Bad-Faith Failure-to-Settle Claims Accrues Only After Final Judgment, Delaware High Court Says

The statute of limitations for a bad-faith failure-to settle claim accrues when an insured suffers a judgment in excess of policy limits and that judgment becomes final and non-appealable, according to the Delaware Supreme Court.

In Connelly v. State Farm Mut. Auto. Ins. Co., C.A. No. K14C-09-002 (March 4, 2016), the Court rejected State Farm’s contention that the bad-faith claim accrues only when the insurer allegedly acts in bad faith and breaches its duty to the insured. State Farm had provided a defense to its insured for a motor vehicle accident lawsuit. The driver offered to settle the case with the insured for $35,000, but State Farm rejected the offer and forced its insured to proceed to trial. At trial, the jury awarded the driver more than $220,000. State Farm paid a portion of the jury award, interest and costs, but filed no appeal of the excess judgment. The driver obtained an assignment of the insured’s rights to pursue a bad faith claim.

State Farm moved to dismiss the bad faith lawsuit on statute of limitations grounds, claiming that the three-year limitation ran either when the driver made her settlement offer or, alternatively, when the offer expired. The trial court granted the motion, but the Supreme Court unanimously reversed. Deciding an issue of first impression, the Court adopted the majority rule that a claim against the insurer for bad-faith failure to settle accrues only once there is a judgment in excess of policy limits and that judgment can no longer be appealed. The Court recognized that this position is based on sound policy because the excess judgment is speculative until it becomes final, and because an earlier statute of limitations would cause a conflict between the insurer and insured, and would waste judicial resources.