Phoenix Business
Group STATE OF CALIFORNIA Date: May 17, 1996 NOTICE TO: ALL INSURERS, THEIR INSUREDS, AND OTHER INTERESTED PARTIES
Subjects:
In the aftermath of the Northridge earthquake of January 1994, the Department of Insurance's Consumer Hotline has received voluminous calls and complaints evidencing contradictory interpretations of the applicable post-loss limitations period for filing suit. This notice is intended to dispel the confusion among insurers, consumers, and attorneys regarding this issue. I. STATUTE OF LIMITATIONS IN RESIDENTIAL PROPERTY CLAIMS California Insurance Code section 2071 is the "standard fire policy form" whose language must be incorporated in any California fire policies. The form contains a clause which provides: "No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within 12 months next after inception of the loss." "Inception of the loss" is the point at which the 12 months to file suit begins to run. Policy provisions limiting an insured's time in which to sue the insurer must be consistent with section 2071 or more favorable to the insured. II. DELAYED DISCOVERY OF LOSS Case law has modified the 12-month post-loss limitations period. The California Supreme Court made the following two findings, among others, in Prudential-LMI Commercial Insurance v. Superior Court of San Diego County (1990) 51 Cal.3d 674 [274 Cal.Rptr. 387]: (1) The standard one-year limitation period begins to run on the date of the inception of the loss -- defined as "that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered." The Court termed this the "delayed discovery rule." (Id. at p.684-686.)1 (2) The 12-month period is "equitably tolled" -- suspended -- from the time the insured gives the insurer notice of claim to the time the insurer formally denies the claim in writing "unequivocally." (Id. at pp. 692-693.)2 If the insurer raises the limitations period as an affirmative defense to a lawsuit, it has the burden of proving the issue. (California Sonsome Co. v. U.S. Gypsum (9th Cir. 1995) 55 F.3d 1402, 1406.) The limitations period does not begin to run until the date appreciable damage occurred so that a reasonable insured would be on notice of a potentially insured loss; thus, the insurer trying to prove the limitations period had run would have to prove when such appreciable damage occurred. Similarly, the insurer might raise the insured's unreasonableness in delaying notification of claim as a separate affirmative defense, but the insurer would have the burden of proving unreasonableness. (Olson v. Standard Marine Ins. Co. (1952) 109 Cal.App.2d 130, 137 [The burden of proof of matters pleading as affirmative defenses is that of the party raising them.].) The Prudential-LMI Court noted that the Court of Appeal in Abari v. State Farm & Casualty Co. "...believed that the insured reasonably could have found the cracks so trivial that [Mr. Abari] would not have been alerted to the gravity of damage" when he first saw them five years before submitting proof of loss. (Prudential-LMI, supra, at p. 686.)3 (see also Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App. 4th 1269, 1279-80, in which the Court of Appeal affirmed the jury's award of contract and emotional distress damages, noting evidence from the insurer's claims agent that "'hairline cracks' are so common place they would not be a manifestation of cognizable damage of concern to a reasonable man....") Awareness of damage which the insured reasonably does not believe exceeds the policy's deductable does not trigger the insured's duty to make a claim or the running of the statute of limitations period. If the insured is required by the policy to comply with policy provisions before she or he has the right to sue, then the limitations period is tolled until the insured has the opportunity to comply with them. (See, e.g., Zurn Engineers v. Eagle Star Ins. (1976) 61 Cal.App.3d 493,499 ["...[O]ur law requires that the policy be read as a whole so that, if the right to sue upon an insurance policy is postponed by action that must be taken as a prerequisite to suit, the limitation period does not commence to run until the insured has an opportunity to comply with the conditions precedent to the litigation.]) The Prudential-LMI Court "...