Each state’s laws set deadlines within which lawsuits must be brought called statutes of limitations. However, insurance companies often try to shorten these deadlines even more by establishing even shorter limitation periods in the insurance policy in which to bring homeowners insurance claims. One year from the date of the loss is a common limitation. These limitations can put policyholders in a tough spot, for instance, when the insurance company is still investigating after a year or when the parties are involved in the appraisal process. Two cases that came out in the past week involving State Farm illustrate this problem.
In Korwin v. State Farm Fire and Casualty Company, the United States District Court for the Northern District of Ohio held that the policy’s one year limitations period prevented the insured from bringing a claim of breach of contract against the insurer, even though the insured had been negotiating with the insurer, providing additional evidence, and State Farm had issued another coverage decision after the one year limit had passed. The Court, however, allowed a bad faith claim to go forward, finding that the limitation period did not apply to it.
In Costello v. State Farm Fire and Casualty Company, the Eastern District of Pennsylvania upheld a similar limitation and dismissed a claim for breach of contract. In that case, the policyholders’ home was destroyed completely by fire. The amount necessary to replace it exceed the policy limits of $340,000. However, the policyholders paid an additional premium for an increased dwelling limit coverage up to an additional $68,000. State Farm initially estimated the loss at $308,000 but when the policyholders had the work done it exceeded the policy limits and apparently the additional $68,000. The policyholders then applied to State Farm for the remainder of the available coverage and additional living expenses under the policy. State Farm paid an additional $11,000 and refused to pay any additional amounts. The policyholders then demanded appraisal under the policy and State Farm refused arguing that the one year limitation applied to the appraisal process also. The policyholders then sued for breach of contract and for bad faith in refusing to engage in the appraisal process.
While the court dismissed the breach of contract claim as mentioned above, it allowed the bad faith claim to go forward, rejecting State Farm’s argument that the one year limitations period applied to bad faith claims and to the appraisal process itself. The court held that the insurer’s allegations that the insurer refused to participate in the appraisal process without a valid reason to do so stated a claim for bad faith.
A one year from the date of loss limitation can impose a very high burden on the policyholder and can require them to bring an action even before the insurance company has breached the policy. Fortunately, some states, like Alabama, currently prevent insurers from shortening the time to bring a lawsuit to less than the state law requirement. Other states, like Texas, limit this ability by requiring insurance companies to allow at least two years after a claim “accrues” for the policyholder to bring suit. Regardless, if you have a claim, read your policy to see if it has a special limitation period and make sure you know where you stand on this important issue.