Determining when the clock starts
Determining when the clock starts10.02.2018
I recently completed a risk management seminar to a group of insurance agents discussing the anatomy of an E&O lawsuit including defenses to such a lawsuit. One defense, the statute of limitations for an insurance agent client to commence a lawsuit, led to a series of questions about what is the event that triggers the time when the statute of limitations begins to run or in legal jargon when does the E&O claim accrue. The answer depends on the jurisdiction in which the E&O claim is brought with some Courts looking at when the agent client is damaged being last date an insurance agent could have corrected the alleged error or what is sometimes called the “delayed damages rule”. A couple of recent decisions, however, support the increasingly more common rule as when the time clock begins to run for the statute of limitations.
In American Family v. Krop, the Illinois Supreme Court held that a claim for the alleged negligence to procure insurance accrues as soon as the insured receives that policy, or the time when the policyholder has an opportunity to read the insurance contract and can reasonably understand its terms. Tellingly, the Court overturned a lower Illinois Court of Appeals decision that the failure to procure claim did not arise until the insured knew or should have known of the injury, namely the ”discovery rule”, which in this case was the time the insurer denied coverage. While I believe the result is a good one, I would note that part of the rationale noted by the Illinois Supreme Court was that “insurance customers frequently maintain the insurance policy for years, perhaps decades” and to apply the discovery rule could unreasonably extend the accrual period. I am not sure that this factual underpinning is accurate, and whether it was simply a means to an end.
The Ohio Supreme Court further clarified the reasoning and provides further support for rejecting the “delayed-damage rule” in negligent procurement claims in LGR Realty v. Frank & London Insurance Agency. The underlying policy at issue was a Real Estate E&O policy that contained a specific endorsement excluding claims against LGR by Plaza Properties. A lawsuit was brought against LGR and coverage was denied citing the Plaza Properties exclusion, and the real estate entity alleged negligence against the insurance agency related to the policy procurement. In finding that the accrual of the statute of limitations began when the policy was issued, the Ohio Supreme Court specifically found the “the delayed-damage rule does not apply … when the policy at issue contains a provision specifically excluding the type of claim the insured alleges it believed was covered by the policy”. Thus, the window was left open that the “delay-damage rule” could effectively delay the commencement of time that the statute of limitation begins to run with respect to a negligent misrepresentation or procurement claim if the claim is based on language not found in the subject insurance policy at the time of issuance.
I started the discussion above noting that the other jurisdictions might rule differently giving the same set of facts, and did not want to leave the impression that the “delayed-damage rule” is not being followed by other courts. In many states like Florida, for example, there are statutes that control when “a cause of action accrues when the last element of the cause of action occurs”. In negligence cases, the last element is the actual loss or damage and, with respect to E&O claims against an insurance agent, this could be when an agent’s client sustains a fire loss that is not covered or when an agent’s client’s liability insurer denies coverage to a lawsuit.