Colorado Supreme Court Issues Decisions on Statute of Limitations for Statutory Bad Faith Claims and the Implied Waiver of Attorney-Client Privilege

The Colorado Supreme Court has been busy the past two weeks, issuing a couple rulings that should be of interest to the insurance industry:

Statute of Limitations for Bad Faith Statute: In Rooftop Restoration, Inc. v. American Family Mutual Insurance Co., 2018 CO 44 (May 29, 2018), the Colorado Supreme Court held that the one-year statute of limitations that applies to penalties, does not apply to claims brought under C.R.S. 10-3-1116, Colorado’s statutory cause of action for unreasonable delay or denial of benefits. Section 10-3-1116 provides that a first-party claimant whose claim for payment of benefits has been unreasonably delayed or denied may seek to recover attorney fees, costs, and two times the covered benefit, in addition to the covered benefit. A separate Colorado statute, CRS 13-80-103(1)(d) provides a one-year statute of limitations for “any penalty or forfeiture of any penal statutes.” To arrive at the conclusion that the double damages available under section 10-3-1116 is not a penalty, the Court looked at yet another statutory provision, governing accrual of causes of action for penalties, which provides that a penalty cause of action accrues when “the determination of overpayment or delinquency . . . is no longer subject to appeal.” The Court stated that because a cause of action under 10-3-1116 “never leads to a determination of overpayment or delinquency . . . the claim would never accrue, and the statute of limitations would be rendered meaningless.” Para. 15. Presumably, the default two-year statute of limitations, provided by CRS 13-80-102(1)(i), will now be found to apply to causes of action seeking damages for undue delay or denial of insurance benefits.

Implied Waiver of Attorney Client Privilege: On June 4, 2018, the Court held that the attorney-client privilege was not impliedly waived when former counsel for State Farm submitted an affidavit refuting factual allegations of plaintiff. In In re Plaintiff: State Farm Fire & Cas. Co. v. Defendants: Gary J. Griggs & Susan A. Goddard, 2018 CO 50, a State Farm adjuster had testified that a medical lien was in the amount of $264,075. State Farm’s attorney at the time then discovered that the lien was actually in the amount of $264.75. While the attorney was investigating the source of the error, plaintiff’s counsel moved to disqualify State Farm’s counsel (based on the attorney’s previous attorney-client relationship with the firm representing the plaintiff). The court disqualified the attorney. The new attorney for State Farm then disclosed the correct lien amount to plaintiff, and noted that the service provider was the source of the error. Plaintiff then sought sanctions against State Farm, in the form of a directed verdict on her bad faith claim, alleging that State Farm deliberately and intentionally concealed the correct lien information. In response, State Farm submitted an affidavit from the former attorney, which stated that at the time of his disqualification, he was still investigating the source of the lien error. Plaintiff argued that by submitting the attorney affidavit, State Farm put at issue the attorney’s advice. The Supreme Court disagreed, explaining that the mere possibility that privileged information may become relevant in a lawsuit is not enough to imply a waiver. Rather, the party asserting waiver “must show that the client asserted a claim or defense that depends on privileged information.” Para. 18. The Supreme Court found that the attorney affidavit did not refer to any claims or defenses, did not refer to advice provided by the attorney to State Farm, and was not offered in support of a claim or defense, but rather to rebut plaintiff’s factual argument. As such, the Court concluded that “State Farm’s submission of the [attorney] affidavit did not place privileged communications at issue and, therefore, did not result in an implied waiver of the attorney-client privilege.” Para. 24.

If there are any questions about either of the above cases or if you assistance with any insurance coverage, bad faith, or mountain states litigation issues, please contact [email protected].

California Appeals Court Rejects Insurer’s “Escape” Clause And Confirms Tolling Of Statute Of Limitations For Equitable Contribution Claims

In Underwriters of Interest v Probuilders Specialty Ins. Co. (Case No. D066615, filed 10/23/15), the California Court of Appeal for the Fourth District, Division One, rejected an insurer’s “escape” clause, ruled that a Contractors Special Conditions endorsement was inapplicable, and confirmed that the statute of limitation for an insurer’s claim for equitable contribution against a co-carrier is tolled until it makes its last defense payment.

Construction siteUnderwriters insured Pacific Trades Construction & Development (“PTCD”) from 2001 to 2003. Probuilders insured PTCD from 2002 to 2004. Pursuant to its policies, Underwriters agreed to defend PTCD in a construction defect action arising out of the construction of single family homes. In contrast, Probuilders denied PTCD’s tender arguing that its policies only provided a duty to defend when “no other insurance affording a defense against such a suit is available to [the insured].” In addition, Probuilders argued its policy included a Contractors Special Conditions (“CSC”) endorsement which provided that as a “condition precedent to this policy applying to any claim in whole or in part based upon work performed by independent contractors,” PTCD must have: (1) written indemnity agreements with each subcontractor hired; (2) certificates of insurance from each subcontractor’s insurer showing PTCD as an additional insured; and (3) maintained records evidencing PTCD’s compliance with these obligations.

