Normally, the statute of limitations sets in when “the cause of action shall have accrued,” to quote California Code of Civil Procedure section 312. In an effort to simplify that date for lay readers, the Sacramento County Public Law Library has stated in a public guide that “generally, a cause of action accrues on the date of injury or the date the incident occurs. If a cause of action has multiple elements, the statute of limitations accrues when the final element occurs.”
Insurers have a duty to settle third party claims when it appears that liability is fairly certain and that a verdict in excess of available policy limits is possible, or perhaps when such an excess judgment is probable. Brown v. Guarantee Insurance Company (1957) 155 Cal. App. 2d 679, 686. But if the insurer fails to do so and an excess verdict results, causing the insured to be liable for the excess above policy limits which a settlement would have avoided and possibly other damages as well, such as emotional distress or loss of valued property in order to pay the excess amount, when does the statute of limitations begin to run?
A much-valued treatise, California Insurance Litigation, by Croskey et al., dances around the subject, saying at times that this occurs when the plaintiff “is entitled to a legal remedy” (sec. 12:443, for which it cites a non-insurance case, Davies v. Krasna (1975) 14 Cal. 3d 502, 514). This would seem to happen as soon as the wrongful failure to settle takes place – potentially a long time before the underlying case is then tried and results in the excess verdict which the insured would have to bear on his or her own account. Elsewhere, the treatise says that the statute of limitations only begins to run when a final judgment in excess of policy limits is entered, citing Brown v. Guarantee Ins. Co., supra(sec. 12:1151). The question when the cause of action for bad faith failure to settle matures has not received much attention in California in recent years, but it is an important question: if the claim is triggered when the refusal to settle occurs, the suit may have to be idled until the plaintiff’s damages are complete, and the complaint may have to be amended to allege the adverse outcome of the underlying action if such a judgment is entered and then becomes final. Or if the suit is not filed until the excess judgment is final and until such things as the insured’s emotional distress and possible loss of property through enforcement of the excess judgment have occurred, the insurer may claim that the time to file such suit, calculated from the wrongful refusal, has meanwhile expired.
These issues were carefully and extensively considered recently by the Supreme Court of Delaware, which discussed cases from throughout the country ruling either way on the issue and then decided unanimously that “a claim that an insurer acted in bad faith when it refused to settle a third-party insurance claim accrues when an excess judgment against an insured becomes final and non-appealable.” Connelly v. State Farm Mutual Automobile Insurance Company (2016) ___ A. 3d ___: 2016 WL 836983.
The Connelly case cites some decades-old California cases on the same side of the issue. It is well reasoned and carefully researched, reviewing cases nationwide which take various approaches to the subject. And it reaches the correct result: it is consistent with well-established California law, which has long held that in evaluating settlement, the insurer owes its insured the duty to evaluate the offer “as though it alone were liable for the entire amount of the judgment” and that “the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer. Such factors as the limits imposed by the policy, a desire to reduce the amount of future settlements, or a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one. “ Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal. 3d 9.
Connelly does a good job of collecting and endorsing these sound principles, and should serve as a guide for the California courts when this situations arises.