INSURANCE BAD FAITH PRIMER

California Insurance Bad Faith Law—Claims Denials and Insurance Coverage Issues, Including ERISA Preemption Issues

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By ALICE WOLFSON and DAVID LILIENSTEIN

DL Law Group

345 Franklin Street • San Francisco, California 94102
Telephone: 1-888-353-3016 • Facsimile: 415-358-8484

I N T R O D U C T I O N

The following are some issues which frequently arise when litigation insurance bad faith cases. This includes claims denials, coverage issues, duty to defend, duty to indemnify, and ERISA preemption law. This primer focuses on insurer conduct that may qualify as bad faith claims handling.

Because statutes change and decisional law on any topic evolves, and because decisions are often subject to multiple interpretations, the reader is cautioned not to rely on the principles set forth without undertaking additional research.

The authors gratefully acknowledge the assistance of Jill Schlichtmann, Esq., and Amy Bach, Esq.

[G] Statute Of Limitations

1. Q: What is the statute of limitations in a bad faith case?
   A: In most cases, a one-year statute for personal injuries (emotional distress) is applied. (C.C.P. section 340.) A two-year statute governing actions “upon a[n] . . . obligation or liability not founded upon an instrument of writing” (C.C.P. section 339(1)) may also apply. (Smyth v. USAA Property and Casualty Ins. Co. (1992) 5 Cal.App.4th 1470, 7 Cal.Rptr.2d 694.) **CAUTION** If the insurance policy contains a contractual statute of limitations clause see question 52 below.
2. Q: Is an insurance policy clause limiting the time “within which the insured must bring an action to recover on the policy” (e.g., one year), enforceable, and if so, how is the time period computed?
   A: This issue is complex. The wording of the policy and the facts of the case are important factors. Some insurance policies attempt to require insured to file actions on the policy within a specified period from the occurrence, rather than from the time the claim is denied. (Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal.App.3d 565, 251 Cal.Rptr. 319; Abari v. State Farm Fire & Casualty Co. (1988) 205 Cal.App.3d 530, 252 Cal.Rptr. 565, 567.)

   In Prudential – LMI Commercial Insurance v. Superior Court, supra, 51 Cal.3d 674, the California Supreme Court held that the time limitation in the policy was enforceable, but tolled between the period of time that the insured gives notice of the loss and the time the claim was denied. For example: a loss occurs on January 1, 1991 and is reported to the insurer on February 1, 1991; it is denied by the insurer on March 1, 1992. The insured must file suit prior to February 1, 1993. The one month that elapsed between the loss and the notice to the insurer counts toward the limitations period. Based on the length of the delay in reporting the loss, the insured will have only and additional eleven months after denial to file the lawsuit. (Prieto v. state Farm Fire & Casualty Co. (1990) 225 Cal.App.3d 1188, 275 Cal.Rptr. 362.)

3. Q: When does the statute of limitations begin to run on an action to compel and insurer to abide by an arbitration clause?
   A: The limitations period begins to run when the insurer refuses to arbitrate. (Spear v. California State Auto. Assn. (1992) 2 Cal.4th 1035, 9 Cal.Rptr.2d 381.)

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