
46. Q: When does the statute of limitations begin to run on an action to compel an insurer to abide by an arbitration clause?
A: The limitations period begins to run when the insurer refuses to arbitrate. (Spear v. California State Auto. Assn. (1992) 2 Cal.4th 1035, 1042.)
We are happy to answer any additional questions you may have about this fascinating field. We handle cases throughout the country and are also happy to discuss association or referral arrangements in appropriate cases.