At a Glance

• Courts do not require an insurer to use “magic words” in its denial of a claim.
• A Texas appellate court stated that an indication that the file is being closed is a finite communication that there would be no further payments on the claim.
• With an increased awareness of the implications surrounding their words and actions, insurers may better evaluate the accrual date for purposes of the statute of limitations set out in a contract.

When does a cause of action arise against an insurer in the property and casualty setting? Are there “magic words” by the insurer that start the clock? No; but an insurance company may better evaluate the accrual date for future lawsuits by understanding how words and actions may impact the contracted statute of limitations.

An Appellate Decision in Texas

A recent opinion from a court of appeals in Texas involved a claim submitted in July of 2017 for coverage under a homeowner’s insurance policy due to hail damage on the roof. After inspecting the property, the insurer determined there was some covered damage under the policy. After receiving more information from the insured, the insurer reevaluated the claim twice and issued additional coverage payments on the claim until the file was ultimately closed on December 3, 2018.

The insured’s attorney sent a demand letter to the insurer the same month, seeking an “acceptable offer of settlement” and threatening a lawsuit if a settlement was not reached. The insured demanded $500,000 for the insurer’s “refusal to honor [its] obligations.” The insurer responded with a settlement offer of $2,500 in January of 2019. Settlement discussions continued, but no agreement was reached. Importantly, the January 2019 settlement correspondence did not indicate a reconsideration or reopening of the claim by the insurer; rather, it was simply an offer to settle a disputed potential lawsuit.

The insured ultimately sued the insurer on January 14, 2021, for breach of contract and breach of the duty of good faith and fair dealing. In response, the insurer pleaded the claim was time-barred by the contracted statute of limitations (two years) and subsequently filed a motion for summary judgment based on the limitation defense. The trial court granted the insurer’s motion and held the claims were time-barred by the statute of limitations.

On appeal, the court again held the insured’s claim was time-barred.

In Texas, the limitations period for a breach of contract claim is four years, but insurance contracts may shorten this up to two years, as the contract did in this case. A cause of action begins when “facts come into existence that authorize a party to seek a judicial remedy.” In most insurance disputes, a cause of action does not arise until after the insurer makes a claim determination. If new facts or issues are presented, an insurer’s subsequent claim determination or denial may act to restart the limitations period.

The insured argued the accrual date began January 2019, making the January 2021 suit timely. However, the court agreed with the insurer that the January 2019 letter from the insurer was not a reconsideration and a new denial of the original claim by the insurer, but a response to the settlement demand. Therefore, January 2019 could not be the accrual date.

Additionally, the insured argued the insurer never outright denied the claim, and the question of the accrual date should be determined by the fact finder. Again, the court disagreed. The court sided with the insurer that the latest date accrual could have occurred was when the insurer notified the insured that they were closing the file.

Analysis

Courts do not require that the insurer use “magic words” in its denial of a claim if the “insurer’s determination regarding a claim and its reasons for the decision are contained in clear writing to the insured.” For example, an indication that the file is being closed is a finite communication that there will be no further payments on the claim. Accordingly, the Texas appellate court held the insured was required to file suit within two years and one day of December 3, 2018, which he failed to do, and therefore the claim was barred by the statute of limitations.

With an increased awareness of the implications surrounding their words and actions, insurers may better evaluate the accrual date for purposes of the statute of limitations set out in a contract.

Legal intern Claire M. Sweeney contributed to this alert.