In a case of first impression, a divided panel of the Kentucky Court of Appeals recently held in Hensley v. State Farm Mut. Auto. Ins. Co., 2013-CA-000006-MR (Ky. App. Aug. 15, 2014), that the statute of limitations on underinsured motorist (UIM) claims begins to run upon denial of a claim by the UIM carrier and communication of that denial to the insured.

Underlying Facts

In Hensley, Amberee Hensley was involved in a motor vehicle accident on August 7, 2009. After the other driver’s insurer accepted liability and tendered policy limits in exchange for a settlement agreement, Hensley began negotiating with State Farm for underinsured motorist coverage under her policies. Hensley formally demanded UIM benefits on November 4, 2011. State Farm denied the claim.

Lower Court Decision 

On January 4, 2012, Hensley initiated a breach-of-contract action against State Farm seeking UIM benefits under her policies. The policies in question provided, in pertinent part, that the insured would have no cause of action against State Farm relating to underinsured or uninsured motorist coverage “unless such action is commenced not later than two (2) years after the injury, death or the last basic reparations payment made by any reparations obligor, whichever later occurs.” State Farm argued that, because it was filed more than two years after the date of the accident and no death or reparation benefits were involved, Hensley’s action was untimely. Hensley argued that the limitations period was unenforceable “because it began running her time to file a UIM claim before her breach of contract cause of action against State Farm accrued.”

The trial court granted State Farm’s motion for summary judgment, reasoning that the policy allowed Hensley a “reasonable amount of time after the accident to establish that the tortfeasor was an underinsured [motorist] and subsequently file suit against State Farm.” Hensley appealed.

Court of Appeals Opinion 

The Court of Appeals began its analysis by outlining the purpose of UIM coverage and reciting the general rule that insurance contracts are permitted to shorten the limitations period specified in KRS 413.090(2) (15 years) “so long as the shortened period is reasonable and not in violation of public policy.” In Riggs v. State Farm Mut. Auto. Ins. Co., 2012-CA-000354-MR (Ky. App. July 19, 2013) (discretionary review granted), the Court considered an identical limitations provision and held that “it would be unreasonable to include a policy provision that required an insured to bring a UIM claim before or simultaneous with a tort claim because the insured might not discover the existence of her UIM claim until discovery was commenced in the underlying tort action.”

This case differed from Riggs, however, in that the Riggs court “presupposed that a UIM claim accrues on the date of the accident at issue” and the issue was “whether it was reasonable for the [insurer] to shorten the limitations period to coincide with the period for bringing a tort-based claim” under the Kentucky Motor Vehicles Reparation Act. Here, Hensley argued that because a UIM claim is based in contract, no claim accrues until there has been a breach of the insurance contract, and therefore the limitations period for the breach-of-contract action is divorced entirely from that of any tort action.

In considering this argument, the Court identified three different approaches for determining the UIM accrual date: “(1) the date that the insurance company allegedly breaches the insurance contract by denying the insured’s UIM claim; (2) the date of the accident; or (3) the date that the insured settles with or obtains judgment against the tortfeasor, thereby exhausting the limits of the tortfeasor’s liability coverage.” The Court concluded that the “overwhelming majority” of jurisdictions have adopted the first approach, a “handful” has adopted the second, and a small minority has adopted the third. After reviewing the rationales for each approach, the Court adopted the majority approach, reasoning that it was consistent with Kentucky’s characterization of UIM claims “as distinct claims that are separate and apart from tort claims.” The defining event in a UIM case, the Court wrote, is not the date of the accident, but the date the carrier denies the insured’s claim for benefits. Thus, “under Kentucky law the statute of limitations for a UIM claim accrues on the date the insurer denies UIM coverage and communicates that denial to the insured.”

The Court addressed State Farm’s concerns regarding “stale claims, delay, and uncertainty,” concluding that the law offered sufficient remedies for these concerns, including requiring the insured to make a claim or notice of potential claim within a certain period without requiring the insured to file a lawsuit against the carrier or filing a declaratory judgment action to determine coverage.

Practice Pointer 

Hensley marks the second major opinion in as many years regarding when the statute of limitations begins to run for UIM claims. As discussed above, in Riggs a divided panel of the Court of Appeals addressed the permissible duration of the limitations period for UIM claims by invalidating as unreasonable a contractually specified two-year limitations period accruing from the date of the underlying accident. The Hensley court went a step further in holding that the cause of action accrues from the date the claim is denied, completely separating the UIM claim from the underlying tort action for statute of limitations purposes. Both opinions are, surprisingly, the first time that a Kentucky appellate court has directly considered these issues. 

Hensley is not a final opinion. State Farm has until mid-September to petition the Supreme Court of Kentucky for discretionary review, and given that the panel was divided, such a petition is likely. Regardless, the Supreme Court has already granted discretionary review in Riggs, and an opinion in that case is expected in mid-2015. Because the Court of Appeals’s reasoning in Riggs and Hensley go hand-in-hand, we can expect the Supreme Court, even in the absence of a successful motion for discretionary review in Hensley, to directly confront the UIM statute of limitations issue in Riggs. It is difficult to envision the Supreme Court ignoring the accrual issue in determining the reasonableness of a two-year limitations period, for the former issue bears directly upon the latter.