Delaware Supreme Court rules the three-year statute of limitations for an insurance bad-faith claim accrues when an excess judgment becomes final and is no longer appealable. 

On March 4, 2016, the Delaware Supreme Court addressed when bad-faith-failure-to-settle claims accrue in the case of Connelly v. State Farm Mutual Automobile Insur. Co., Del. Supr., No. 426, 2015 (Mar. 4. 2016). In a decision authored by Chief Justice Leo Strine, the Court held that the three-year SOL accrues when an excess judgment becomes final and no longer appealable.

The Court began its analysis with basic principles. It first applied the condition of “good faith and fair dealing” imposed upon all Delaware contracts. The Court explained that in the insurance context, the implied covenant historically “included a duty to settle claims within policy limits where recovery in excess of those limits is substantially likely.” The Court also drew upon reasoning from jurisprudence in the area of indemnification of directors and officers. In that context, indemnity claims do not accrue until there is a final judgment. The Court reasoned that insurance claims are also a type of indemnity because the obligation to cover an indemnified party’s costs only arises if and when a final and non-appealable excess judgment to a third-party claim arises. Applying Delaware General Corporation Law (“DGCL”) Section 145, the Court determined that in non-advancement indemnity claims, the “corporation’s obligation to indemnify its fiduciary, employee, or agent, is also conditioned on that party meeting the standard of conduct.” It further held that similarities between insurance and traditional D&O indemnity claims warrant application of the same policies of “litigative efficiency and preventing waste of judicial resources that have led Delaware courts to determine that an indemnity claim accrues when there is a final judgment.”

The case is particularly interesting for its application of director and officer indemnity jurisprudence outside its typical context and because many litigators will benefit from knowing when the SOL begins to run for a claim against an insurance company for bad faith failure to settle within policy limits. Although arguing for a different rule, State Farm accepted the decision “as fair,” telling the Delaware Law Weekly through counsel that “[i]t’s fine, as long as we know what it is.” The decision does provide sound guidance and needed certainty moving forward and establishes precedent for other jurisdictions to adopt.

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