Turning first to Probuilders’ defense obligation, the Appellate Court, citing Edmondson Property Management v. Kwock (2007) 156 Cal.App.4th 197, 203-204, held that Probuilders’ other insurance clause was an “escape” clause disfavored under the law.

[C]ourts have considered this type of “other insurance” clause as an “escape” clause, a clause which attempts to have coverage, paid for with the insured’s premiums, evaporate in the presence of other insurance….Escape clauses are discouraged and generally not given effect in actions where the insurance company who paid the liability is seeking equitable contribution from the carrier who is seeking to avoid the risk it was paid to cover.

Reasoning the policies issued by Underwriters and Probuilders were not completely overlapping and provided coverage for at least different periods of time, the Appellate Court refused to enforce Probuilders’ other insurance clause.

The appeals court also rejected Probuilders’ argument that its CSC endorsement obviated a duty to defend because PTCD had failed to secure indemnity and/or additional insured coverage from all of its subcontractors. Noting Probuilders had not conclusively established that all of the claims against PTCD were limited to work performed by subcontractors and that while there was evidence of incomplete compliance with the CSC endorsement at least one subcontract had complied, the court found there was a question of fact precluding summary judgment in Probuilders’ favor.

Next, the appeals court found Underwriter’s equitable contribution claim was timely because while the claim first accrued at the time Probuilders first refused to participate in PTCD’s defense, the statute of limitations was “tolled until all of the defense obligations in the underlying action are terminated by final judgment.”

While not a departure from current case law, the case confirms California’s rejection of “escape” type clauses in contribution disputes between carriers and that under the right set of facts, endorsements requiring insureds to secure additional insured coverage from subcontractors may serve as a means to limit or possibly obviate the duty to defend and/or indemnify.

Pennsylvania Superior Court Issues Critical Ruling on Statute of Limitations for Declaratory Judgment Actions

A recent decision by the Pennsylvania Superior Court clarifies when the four-year statute of limitations begins to run on an insurer’s ability to bring a declaratory judgment action against its insured. In Selective Way Insurance Co. v. Hospital Group Services, Inc., 2015 PA Super 146 (2015), the Superior Court ruled that the statute begins to run when an insurer has a sufficient factual basis to support its contentions that it has no duty to defend and/or indemnify the insured.

The litigation in Selective Way arose out of a 2006 automobile accident which resulted in the death of an intoxicated 17-year old driver. The driver was found to have a .14 BAC at the time of his death, and the plaintiffs alleged that he drank alcohol while working a lengthy shift at a Ramada Inn hotel. After his family sued the hotel’s management company for various negligence claims, the management company tendered the claim to its insurer, Selective Way Insurance Company (“Selective”). Selective defended under a reservation of rights, but almost five years later, it filed a declaratory judgment action seeking a declaration of no coverage.

The trial court eventually granted summary judgment in favor of the plaintiff and insured, holding that the statute of limitations had already run because the statutory period commenced when the insurer received the complaint relating to the underlying litigation. Under that analysis, the trial court dismissed the action because Selective waited almost five years to file for declaratory judgment.

On appeal, the Superior Court reversed and held that the statute of limitations begins to run only when an insurer has the factual basis to believe that there could be a dispute as to coverage. The court noted that more generally, under Pennsylvania law, a statute of limitations begins to run from the date on which the cause of action arises, and a cause of action arises on the date on which a plaintiff could first maintain an action to a successful conclusion. The court reasoned that until the insurer actually has a factual basis for denying coverage, which it will not always have simply from reading the complaint, there is no controversy or corresponding cause of action. In other words, until the insurer has reason to deny coverage, there is no dispute which a court could resolve. Thus, when the insurer can determine from the face of the complaint that there will be coverage issues, the statute of limitations begins to run when the insurer receives the complaint. But when the insurer cannot tell if there will be coverage issues until the case has progressed and the exact legal issues involved are clearer, the statute of limitations does not run until the insurer has the factual basis to conclude that coverage may not exist.

The Superior Court’s ruling is important because it gives insurers more leeway to conduct thorough coverage investigations without the need to file a Declaratory Judgment Action solely to protect the statute of limitations. This leeway, in theory, should limit the unnecessary Declaratory Judgment Action and the bad faith counterclaims that come with it. However, these cases could open the door to additional discovery against insurers as to precisely when an insurer became aware of facts which could negate coverage.