Statute of Limitations Period Begins When Insured Can Plead Prima Facie Elements of Bad Faith Case

The Supreme Court of Delaware has held that under Delaware law, the three-year statute of limitations period applicable to a statutory bad faith action governed by Louisiana law commences when the insured could plead a prima facie case and was therefore barred.  Homeland Ins. Co. of New York v. Corvel Corp., 2018 WL 6061261 (Del. Nov. 20, 2018).

The insured, a Delaware company that operates a national Preferred Provider Organization network in Louisiana, sued its errors and omissions insurer under a Louisiana bad faith statute.  The statute provides that an insurer that knowingly misrepresents “pertinent facts or insurance policy provisions” shall be liable for any damages sustained by the insured “as a result of” the misrepresentation.  The lawsuit alleged that the insurer knowingly misrepresented in a 2011 declaratory judgment complaint that the insured failed to report certain claims in compliance with the policy’s reporting requirements.  The insurer argued that the three-year statute of limitations period to allege a violation of the Louisiana statute accrued in 2011, when the insured settled the underlying claims, barring the 2015 bad faith cause of action.  The Delaware Superior Court concluded that the statute of limitations period had not run, opining that the insured’s bad faith claim did not accrue until the Louisiana trial court in the declaratory judgment action determined that coverage was available for the underlying claims.

The Delaware Supreme Court reversed the lower court decision, holding that the statute of limitations began running as a matter of Delaware law once the insured was able to plead the necessary elements of a prima facie case under the Louisiana statute.  The court found that the insured could plead the necessary elements under the bad faith statute—(1) the insured had “a valid, underlying, substantive claim upon which insurance coverage is based”; (2) the insurer knowingly misrepresented pertinent facts or insurance policy provisions relating to coverage; and (3) the insured incurred damages “as a result of” the misrepresentation—immediately after it settled the underlying claims in 2011.  The court found that, at the time of settlement in 2011, the insured had a claim for indemnification for which it sought coverage, the insured could plead that the insurer’s alleged knowing misrepresentation had been made when the insurer filed the declaratory judgment action earlier that year, and the insured incurred damages because it paid its own money to resolve the underlying disputes.  The court concluded that, because the insured did not file the bad faith cause of action until 2015, its claim was barred.  In doing so, the court rejected the insured’s argument that it could not have pled the damages element when it settled the underlying claims because a court had not yet determined the availability of coverage, because, regardless of the outcome of a judicial determination, the insured already had paid the settlement.