The decision that came down recently in Spray, Gould & Bowers v. Associated International Ins. Co., 71 Cal. App. 4th 1260 (1999), and the question pending before the California Supreme Court in Vu v. Prudential Property & Casualty Co., 172 F.3d 725 (9th Cir. 1999), have provoked some talk concerning the "demise" of the one-year contractual limitations period authorized by Insurance Code Section 2071 and contained in most California property insurance policies.
Such talk is premature. Spray notwithstanding, and regardless of how the Supreme Court ultimately rules in Vu, the majority of insureds who wait too long to file their breach-of-contract and bad-faith breach-of-contract (i.e., tort) claims will remain shut out of court.
Section 2071 provides, "No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless … commenced within 12 months next after inception of the loss."
Very broadly, courts have interpreted this language to afford an insured one year from the date he or she reasonably should have discovered facts giving rise to an insurance claim to sue on that claim. See Prudential-LMI Commercial Ins. V. Superior Court, 51 Cal. 3d 674 (1990). The running of that one-year period is tolled while the insured’s claim is being adjusted (i.e. during the period the insurer is deciding whether and to what extent to honor the claim).
And if the one-year period runs before the insured finds his or her way into court, he or she can, and usually does, argue that the insurer is equitably estopped from asserting a timeliness defense based on that provision. Spray made its much-discussed, but ultimately benign, appear in the estoppel context.
Equitable estoppel requires a representation or concealment of a material fact made with knowledge, actual or virtual, of that fact to a party ignorant, actually and permissibly, of the truth with the actual or virtual intention that the latter act on it; and the party must have been induced to act on it. Wood v. Blaney, 107 Cal. 291 (1899).
Historically, courts have made demonstrating the "misrepresentation" element extremely difficult for insureds. Accordingly, insureds have historically had an extremely difficult time using equitable estoppel to rescue their delinquent claims from the one-year time bar. The difficulty has been that, because transactions between insurers and insureds are at "arm’s length," mere silence has been held to be an insufficient ground for estoppel (i.e., insurers have not duty to speak). See, e.g., Velasquez v. Truck Insurance Exchange, 1 Cal. App. 4th 712 (1991); Kurokawa v. Blum, 199 Cal. App. 3d 976 (1988).
Putting it another way, courts have held that an insurer cannot be estopped from relying on a limitations provision unless it has engaged in some affirmative conduct to lull the insured into believing he or she need not comply with it. See Tubbs v. Southern Cal. Rapid Transit Dist., 67 Cal. 2d 671 (1967); Kunstman v. Mirizzi, 234 Cal. App. 2d 753 (1965). At first glance, Spray appears, at least in one particular context, to change all that. But only at first glance.
In Spray, the insurer denied the insured’s earthquake claim without providing formal written notice of the one-year contractual limitations period, notwithstanding that Insurance Code Regulation Section 2695.4(a) requires that the insurer do so. More than a year later, the insured sued the insurer over that denial. The trial court granted summary judgment for the insurer on timeliness grounds. The appellate court reversed, holding that the insurer’s admitted failure to comply with Section 2695.4(a), 10 C.C.R. Section 2695.4(a), created a triable issue of fact as to whether the insurer was estopped to assert the limitations’ provision as a defense based on that failure.
(That the insurer admitted the violation is critical, as mere technical failure to adhere to an Insurance Code Regulation does not by itself mean an insurer is in "noncompliance" with that guideline. Before that legal determination can be made, the insurance commissioner must make a number of complicated factual determinations concerning a number of mitigating considerations. See 10 C.C.R. Section 2695.12(b). Until the commissioner makes those determinations, no "noncompliance" has occurred. The insurer’s admission in Spray meant the court never had to reach this question.)
According to Spray, then, Section 2695.4(a) created the duty to speak in this context that is typically missing in insurer-insured relationships. Thus, where that regulation has been violated, the failure to send the required notification (it’s a question of fact) can satisfy the misrepresentation element of an estoppel claim. But the inquiry does not end there; the insured still must satisfy the other elements, including reliance.
As Spray explains, if the facts show that the insured failed to file a timely lawsuit out of ignorance of the policy limitations provision, there are grounds for estoppel. Conversely, if the insured had actual notice of the limitations provision, no estoppel will arise because of the belated filing of the lawsuit was not the result of the insurer’s misconduct or silence. In short, a violation of the regulation will result in an estoppel only if that violation caused the insured’s tardiness.
Viewed this way, Spray changes very little. Before, an insured had to show "affirmative conduct," as opposed to "mere silence," to establish an estoppel defense to the one-year contractual-limitations’ provision. Now, "mere silence" suffices where some extraordinary circumstance establishes a duty to speak, as in the case in which the insurer admits to having violated Section 2695.4(a) or in which the insurance commissioner or the court determines that the insurer violated it — a rate occurrence. Hence, Spray is not so earth-shattering after all.
Nor will the Vu decision effect any more dramatic a change in the law, no matter which way it comes down.
In Vu, the insured timely submitted a claim for earthquake damage to his insurer. The insurer sent to inspect the damage an adjuster who determined that the damage did not exceed the insured’s deductible. The insurer denied the claim. More than one year later, the insured discovered that the damage in fact substantially exceeded his deductible and tendered a claim on the damage, only to have the insurer deny it one timeliness grounds.
The insured then sued the insurer in federal court for breach of contract and breach of the implied covenant of good faith and fair dealing on the theory that the carrier was estopped from asserting the contractual-limitations’ provision because it essentially tricked the insured out of timely filing his lawsuit. The trial court ruled the one-year provision barred both the "common" breach-of-contact claim and the "bad-faith" claim.
In so ruling, the trial court relied on Neff v. New York Life Ins. Co., 30 Cal. 2d 165 (1947), which held that an insurer can invoke the statute of limitations as an affirmative defense even if it erred in denying a claim and the insured relied on the erroneous denial until the time to sue had expired. The court based that conclusion on three considerations: the insurer advised the insured the claim had been denied; the relationship between the insurer and insured as "arm’s length," so the insured had no reasonable basis for believing he could rely on the insurer’s investigation; and the insurer did not make any "deceptive assurances … tending to lull the insured … into a sense of security and to forbear suit." Indeed, Neff held that the insurer was not estopped even if it denied the claim fraudulently.
But not so fast, the 9th Circuit in Vu said. Reasoning that cases since Neff have established a "quasi-fiduciary" relationship between the insured and insurer, the 9th Circuit thought that Neff’s categorical holding that the insured had no right to rely on the insurer’s representations — ever — might be too extreme for use in the 1990s.
(Indeed, that one aspect of the Neff holding is, to some extent, an anachronism already; as the foregoing discussion makes plain, courts in recent years have allowed insureds to "rely" on affirmative conduct that fools them into believing an insurer will forgo the contractual-limitations’ provision.)
At the same time, though, the 9th Circuit recognized that Neff is still the law in California and thus could not lightly be circumvented. Thus, it asked the California Supreme Court to take another look at the question of whether an insurer can be estopped to assert a contractual one-year limitations provision if it erroneously represented to an insured that a claim was not covered and the insured relied on that representation to his detriment.
At bottom, then, the high court will be deciding little more than whether or not an insured may rely on affirmative representations made by the insurer. If it allows Neff to stand, the answer will be "no," and an insured will have almost no hope of ever establishing the elements of an equitable estoppel claim. If it overrules Neff, then the ordinary equitable estoppel analysis — discussed earlier in connection with Spray, which creates an extremely high hurdle for insureds to surmount — will continue to apply. Thus, Vu will be no more significant than is Spray.