For the most part, the question of which statute of limitations applies (tort or contract) to UM/UIM cases has been resolved throughout most of the states. The majority view is that the contract statute of limitations applies which is triggered when the insurance company denies UM/UIM benefits in whole or in part. The actual contract statute of limitations period varies from state to state with the typical statutory period being either six years or ten years. Recently, the Rhode Island Supreme Court joined the majority and decided that issue finding that the contract statute of limitations was applicable in Rhode Island. The issue was submitted to the Rhode Island Supreme Court upon a certified question from the United States Court of Appeals for the First Circuit. The Federal Court’s certified question and the Rhode Island Supreme Court’s response is set forth below.
Federal Court Question
The Rhode Island Supreme Court was recently presented with a certified question from the United States Court of Appeals for the First Circuit (American States v. LaFlam, 672 F.3d 38 (1st Cir. 2012)), which asked whether a UM/UIM policy that requires a UM/UIM claimant to initiate legal action or make a written demand for arbitration within three years after the date of the accident was unenforceable as against Rhode Island public policy. American States Ins. Co. v. LaFlam, 69 A.3d 821, 838 (R.I. 2013). The First Circuit Court of Appeals had identified a potential danger regarding the structure of the policy in question wherein a contractual limitation period, which both began to run on the date of the accident and was shorter than the statute of limitations period, could have the unique effect, of barring recovery under the UM/UIM policy before the insured knew or had reason to know that he/she had a UM/UIM claim against the insurance company. The First Circuit Court of Appeals recognized that in some cases, “it [may] not become clear that the insured has such a claim until after the insured has attempted to obtain compensation from the tortfeasor. The insured … may well not know whether the tortfeasor is underinsured in light of the damages until long after the accident.” In that situation, the contractual limitations clause could effective bar recovery because the three-year limitations period, which began to run on the date of the accident, would impractically “require some insureds to file suit before it becomes clear that the tortfeasor is underinsured at all, particularly if the insured remains mired in legal battle with the tortfeasor and has not yet achieved a judgment.”
Rhode Island Supreme Court Answer
The Rhode Island Supreme Court in American States Ins. Co. v. LaFlam, 69 A.3d 831 (R.I. 2013) answered the federal court’s question. Although the issue of when a UM/UIM cause of action accrues was an issue of first impression in Rhode Island, the Rhode Island Supreme Court noted that “the overwhelming majority of … jurisdictions [that have considered this issue] have concluded that the limitations period begins to run on a [UM/]UIM claim upon the insurer’s breach of the insurance contract rather than the date of the accident.” After careful consideration, the Rhode Island Supreme Court was persuaded to join that majority viewpoint.
The Rhode Island Supreme Court began its analysis by noting that an insured’s action against his or her UM/UIM carrier is an action for breach of contract. The basis of the insurer’s obligations to pay UM/UIM benefits is not its actions resulting in personal injury but, rather, its contractual promise to indemnity against such injury. Therefore, an action on a UM/UIM policy is an action in contract for indemnification. Based on this principle, the Court concluded that an insured is not injured by his/her UM/UIM carrier and, therefore, has no right to seek judicial relief against the insurer unless and until the insurer breaches the insurance contract. That breach does not occur until the insurer refuses payment (or arbitration if applicable). Although an insured is entitled to formally or informally pursue a claim for UM/UIM coverage against the insurer starting from the date of the accident, the Court drew a distinction with the fact that a cause of action for breach of contract against the insurer did not accrue until the insurer formally denied UIM coverage benefits. LaFlam, 69 A.3d at 841 (citing State Farm Mut. Auto. Ins. Co. v. Fitts, 120 Nev. 707, 99 P.3d 1160, 1162 (Nev. 2004)).
The insurance company in the LaFlam case, American States, argued that the date of the accident should be used as the accrual date for UM/UIM claims because, were it otherwise, an insured would be permitted to “sit on his or her claim even for decades or more[,]” while prejudgment interest continued to accrue on the underlying claim. The Rhode Island Court answered this assertion by relying upon a recent Alaska Supreme Court case which rejected a similar argument:
An insurance company can require the insured to make a claim or notice of potential claim within a certain period of time without requiring the insured to file suit against the insurer. And, … once insurance companies have received notice of a claim, they ”are not forced to stand by helplessly as memories fade and physical evidence is lost,” but are “entitled to bring declaratory judgment actions to determine coverage at their own convenience.” LaFlam, 69 A.3d at 841 (citing McDonnell v. State Farm Mut. Auto. Ins. Co., 299 P.3d 715, 728, quoting Estes v. Alaska Ins. Guaranty Ass’n, 774 P.2d 1315, 1318 n. 1 (Alaska 1989)).
The Rhode Island Supreme Court was not convinced that American States’ “doomsday scenario” would actually come to fruition. The Court observed that insurance companies “possess the means to prevent the belated assertion of overly stale claims.” Additionally, the Court was hard-pressed “to envision a scenario in which an insured who is in need of benefits and who has a viable UM/UIM claim, occurring only because the tortfeasor’s policy limits were less than the insured is ‘legally entitled to recover because of bodily injury, sickness, or disease, including death, resulting from that injury, sickness or disease,’ … would delay asserting the claim and remain less than fully compensated any longer than necessary.”
A second argument asserted by American States was that the UM/UIM cause of action should accrue when the insured receives information regarding the respective limits of the tortfeasor’s policy from which the insured can come to realize that the claim value exceeds those limits. According to American States, when the insured determines that the limits of the UM/UIM policy exceed those of the tortfeasor’s policy, the UM/UIM claim for benefits accrues. It is at that point that American States argued an insured could notify the insurance carrier of the existence of the claim and file suit or proceed to arbitration. This argument was also rejected by Rhode Island Supreme Court.
First, the point in time when the insured first learns that the limits of the applicable UM/UIM policy are greater than those of the tortfeasor may never come to pass. Furthermore, the Court rejected the notion that a UM/UIM claimant would submit his or her claim to arbitration or resort to expensive litigation before becoming aware of the extent of the injuries. The Court recognized that parties typically do not submit a dispute to arbitration in order to obtain a stay for discovery purposes why they explore the nature and extent of injury; they submit to arbitration in order to obtain a decision from the arbitrators. This “hurry up and wait” approach whereby claimants rush to file actions or make demands for arbitration to comply with the “accident-based” statute of limitations only to request an immediate stay until the insured’s underlying tort action can be resolved is problematic and should not form the basis to allow a carrier to escape its obligations.
Having determined that a UM/UIM cause of action accrues at the time that the insurance contract is breached, the Rhode Island Supreme Court concluded that the contractual limitation provision in question was void as against Rhode Island public policy. The limitation impermissibly restricted UM/UIM coverage and frustrated the public policy concerns embodied in Rhode Island’s UM/UIM statute.
However, the Court made ambiguous concluding remarks indicating that the Court’s holding was limited and that the Court “need not and [did] not decide whether an insurance policy may properly contain a shortened time period within which a UM/UIM claim may be brought after the cause of action accrues and, if so, whether a three-year time period … would be reasonable.”
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