A “Three-Year” Limitations Period in a Disability Policy Can Extend California’s Two-Year Statutory Limitations Period for Insurance Bad Faith

Life, health and disability insurers are always looking for ways to deny insurance claims. When they do so unreasonably, insured policyholders may be able to sue them for insurance bad faith under California law. Count on insurers to argue everything they can to defeat a bad-faith claim, including asserting the statute of limitations for bad-faith claims. Life, health and disability insurance plaintiff attorneys must remain current as to changes in the law so they can defeat these insurance company tactics. One notable question they must answer is this: Can a disability policy provision setting forth the timing of a lawsuit against the insurer “extend” California state tort law (e.g., statute of limitations to three years) from the statutory two-year limitations period? Recently, a United States District Court in San Francisco held that it could. That court denied an insurance company’s motion to dismiss, because the policy’s contractual language (that barred an action “more than three years after the time proof of claim is required”) could be one that a “reasonable layperson” interprets as meaning she had three years (rather than the statutory two-year period) to bring any action, including both contractual and tort claims, based upon an allegedly wrongful cancelation of the policy. Alberts v. Liberty Life Assurance Company of Boston, 65 F.Supp.3d 790, 795 (2014). Therefore, it is crucial to closely compare any policy language that varies from the statute of limitations, in order to successfully argue for a longer timeframe within which to bring such a California state action.

Plaintiff, Karen Alberts, was a police officer for the University of California when she suffered an injury to her right wrist during physical-training exercises in September 2009. After her injury, Alberts resumed work in a modified-duty capacity, but her condition worsened and, eventually, the UC police department could no longer accommodate her medically prescribed work restrictions. On March 19, 2010, Alberts stopped working for the police department. She was initially approved by Liberty Life Assurance Company of Boston (“Liberty”) for short-term-disability (“STD”) benefits from February 1 through July 31, 2011; she was subsequently extended coverage through February 28, 2012. Sometime between February 9 and February 22, 2012, Alberts received a letter from Liberty that stated that Liberty would be terminating her STD payments because it had determined that she did not qualify for continued benefits under the policy’s provision for long-term coverage.

Under the standard two-year statute of limitations period set forth in California Code of Civil Procedure Section 339(1) for tortious breach of the covenant of good faith and fair dealing (also known as a bad-faith claim), Liberty argued that Alberts’ claim was filed too late, by at least three days, on February 25, 2014. The District Court compared the policy language barring such an action (“more than three years after the time proof of claim is required”) to California Insurance Code Section 10350.11, which sets forth that disability policies must include the following (at a minimum): “No action shall be brought after the expiration of three years after the time written proof of loss is required to be furnished.” That exact language in the Insurance Code has repeatedly been held to not displace the two-year statute of limitations for purposes of federal ERISA claims. Nonetheless, since this was a state claim (even though it was being tried in federal court) and did not use exactly the same language as Insurance Code Section 10350.11, the trier of fact could find that a “reasonable layperson” would assume that she had three years, rather than two, within which to file her lawsuit.

In the meantime, however, in non-ERISA state-law disability insurance claims (even in federal court), it is imperative that the contractual language in each disability policy be closely examined. Where the statutory two-year limitation period is an issue, does the policy language vary at all from California Insurance Code Section 10350.11: “No action shall be brought after the expiration of three years after the time written proof of loss is required to be furnished”? If it does, even by a few words, the plaintiff may be able to argue that a longer, three-year limitations period applies, for both contractual and tort claims.

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law.  To speak with a highly skilled California/Nationwide disability insurance lawyer or ERISA lawyer at the McKennon Law Group PC, call (714)274-6322 for a free consultation or go to our website at www.mckennonlawgroup.com and complete our free consultation form today.

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