Russo & Kieck

By: Donna Russo, Esq.

Insureds should, but almost never, read their policies. Most insureds know that they should file a claim as soon as possible. However, most insureds don't realize that their policy may contain language which limits the time within which they may file a lawsuit against the insurance company that has declined coverage or tenders coverage in an amount less than the claim submitted by the insured. Some policies have a specific provision which addresses the time period in which suit may be brought against the company. Other policies are silent. The silent policies follow the statute of limitations for contracts, which in New Jersey, is six years. Otherwise, the time period for suit set forth in the policy must be followed or the lawsuit will be barred.

In Gahnney v. State Farm Insurance Co. et. al., No. 98-4659, decided 7/27/99, __ F. Supp. __ (D.Ct. N.J., 1999), the Federal District Court revisited the binding effect of a statute of limitations provision contained in an insurance policy. Most policies that contain such a provision follow the standard fire policy language, modeled after the New York policy form and adopted by the majority of states, including New Jersey. The standard policy uses the language "inception of the loss" as the date on which the statute of limitations begins to run.

In Gahnney v. State Farm Insurance Co., the plaintiffs had a homeowners policy which provided coverage for water damage to their residence. During the winter of 1995-1996, the heavy weight from ice and snowfall caused damage to plaintiffs' home. In January 1996, the plaintiffs began noticing storm water leaking through certain windows. In May 1996, the plaintiffs realized the full extent of water damage when the snow had completely melted. The plaintiffs contended that they did not realize the full extent of soot damage until July, 1996.

In July 16, 1996, the plaintiffs hired their first adjustment company. On October 9, 1996, this adjustment company and the insurer conducted an inspection and an offer of $2,686 was made by the insurer and recommended to the plaintiffs by the adjustment company. On February 10, 1997, the plaintiffs ended their relationship with the first adjustment company on the grounds that this adjustment company had not done an adequate job. On March 11, 1997, plaintiffs submitted an estimate of damages by a second adjustment company in the amount of $23,906.72. On April 1,, 1997, the plaintiffs requested an appraisal. The insurance company first conducted another inspection which confirmed their original offer. On August 5, 1997, the independent appraisers agreed to a damage figure of $3,984.68. On August 27, 1997, the insurance company sent their check for $3, 984.68 to the plaintiffs. The plaintiffs contend that they received this check on September 4, 1997 and did not cash the check because it was significantly less than the second adjustment company's estimate.

Plaintiffs did not file suit until August 7, 1998. Their homeowner's policy contained the following statute of limitations provision: "No suit or action on this policy for recovery of any claim shall be sustainable in any court of law or equity unless the requirements of this policy have been complied with, and unless commenced within twelve months next after inception of the loss."

The insurance company filed for summary judgment dismissing the lawsuit with prejudice because the plaintiffs failed to file suit within one year as required by the policy. Plaintiffs contend that they filed within the one year because the negotiation period tolled the statute of limitations and that the insurance company was precluded from asserting the defense because it did not provide plaintiffs with notice of the statute of limitations period.

The Court granted summary judgment to the insurance company. The Court recognized the well established law, commencing with Peloso v. Hartford Fire Insurance Co., 56 N.J. 514 (1970), which permits the tolling of the statute of limitations during negotiation, the period between the time that the insured notifies the insurance company of the loss and the date that the insurance company makes its determination. The Court found that the plaintiffs miscalculated the statute of limitations because plaintiffs ignored the time period between the "inception of the loss" and the date of notice to the company. Viewing the facts most favorably to the plaintiffs, the Court found that by January 31, 1996, the plaintiffs should have discovered the true extent of their loss. The notice of claim was filed on July 16, 1996. Thus, plaintiffs waited 166 days after the "inception of the loss" to notify the insurance company. In order to satisfy the on year statute, plaintiffs had 199 days left. The Court, applying the tolling rule, found that the period of July 16, 1996 to September 4, 1997 was not to be counted because the parties were negotiating. The statute began to run again on September 4, 1997 which allowed plaintiffs until March 23, 1997. By filing the complaint on August 8, 1998, plaintiffs were 138 days past due.

The Court disregarded plaintiffs argument that they were not provided with notice of the statute of limitations. The Court refused to impose such a requirement the insurance company when the policy contained a specific provision addressing the limitation of lawsuits.

Comments:

The statute of limitations defense is one area where the courts favor the insurance companies over the insureds. Courts will avoid finding that statute of limitations provisions are ambiguous when the courts generally find other provisions such as exclusions to be ambiguous and unenforceable. A word of caution with respect to this opinion. One must be mindful that this case was filed in Federal Court where the judges are more inclined to grant summary judgment. Although a state court would probably make a similar finding on the statute of limitations it is also likely that a state court may stretch to find a later date for inception of the loss or a longer negotiation period so as to allow a finding that the suit was filed within the statute of limitations time period.