- Bad Faith Failure to Settle: When Does the Clock Start Ticking in Delaware?
- September 12, 2016 | Author: Thomas J. Gerard
- Law Firm: Marshall Dennehey Warner Coleman & Goggin, P.C. - Wilmington Office
- Key Points:
- When does the statute of limitations begin to run in Delaware cases involving bad faith failure to settle?
- The Delaware Supreme Court has decided that the statute begins to run when an excess judgment becomes final and non-appealable.
The Delaware Supreme Court recently considered this question in Connelly v. State Farm Mut. Auto. Co., 135 A.3d 1271 (Del. 2016). It determined that the statute of limitations on a bad faith claim begins to run when an excess judgment becomes final and non-appealable.
The facts in Connelly are similar to those we see on a regular basis when a decision is made to take a case to trial. In 2007, State Farm’s insured, Ronald Brown, rear-ended a vehicle operated by Christina Connelly. Brown had a liability policy providing coverage of $100,000 per person and $300,000 per occurrence. Connelly sued Brown for injuries, and State Farm provided Brown with a defense under his policy. On May 10, 2011, Connelly offered to settle the case for $35,000. The demand was rejected on June 9, 2011, and the case went to trial. Brown admitted that his negligence was the proximate cause of the collision, and the jury awarded Connelly $224,271.41, plus pre-judgment interest of $92,958.96, costs of $5,435.28 and post-judgment interest of $10,580.64. State Farm only paid a portion of the award, and the deadline to appeal expired in April 2012.
In September 2014, Connelly brought a claim against State Farm and Brown as Brown’s judgment creditor. Brown alleged State Farm acted in bad faith, maliciously and without any reasonable justification when it refused to settle the claim for less than policy limits and failed to seek appellate review of the excess judgment. State Farm moved to have Connelly’s claim against it dismissed for lack of standing, at which point Brown assigned his rights to pursue an action against State Farm to Connelly, who then amended the complaint to reflect the assignment. State Farm moved to dismiss the case, asserting it was barred by the three-year statute of limitations proscribed in 10 Del. C. § 8106, which State Farm contended began to run on either May 10, 2011, when the plaintiff’s demand was made, or on June 9, 2011, when the offer was rejected.
The Delaware Superior Court heard arguments and did not address substantive issues raised in the complaint as to whether State Farm’s actions amounted to bad faith. Instead, the Superior Court focused on the motions before it, confirming that the statute of limitations in 10 Del. C. § 8106 applied and that the central issue was when the statute of limitations began to run. In contrast to State Farm’s position, the plaintiff contended the statue of limitations began to run when a final judgment was entered against the insured that was in excess of the policy limit.
The plaintiff asserted in her complaint against State Farm that “State Farm acted in bad faith [...] in failing to accept the Plaintiff’s settlement offer[...].” The Superior Court relied upon the plaintiff’s own words as to when the breach occurred and noted that well-settled Delaware law holds the applicable statute of limitations begins to run at the time of the wrongful act. The Superior Court held that the statute of limitations began to run on the date State Farm denied the plaintiff’s settlement demand, putting her on notice of the cause of action. Whether the statute began to run in May 2011 or June 2011 was of no consequence since either date, as the triggering event, resulted in a filing that was time-barred.
A three-justice panel of the Delaware Supreme Court reversed the trial court’s holding, establishing, instead, that a claim for bad faith against an insurer for refusing to settle a third-party insurance claim accrues when an excess judgment against its insured becomes final and non-appealable. As the court reasoned, this conserves both litigant and judicial resources and properly aligns the incentives of the insurer and its insured. It allows the insurer and the insured to join efforts in defending the underlying third-party claim without a breach of contract claim causing a conflict of interest. Further, the court reasoned that damages cannot be properly pleaded in a bad faith claim until there is a final excess judgment.
The Supreme Court’s opinion is sound. It allows the carrier and its insured to align their interests and eliminate the expense and complication of potential prophylactic litigation, which ultimately may prove to be unnecessary.