A recent decision by the Pennsylvania Superior Court clarifies when the four-year statute of limitations begins to run on an insurer’s ability to bring a declaratory judgment action against its insured. In Selective Way Insurance Co. v. Hospital Group Services, Inc., 2015 PA Super 146 (2015), the Superior Court ruled that the statute begins to run when an insurer has a sufficient factual basis to support its contentions that it has no duty to defend and/or indemnify the insured.
The litigation in Selective Way arose out of a 2006 automobile accident which resulted in the death of an intoxicated 17-year old driver. The driver was found to have a .14 BAC at the time of his death, and the plaintiffs alleged that he drank alcohol while working a lengthy shift at a Ramada Inn hotel. After his family sued the hotel’s management company for various negligence claims, the management company tendered the claim to its insurer, Selective Way Insurance Company (“Selective”). Selective defended under a reservation of rights, but almost five years later, it filed a declaratory judgment action seeking a declaration of no coverage.
The trial court eventually granted summary judgment in favor of the plaintiff and insured, holding that the statute of limitations had already run because the statutory period commenced when the insurer received the complaint relating to the underlying litigation. Under that analysis, the trial court dismissed the action because Selective waited almost five years to file for declaratory judgment.
On appeal, the Superior Court reversed and held that the statute of limitations begins to run only when an insurer has the factual basis to believe that there could be a dispute as to coverage. The court noted that more generally, under Pennsylvania law, a statute of limitations begins to run from the date on which the cause of action arises, and a cause of action arises on the date on which a plaintiff could first maintain an action to a successful conclusion. The court reasoned that until the insurer actually has a factual basis for denying coverage, which it will not always have simply from reading the complaint, there is no controversy or corresponding cause of action. In other words, until the insurer has reason to deny coverage, there is no dispute which a court could resolve. Thus, when the insurer can determine from the face of the complaint that there will be coverage issues, the statute of limitations begins to run when the insurer receives the complaint. But when the insurer cannot tell if there will be coverage issues until the case has progressed and the exact legal issues involved are clearer, the statute of limitations does not run until the insurer has the factual basis to conclude that coverage may not exist.
The Superior Court’s ruling is important because it gives insurers more leeway to conduct thorough coverage investigations without the need to file a Declaratory Judgment Action solely to protect the statute of limitations. This leeway, in theory, should limit the unnecessary Declaratory Judgment Action and the bad faith counterclaims that come with it. However, these cases could open the door to additional discovery against insurers as to precisely when an insurer became aware of facts which could negate coverage.