Insurers and policyholders alike are often presented with the question of whether an insurance policy’s limitation of action clause is enforceable. Many policies contain such clauses, which attempt to shorten the time permitted under law (currently 15 years in Ohio) for an insured to sue under the policy. In a pair of decisions issued in August and September 2011, the Supreme Court of Ohio answered this question with a resounding “yes,” turning back two challenges to the enforceability of such clauses.
In Dominish v. Nationwide Insurance Co., Slip Opinion, No. 2011-Ohio-4102, a unanimous Supreme Court ruled that a one-year limitation of action provision was unambiguous and enforceable. In that case, the insured made a claim with his insurer for storm damage to his home. The insurer investigated the claim and twice issued a check to the insured for the portion of the loss that it viewed as covered under the policy. Each time, however, the insured returned the check with the word “VOID” written across it, as the insured contested the payment amount.
The insured did not sue the insurer until nearly two years after the storm. The policy at issue, however, contained a limitation of action provision providing that “No action can be brought against us unless there has been full compliance with the policy provisions. Any action must be started within one year after the date of loss or damage.” The insurer moved for summary judgment, claiming that the one-year limitations period had expired prior to the insured filing suit. The insured opposed this motion, claiming the language was unenforceable because it was ambiguous and, moreover, had been waived by the insurer’s adjustment and partial payment of the claim. The trial court granted the insurer’s motion, but the appellate court reversed.
The Supreme Court reinstated the trial court’s decision, finding the limitation of action provision to be enforceable. The Court first noted that the policy language was unambiguous, as “[t]he policy states in language clear enough to be plainly understood that any lawsuit by an insured against [the insurer] must be commenced within one year of the loss or damage sustained.” The Court additionally concluded that the insurer had not waived the right to enforce the limitation of action provision. The Court reaffirmed its prior precedent that, in order for a waiver to be present, “an insurance company must have either recognized liability or held out reasonable hope of adjustment and by doing so, induced the insured to delay filing a lawsuit until after the contractual period of limitation had expired.” However, the Court found no waiver by the insurer, as the insurer clearly stated in its communications to the insured that it was not liable beyond the amount of the check it sent to the insured and, moreover, expressly reminded the insured of the one-year limitation of action clause.
The Supreme Court followed up Dominish with its September 29 decision in Barbee v. Nationwide Mutual Ins. Co., Slip. Op. No. 2011-Ohio 4914. Barbee involved a claim for uninsured/underinsured motorist (“UM/UIM”) benefits. The Court was confronted with the issue of whether a policy provision requiring exhaustion of the tortfeasor’s liability limits as a condition precedent to the right to payment conflicts with the policy’s three-year limitation of action provision.
The insureds were injured in an automobile accident in Wisconsin and brought suit against the tortfeasors in federal court in Wisconsin. One of the defendants was an estate and the other was the United States of America, by and through its insured, a member of the Armed Forces. The Wisconsin court found the tortfeasors liable and awarded damages, finding that the service member was 30 percent liable for the accident and the estate 70 percent liable. The U.S. government accordingly paid 30 percent of the damage award and the estate paid its $75,000 in insurance coverage towards the award, leaving the judgment unsatisfied.
Four years after the accident, the insureds filed suit against their UM/UIM carrier to recover the outstanding amount of the judgment. The insurer filed a motion for summary judgment, asserting that the policy’s limitation of action provision, which precluded the insureds from bringing suit more than three years after the accident, applied to bar the insureds’ lawsuit. The insureds, however, argued that the three-year limitation of action provision was ambiguous when read in conjunction with the policy’s provision stating that “[n]o payment will be made until the limits of all other liability insurance and bonds that apply have been exhausted by payments.” According to the insureds, the exhaustion provision prevented the three-year limitations period from running until after they obtained a judgment in Wisconsin and it became clear that all other liability insurance had been exhausted. It was only after the Wisconsin judgment was entered that the insureds “knew they had an underinsured motorist claim.”
The Supreme Court rejected the insureds’ arguments, finding the limitation of action clause to be unambiguous, even when read in conjunction with the policy’s exhaustion requirement. The Court found that the clauses dealt with separate issues: (1) when payments could be made and (2) when a suit for benefits could be filed. By its terms, the policy “does not . . . impose exhaustion of the tortfeasor’s insurance as a condition that must be satisfied before an insured can file suit against his insurer to establish his claim under the policy for underinsured-motorist benefits.” If the insureds anticipated having a UM/UIM claim, it was up to them to file suit within the three-year limitations period to preserve their rights.
In his dissent, Justice Paul E. Pfeiffer observed that the Court’s ruling appears to require insureds to preemptively file suit for UM/UIM benefits, even if they are unsure of whether they possess a valid claim for such benefits. Justice Pfeiffer called the Court’s ruling “penny wise and pound foolish” and predicted that it will unnecessarily clog Ohio’s court system with UM/UIM cases. The Court, however, dismissed this concern, noting that it is already the practice of many insureds to file suit against their UM/UIM carriers as soon as they anticipate a UM/UIM claim and that, moreover, the UM/UIM cases could simply be stayed pending resolution of the liability issues to determine whether a tortfeasor is, in fact, uninsured or underinsured.
These decisions by the Supreme Court reflect the Court’s willingness to enforce the terms of limitation of action clauses, absent extraordinary circumstances. Insurers faced with litigation of stale claims by their insureds can assert such clauses knowing that Ohio courts will likely enforce them, provided they are reasonable (i.e., at least one year in duration). However, as pointed out in Dominish, insurers should be careful to send clear reservation of rights letters to their insureds making apparent that coverage defenses are being asserted. Such letters should also include a reference to the applicable limitation of action clause so the insured doesn’t have a basis to argue that the limitation of action clause was waived by an insurer’s representation or action.