Policy clauses that limit lawsuits create pitfalls

Policyholders should be aware of the potential pitfalls of clauses that limit their right to bring a lawsuit.

First-party property insurance policies generally include so-called "suit limitations" clauses, which cap the time that a policyholder may bring a lawsuit against an insurance company for coverage disputes, and are generally shorter time periods than allowed by the otherwise applicable statute of limitations. Thus, a policyholder facing a first-party loss is well advised to examine its policies and the applicable state laws to determine whether a deadline is looming with respect to its coverage.

There is considerable variation among states' laws on the treatment of suit limitations clauses. For example, Mississippi prohibits contractual clauses purporting to shorten the state's regular three-year statute of limitations for contract claim lawsuits.

Similarly, Louisiana's Legislature, spurred by the anniversaries of Hurricanes Katrina and Rita--whose Louisiana landfalls took place on Aug. 29, 2005, and Sept. 24, 2005, respectively--passed statutes extending the one-year suit limitations periods from the two hurricanes for an additional year. The Louisiana Supreme Court has upheld the constitutionality of these statutes, though the time for the unsuccessful insurance company litigants to seek review of this decision from the U.S. Supreme Court will not expire until late November.

Another area of variation among states, and a source of confusion for policyholders, is the effect that continuing negotiations with an insurance company has on the limitations period. For example, under California law, a one-year suit provision runs from the date of "inception of the loss," but is delayed from the time an insured gives notice of the damage to his insurer, pursuant to applicable policy notice provisions, until coverage is denied, according to a 1990 California Supreme Court ruling in Prudential-LMI Commercial Insurance vs. Superior Court.

In other states, where the limitations period is not automatically delayed until denial, policyholders frequently assert that the negotiations lulled them into believing that the insurance company would pay without a lawsuit, and argue that the insurance company thus has waived or should be estopped from asserting the suit limitations clause.

Many courts have accepted such arguments under the proper facts: "The insurer cannot hold out the hope of an amicable adjustment of the loss, and thus delay the action of the insured, and then plead the delay, caused by his own conduct, as a defense to the action when brought," from the 1973 Louisiana Court of Appeals ruling in Weinberg Inc. vs. Aetna Casualty & Surety Co., which relied on the 1951 Louisiana court decision in Brocato vs. Sun Underwriters Insurance Co.

In the Weinberg case, the court reversed a ruling in favor of the insurance company on a suit limitations clause in a policy covering theft of goods, when there was evidence that the insurance company had requested additional supporting documentation on the claim and told the policyholder that the time needed to obtain the documentation would not be a problem.

In other cases, however, policyholders have been unable to establish that their insurance companies' conduct supported such a finding.

In the case of North American Foreign Trading Corp. vs. Mitsui Sumitomo Insurance USA Inc., for example, the Southern District Court of New York addressed insurance coverage for the policyholder's loss of cordless telephones from a warehouse. The court held in 2006 that under New York law, investigation, communication or settlement negotiations do not waive the limitations period, and there is no duty even to advise the policyholder of the suit limitations clause. The court held that the policyholder would need to show it had been misled or lulled into failing to bring suit in order to avoid the limitations period, and found no such evidence in that case.

Thus, policyholders should be vigilant about any suit limitations deadlines on its claims under the policy language and applicable law. Furthermore, rather than relying after the fact on arguments that continued negotiations lulled it into overlooking the suit limitations clause, a much better course for a policyholder, in jurisdictions that so allow, is to request that the insurance company sign an agreement expressly delaying the limitations period to permit the negotiations to proceed.

This should remove any uncertainty associated with implying waiver by conduct under varying standards in different states. If the insurance company refuses to grant an extension, this may well be an indication that the policyholder should reassess how well it believes the negotiations are going. Of course, the filing of a lawsuit prior to the expiration of the period also avoids any suit limitations problems.

Michael T. Sharkey and Barry J. Fleishman are partners with the law firm of Dickstein Shapiro L.L.P. in Washington. The opinions expressed in this article are those of the authors and not necessarily those of any of their clients.