(Article from Insurance Law Alert, March 2016)
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Addressing a matter of first impression under Delaware law, the Delaware Supreme Court ruled that a bad faith failure-to-settle claim against an insurer accrues when a judgment against the policyholder in excess of policy limits becomes final and non-appealable. Connelly v. State Farm Mutual Auto. Ins. Co., 2016 WL 836983 (Del. Mar. 4, 2016).
The bad faith claim arose out of an automobile accident between Brown and Connelly. Connelly sued Brown and subsequently offered to settle for $35,000. State Farm, which had the exclusive right to control Brown’s defense, rejected the offer. A trial later awarded Connelly approximately $224,000. State Farm paid part, but not all of the judgment. Connelly, as Brown’s judgment creditor, sued State Farm alleging bad faith based on its refusal to settle for $35,000 given the policy’s $100,000 limit. State Farm moved to dismiss the complaint on the ground that it was barred by the applicable three-year statute of limitations. See 10 Del. C. §8106. State Farm argued that the statute of limitations began to run either on the date Connelly made her settlement offer, or one month later, when the offer expired. A Delaware trial court granted State Farm’s motion to dismiss, finding that the bad faith claim accrued at the time that State Farm allegedly breached its contractual duties, which was the date State Farm denied Connelly’s settlement offer. The Delaware Supreme Court reversed.
Joining “the majority rule of courts in other states,” the Delaware Supreme Court ruled that the accrual date for a bad faith failure-to-settle claim is when an excess judgment becomes final and non-appealable. The court noted that this holding promotes judicial economy (
i.e., avoiding bad faith litigation if there is no excess judgment against the policyholder) and reduces potential conflicts of interest between insurers and policyholders (
i.e., avoiding a bad faith claim during the pendency of an underlying suit defended by an insurer). In addition, the court explained that using the date of final judgment as the accrual date comports with Delaware bad faith law, because in order to state a bad faith claim, a policyholder must plead damages, which it cannot do until a final excess judgment is issued.