QUITE THE SPLIT: LOUISIANA THIRD CIRCUIT COURT OF APPEAL APPLIES TEN-YEAR PRESCRIPTIVE PERIOD TO CONTRACT-BASED BAD FAITH CLAIMS
In a surprising decision on rehearing, on February 4, 2019, a panel of the Louisiana Third Circuit Court of Appeal reversed itself and held that bad faith claims arising out of an insurance contract are subject to a ten-year prescriptive period rather than a one-year prescriptive period.[1] Fils v. Starr Indemnity & Liability Company, — so. 3d — (La. App. 3rd Cir. 5/9/2018)(on r’hrg), centered on the timeliness of the plaintiff’s bad faith claims against his uninsured motorist carrier. Dissatisfied with the $45,000 that his UM carrier had tendered following a motor vehicle accident on August 28, 2013, the policyholder filed suit against the insurer for additional benefits the day before the expiration of the two-year prescriptive period applicable to claims for UM benefits. Sixteen months later, the insured amended his petition, alleging bad faith on the part of the UM carrier and seeking penalties and attorneys’ fees pursuant to Louisiana’s two “bad faith” statutes, La. R.S. 22:1973 and La. R.S. 22:1892. The trial court sustained the insurer’s exception of prescription and dismissed the bad faith claims with prejudice.
In a decision rendered May 9, 2018, the Third Circuit affirmed the trial court’s dismissal of the insured’s bad faith claims, holding that claims brought pursuant to Louisiana’s bad faith statutes are subject to a one-year prescriptive period. The Court reasoned that an insurer’s duties under the two bad faith statutes are statutory in nature, not contractual, and that because a contractual relationship between a claimant and an insurer is not a prerequisite to actions under the two bad faith statutes, the ten-year prescriptive period for actions on contracts does not apply. In support of its holding that a one-year prescriptive period applied to bad faith claims against insurers, the Third Circuit noted that the Louisiana Supreme Court has never directly addressed whether a one-year or ten-year prescriptive period applies to bad faith claims against insurers and suggested that the Louisiana Supreme Court tacitly agreed that a one-year prescriptive period applied when it denied writs in Labarre v. Texas Brine Company. In the Labarre case the First Circuit Court of Appeal had reversed the trial court’s application of a ten-year prescriptive period and pronounced that a one-year prescriptive period applied to bad faith claims against insurers.
The Third Circuit granted the insured’s application for rehearing and accepted numerous amicus curiae briefs, some urging the Court to maintain its holding that claims asserted under the two bad faith statutes are subject to a one-year prescriptive period and some urging the Court to reverse its decision. In its opinion on rehearing, the Third Circuit recognized the split between the First and Second Circuit Courts of Appeal regarding the prescriptive period applicable to bad faith claims and closely examined jurisprudence from those courts and from the United States District Court for the Eastern and Western Districts of Louisiana.
The Third Circuit emphasized that prior to the enactment of the two bad faith statutes, Louisiana courts routinely imposed liability upon insurers for failing to act in good faith and in the best interests of their insureds. The Court also focused on a twenty-four year old pronouncement by the Louisiana Supreme Court that the enactment of the bad faith statute was a recognition of the duty of good faith and fair dealing that had been established by the Courts – a duty that was based on the contractual and fiduciary nature of the relationship between the insurer and the insured. The Third Circuit determined that all of the insurer’s obligations to the insured in this case arose out of the contract between them that provided for UM benefits and that the insured would not have had any claims against the insurer in the absence of such a contract. The Court held that “[b]ecause any bad faith on an insurer’s part is a breach of a contractual duty, it necessarily follows” that bad faith claims are contractual in nature and therefore subject to a ten-year prescriptive period. The Court also determined that it would be “nonsensical” to apply a one-year prescriptive period for bad faith claims when causes of action for UM benefits are subject to a two-year prescriptive period as such an application would potentially require claimants to file bad faith claims before the running of prescription on the underlying claims.
It is crucial to note that the ten-year prescriptive period will not apply to all bad faith insurance claims in the Third Circuit. The Court recognized that whether a claim is based in contract or tort is determined by the nature of the duty breached and that there may be instances where the bad faith alleged on the part of the insurer is based in tort rather than on the insurance contract, such as a violation of an insured’s privacy rights through an abusive investigative process. However, the Third Circuit emphatically and unequivocally held that when a claimant’s bad faith claims are based on the breach of obligations the insurer assumed in the insurance contract, the Court will apply a ten-year prescriptive period to those claims. The UM carrier has applied for rehearing by the Court en banc. Regardless of any decision by the Court en banc, this significant split among the circuit courts of appeal as to the correct prescriptive period applicable to bad faith claims is one practitioners expect to be appealed to the Louisiana Supreme Court and that should be ripe for the Court to accept. Cozen O’Connor will continue to what and report on this significant Louisiana limitations issue.
[1] Louisiana has prescriptive periods instead of statutes of limitations.