Why it matters

What triggers the statute of limitations on claims filed against the California Insurance Guarantee Association (CIGA)? According to a California appellate court, one thing that does not start the clock is the filing of a declaratory judgment action to determine CIGA’s obligation to pay an insolvent insurer’s obligation in a case brought by a trust to pursue recovery of an estimated $6 billion in asbestos bodily injury claims. “To preserve a claim for coverage by CIGA, an insured must give CIGA notice of its potential claim by the deadline for filing a claim in the insolvent insurer’s liquidation proceedings,” the panel explained. “This notice permits CIGA to take such steps as it deems appropriate to ascertain the facts and protect its interests in responding to an eventual demand for payment. The time within which the insured must submit its claim for payment, however, does not commence until the insured possesses a ‘covered claim’ within the meaning of the statute. CIGA must be presented with a timely claim for payment and affirmatively deny coverage before a breach of its duty can occur. An insured’s complaint seeking a declaration of duty, and the defendant’s answer disputing its duty, does not constitute the submission and denial of a claim sufficient to trigger the statute of limitations.”

Detailed discussion

For many years, three companies – Western Asbestos Company, Western MacArthur Co., and Mac Arthur Co. – distributed asbestos-containing building materials. Facing asbestos-related litigation, the Western Companies filed for Chapter 11 bankruptcy in 2002. In 2004, the bankruptcy court established the Western Trust, an asbestos claimants’ trust, to manage personal injury claims arising from exposure to asbestos-containing products, estimated at $6 billion.

Although the Western Companies had seven liability policies issued by Home Insurance Company, Home was declared insolvent in 2003. Western Trust filed an action in California state court against several defendants related to the Home policies. The Trust also pled a declaratory relief cause of action against CIGA, seeking “to determine the existence and scope of CIGA’s obligations” to the insureds “in light of Home’s liquidation.”

CIGA filed an answer to the complaint in 2005 with a general denial of liability and 24 affirmative defenses, including that Western Trust’s complaint was premature because the Trust was pursuing other insurance. In the interim, Western Trust reached a settlement with the New Hampshire Insurance Commissioner, Home’s liquidator. Pursuant to the deal, Western Trust dismissed without prejudice its pending complaint against CIGA and the Commissioner allowed a claim for $242.5 million. CIGA was dismissed from the California state claim in May 2011.

In February 2013, Western Trust filed the current action: a new complaint for declaratory relief against CIGA for breach of its obligation to pay claims covered by Home’s policies. Western Trust asserted that Home policyholders are unlikely to receive full payment of their claims because the liquidation claim was settled for $242.5 million and no other undisputed insurance existed to cover the Western Companies’ asbestos bodily injury liabilities, leaving CIGA required to compensate Western Trust for the extent the asbestos claims would have been paid by Home but for its insolvency.

CIGA argued that if any breach occurred, it happened in August 2005 when it filed an answer to Western Trust’s first declaratory action, launching the three-year statute of limitations, which had expired by the time the second complaint was filed.

In reply, Western Trust said the time limit had not even begun to run. Both declaratory actions alleged an actual controversy concerning coverage, Western Trust told the court – but did not allege that a viable claim has yet matured or that the trust has even submitted a specific claim for payment.

A trial court disagreed and granted CIGA’s motion to dismiss based on the expiration of the statute of limitations.

But on appeal, the panel took a close look at precisely what the statute requires. Insurance Code Section 1063.2(a) sets forth CIGA’s duty to pay “covered claims,” with several exclusions and limitations, and makes clear that the statute of limitations begins to run when CIGA rejects a claim.

But when does the limitations period begin to run for submitting a claim for coverage? The court found this “a more difficult question,” as neither the statute nor any regulation specifies a point at which a claim must be submitted to CIGA. California’s statute differs from other states’, the panel added, which set a deadline for filing claims with the association.

“To the contrary, the California statute provides no specification of the procedures for presenting or processing claims against CIGA,” the court wrote, and the only express statutory requirement is found at Section 1063.1(c)(1)(C), that the insured present “a claim to the liquidator in the state of domicile of the insolvent insurer or to the association on or before the last date fixed for the filing of claims in the domiciliary liquidating proceedings.”

“Filing such a claim is a condition precedent to the accrual of a cause of action but the deadline for filing the insolvency claim is not necessarily the date at which the cause of action against CIGA accrues and does not determine the date by which such an action must be filed,” the court said. “Applying the basic principle that a statute of limitations does not begin to run until ‘the cause of action is complete with all of its elements,’ no cause of action accrues against CIGA until an insured has acquired a ‘covered claim’ within the meaning of the statute.”

An insured’s right to recover from CIGA does not arise and cannot be determined until it is known what recovery the insured will obtain in the insolvency proceedings, the court said, and “a fair argument can be made that the cause of action against CIGA does not accrue until that uncertainty has been resolved.”

“The present complaint does not allege that all such claims against other insurers were exhausted more than three years before the action was filed,” the panel said. “Indeed, it cannot be determined from the face of the pleading when, if ever, the trust acquired a ‘covered claim’ and a cause of action against CIGA.”

No specification existed in either complaint of any amount that Western Trust alleged to be a covered claim, “much less of any particular asbestos claim giving rise to a liability of the trust covered by a Home policy for which the trust demanded payment from CIGA,” the court said. “Neither the 2004 nor the 2013 complaint alleged, explicitly or implicitly, that any amount was payable to CIGA as of the time the complaint was filed.”

Without evidence that a cause of action for payment upon a covered claim had accrued or that a claim for any such payment had been submitted more than three years before the present complaint was filed, the statute of limitations did not bar the action, the panel concluded.

Even if Western Trust was found to have submitted a claim, the court said there was no showing that CIGA denied it. The record contained no correspondence that CIGA evaluated a claim, determined it did not constitute a covered claim, or denied coverage.

The Association’s 2005 answer to the first declaratory action “can be understood to assert no more than that the trust had not then submitted a ‘covered claim’ within the meaning of the statute,” the court said. “With no specific claim before it, and with proceedings ongoing that unquestionably precluded any claim against CIGA from being a ‘covered claim,’ CIGA could hardly have alleged otherwise. Moreover, while CIGA’s answer to the 2004 complaint obviously sought to preserve all possible defenses, having alleged that the complaint was premature because the trust was pursuing other insurance and had not exhausted its remedies in the Home liquidation proceedings, CIGA can hardly assert at this time that the prior action was, in fact, a timely demand for payment barring a claim when the former uncertainties have been eliminated.”

CIGA’s contention that the 2004 complaint constituted a claim for payment and CIGA’s answer a denial of coverage misconstrued the nature of a declaratory relief action, the panel added, which operates prospectively. “It would be a perversion of the process to hold that the assertion of a dispute in a declaratory relief action, and a defendant’s answer acknowledging the controversy, constitutes either a claim that the defendant has already breached its obligations or an actionable repudiation of the alleged obligations,” the court wrote.

To read the opinion in Snyder v. California Insurance Guarantee Association, click here.