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(Article from Insurance Law Alert, July/August 2015)

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Addressing a matter of first impression under Pennsylvania law, the Superior Court of Pennsylvania ruled that the statute of limitations (“SOL”) for a declaratory judgment action regarding an insurer’s duty to defend does not start to run until the insurer has sufficient factual basis for denying a defense.  The court expressly rejected the argument that the SOL begins to run when the insurer receives the complaint in the underlying action against the policyholder.  Selective Way Ins. Co. v. Hospitality Grp. Servs., Inc., 2015 WL 4094398 (Pa. Super. Ct. July 7, 2015).

The insurance dispute arose out of a fatal car accident.  The deceased driver’s family sued his employer, alleging negligence and negligent supervision.  The employer forwarded notice of the suit to Selective, which defended subject to a reservation of rights.  Approximately five years later, Selective filed suit, seeking a declaration that it had no duty to defend.  The policyholder moved to dismiss on several bases, including that the applicable four-year SOL had expired.  The trial court agreed and dismissed Selective’s complaint.  The trial court reasoned that the SOL began to run when Selective received the underlying complaint and had the opportunity to compare the allegations to the insurance policy.  The Superior Court of Pennsylvania reversed.

The court held that a SOL begins to run when a cause of action accrues, and that a cause of action for a declaratory judgment accrues when an “actual controversy exists between the parties.”  The court explained that “[t]his requires a determination of when the insurance company had a sufficient factual basis to present the averments in its complaint for declaratory judgment that the insurance policy at issue does not provide coverage for the claims made in the third party’s action.”  Emphasizing the fact-specific nature of this analysis, the court observed that “[i]t is possible for the insurance company to possess sufficient information at the time it receives a complaint to cause the [SOL] to begin to run; or that may not occur until the case develops and the claim is winnowed down to a recovery the insurance company believes is not covered by the policy of insurance.”  In adopting this fact-driven approach, the court rejected bright-line rules at either extreme  (i.e., that the SOL automatically begins to run when an insurer receives a complaint, or conversely, that it does not begin to run until an insurer issues an official coverage denial).  The court remanded the matter for a factual determination of when Selective had a sufficient basis for denying coverage.