Lessons in Limitation – Contractual Limitations Provisions as a Basis for Summary Judgment

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In recent weeks, our firm obtained summary judgment under a contractual limitations provision that the plaintiff-insured argued had been equitably tolled due to the insurance carrier’s conduct. Although the good guys won, the case offers helpful reminders for carriers handling claims in California and across the county.

Contractual Limitations Provisions – A Primer

Provisions creating a contractual limitations period for policyholders to sue their insurance carriers are commonplace in insurance policies. Often, these provisions require the insured to bring an action within one year after the “inception of the loss.” And in California, courts generally agree that “inception of the loss” refers to “that point in time at which appreciable damage occurs so that a reasonable insured would be on notice of a potentially insured loss.”[1]

The goal of these provisions is straightforward—prompt resolution of disputes and prevention of loss of evidence. As the Supreme Court put it in its 1944 decision Order of Railroad Telegraphers v. Railway Express Agency, “the right to be free of stale claims in time comes to prevail over the right to prosecute them.”[2]

Accordingly, courts in California have repeatedly held these provisions to be enforceable, reasoning that they constitute “a reasonable limitation which manifests no undue advantage and no unfairness as to the period of time.”[3] As a result, in many cases initiated by a policyholder against their insurance carrier, such as those for bad faith or breach of contract, these provisions can be a useful basis for a motion for summary judgment.

As with most defenses, however, a contractual limitations period is not foolproof. For instance, under the doctrine of equitable tolling, an insurer’s own actions can render its contractual limitations provision toothless.

The Effect of Equitable Tolling

Equitable tolling functions to extend or suspend a contractual limitations period. In California, the contemporary equitable-tolling doctrine traces its origins to a 1990 opinion by the California Supreme Court in Prudential-LMI Commercial Insurance v Superior Court of San Diego County, which held that the one-year period is equitably tolled between the time that the insured notifies the carrier of the loss and the denial of the claim.

Since then, California courts have held that the statute of limitations may be tolled for a second time where the insurer (1) expressly agrees to reopen the claim; or (2) engages in conduct or representations that would induce the insured to not file suit.[4] Many carriers encounter issues with this “second period” of equitable tolling when, perhaps unintentionally, they convince the insured to not file suit when they otherwise would. For example, courts have tolled the statute of limitations because the insured and insurer engaged in negotiations regarding the claim following the insurer’s initial denial.

In our firm’s recent case before the U.S. District Court for the Central District of California, the plaintiff argued that the insurer’s internal decision to reopen the case tolled the contractual limitations period—even though the case’s reopening was never communicated to the insured. The court rightfully disagreed, holding that, despite an insurer’s internal notes reflecting that the claim was still being investigated after the issuance of a letter to the insured determining coverage, the insured could not have relied on the case’s reopening in delaying suit against the insurer. Simply put, and consistent with previous rulings in California, the fact that the claim has been “reopened” needs to be communicated to the insured for equitable tolling to apply, and a policyholder cannot use “claim notes” or “claim files” obtained during discovery to toll the limitations period.

What This Means for You

This recent ruling and the decades of litigation surrounding contractual limitation provisions in insurance policies leave several important considerations for insurance carriers in California and elsewhere:

1. Insurance policy provisions that require the filing of suit by an insured against their carrier within one year (or within another time period as state law may provide) are generally enforceable.
2. As a practical matter, in California, a court is likely to hold that the limitations period began to run when the carrier issued a decision on the claim to the policyholder.
3. Carriers should be careful about what they communicate to their insured’s once a claims decision has been made—equitable tolling (and extension of the limitations) applies when a carrier explicitly communicates to the insured that their claim has been reopened or otherwise engages in negotiations causing the insured to delay filing suit.

[1] Prudential-LMI Com. Ins. v. Superior Ct., 51 Cal. 3d 674, 685 (1990).
[2] Order of Railroad Telegraphers v. Railway Express Agency, 321 U.S. 342, 348 (1944).
[3] Lawrence v. Western Mut. Ins. Co., 204 Cal.App.3d 565, 571 (1988).
[4] Singh v. Allstate Ins. Co., 63 Cal. App. 4th 135, 144 (1998).