[found] instructive Zurn's recognition that a strict construction of the term 'inception of the loss' may lead to an inequitable technical forfeiture of insurance coverage." (Prudential-LMI, supra, p. 685.) Where the insured makes a claim within the 12-month period and the insurer pays something, or pays nothing because it claimed that the damages were below the deductible, but the insurer does not inform the insured, formally and in writing, unequivocally and unconditionally, that any and all other damage relating to that claim is being denied, the statute remains tolled, i.e., the tolling period does not end and the time for filing suit does not yet begin to run again. The insurer cannot then legitimately deny a subsequently submitted claim for benefits relating to the original claim on the basis of the running of the statute. Where an insured gives notice of the claim to an agent of the insurer, the agent fails to transmit notice of claim to the insurer, and the claim is not properly denied, the tolling period will not have ended. The denial of a claim under an insurance policy arising from, e.g., an earthquake does not act as a denial of second claim resulting from another earthquake on a different date. If, for example, an insured was told by an insurer that damage to his or her property from the January 17, 1994, earthquake was either below the deductible or less than the damage that now exists at the property, the present damage may be covered if caused by an aftershock or separate earthquake, and therefore may not be barred by the 12-month limitation period. Similarly, the denial of a claim for damage resulting from one covered peril, e.g., earthquake, may not act as a denial of claim for damage from a different covered peril, e.g., water or fire, which occurred on the same or different date, depending on application of proximate and concurrent causation factors. III. INSURER OBLIGATIONS Courts have held that an insurer need not disclose to its insured all possible legal theories of recovery. (See, e.g., Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1150; State Farm Fire & Casualty Co. v. Superior Ct. (1989) 210 Cal.App.3d 604, 609.) They have not held, however, that insurers need not disclose the factual and legal reasons for denial or rejection of a claim. Moreover, fair claims handling practices require both disclosure of reasons for denial and disclosure of all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to its insured's claim. (Cal. Ins. Code S 790.03, subd. (h); Cal. Code Regs., SS 2695.4, 2695.7.) The Department views any failure to meet these obligations as violation of California Insurance Code, section 790.03, and, as such, should cease. The insurer should inform the insured that (1) if the insured files a lawsuit contesting the insurer's position, the insurer, not the insured, will have the burden of proving to a judge or jury that it is correct; and (2) if the insurer fails to meet this burden, it may be ordered to pay the insured additional monies for having violated its duties to the insured of good faith and fair dealing. An insurer that has already denied a claim based on the statute of limitations should promptly contact each such insured and inform them of the above. The insurer's burden of proof, the insured's right to not have claims unreasonably denied, and the insured's right to be compensated for an insurer's violation of its duties to the insured all are benefits of the insured's policy. Unless willing to risk allegations and an ultimate finding of bad faith, an insurer might better choose not to deny a claim on statute of limitations grounds before obtaining a determination from a court -- and informing the insured -- as to (1) the point in time when appreciable damage occured; (2) the point in time when the insured's delay in notifying the insurer, if any, became unreasonable, triggering the running of the statute; and (3) the total number of days from those points in time during which the statute was tolled. Please direct any questions concerning this notice to The Compliance Bureau, Department of Insurance, 45 Fremont Street, 21st. Floor, San Francisco, California 94105, (415) 904-5382.
1In discussing inception of the loss and delayed discovery, the Court drew a distinction only between fire and property loss cases not involving fire; therefore, we apply the rulings in the case in single incident and progressive property damage cases not involving fire. (Id.) 2Almost 50 years ago, in Neff v. New York Life Ins. Co. (1947) 30 Cal.2d 165,170, 172 [180 P.2d 900], the California Supreme Court had held that an "unconditional" denial by the insurer marks the accrual of the insured's cause of action. 3"However," the Abari court continued, "the complaint lacks such an allegation...." The court then ruled in favor of the insurer, finding that Mr. Abari failed to state facts to toll the running of the commencement of suit provision. (Abari, supra, (1988) 205 Cal.App.3d 530, 535.). Back to the Earthquake Damage page. Back to the Home page. [ Real Property ]
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