A recent Delaware Supreme Court opinion should be of interest to readers of these pages for two reasons: (1) Almost every litigator will find it useful during some point in her career to know when the statute of limitations runs for a claim against an insurance company for bad faith failure to settle within policy limits; and (2) for corporate and commercial litigators in particular, the court applies reasoning that borrows from its jurisprudence in the area of indemnification of directors and officers under Section 145 of the Delaware General Corporation Law. Connelly v. State Farm Mutual Automobile Insur. Co., Del. Supr., No. 426, 2015 (Mar. 4, 2016).
Issue on Appeal: When does the bad-faith-failure-to-settle claim accrue for purposes of the three-year statute of limitations.
Key Principles: The court began its analysis with basic principles. Readers are familiar with the condition imposed on all Delaware contracts of “good faith and fair dealing.” As applied to insurance contracts, the court explained that historically the implied covenant has “included a duty to settle claims within policy limits where recovery in excess of those limits is substantially likely.” See footnotes 12 and 13 for copious supporting citations.
The court drew upon analogous reasoning in the corporate context in which it is well settled that indemnity claims by a director or officer do not accrue until there is a final judgment. In other words, until the final judgment of the trial court withstands appellate review, the outcome of the underlying matter is not certain. See footnotes 33 to 36.
The court explained that insurance claims are a type of indemnity claim because in both cases the obligation to cover the indemnified party’s costs arises only once certain conditions occur—in the case of the bad-faith suit against an insurer, a final and non-appealable excess judgment as to a third-party claim. As for non-advancement indemnity claims, the “corporation’s obligation to indemnify its fiduciary, employee, or agent, is also conditioned on that party meeting the applicable standard of conduct” (citing DGCL section 145 (a) and (b)).
Delaware’s high court reasoned that the similarities between indemnity and insurance claims, justify the same policies of “litigative efficiency and preventing waste of judicial resources that have led Delaware courts to determine that an indemnity claim accrues when there is a final judgment….”