Defense Digest

Pennsylvania Superior Court Applies Two-Year Tort Limitations Period In Statutory Bad Faith Actions.  Next Stop, Supreme Court?

A recent decision by the Pennsylvania Superior Court, Ash v. Continental Ins. Co., 2004 PA Super 424, 2004 Pa.Super. LEXIS 3942 (Pa.Super.), has, at least, temporarily resolved the long-standing issue of the applicable statute of limitations in statutory bad faith actions under 42 Pa.C.S. § 8371. The Superior Court's ruling, in what can only be described as welcome news to insurers and those who defend them in statutory bad faith actions, has significantly limited the time in which said actions may be brought.

In Ash, the Superior Court held that an action under Section 8371 sounds exclusively in tort and, thus, is subject to a two-year statute of limitations. The relief afforded by the Ash decision may be short-lived, however, as the Ashes have filed a petition for allowance of appeal with the Pennsylvania Supreme Court.

The bad faith statute in Pennsylvania is found at 42 Pa.C.S. § 8371. The Pennsylvania Legislature did not include a statute of limitations in the bad faith statute, and since it was enacted in 1990, both Pennsylvania trial courts and federal district courts have rendered conflicting opinions on the limitations period applicable to violations of Section 8371. Some of the courts have applied the two-year tort limitation, while others have employed the six-year "catch-all" period, which pertains to claims for which no other limitations period is established by statute. See e.g.: Margaret Auto Body, Inc. v. Universal Underwriter’s Group, et al., 2004 WL 1073992 (Phila. Cty. April 12, 2004)(two years); Hospital Shared Services v. CIGNA Ins. Co., 41 Pa. D. & C. 4th 148 (Alleg. Cty. 1998)(six years); Mantia v. Northern Ins. Co. of New York, 39 Pa. D. & C. 4th 71 (Lanc. Cty. 1998)(six years); Susich v. Prudential Prop. & Cas. Ins. Co., 35 Pa. D. & C. 4th 178 (Beaver Cty. 1998)(two years); Haugh, supra (two years); Mantakounis v. Aetna Cas. & Sur. Co., 1999 WL 600535 (E.D.P.A. August 10, 1999)(two years); Nelson v. State Farm Mut. Auto. Ins. Co., 988 F.Supp. 527 (E.D.P.A. 1997)(two years); Miller v. Cincinnati Ins. Co., 1997 Lexis 23725 (E.D.P.A. July 9, 1997)(six years); Woody v. State Farm Fire and Cas. Co., 965 F.Supp. 691 (E.D.P.A. 1997)(six years).

No Pennsylvania appellate court had ruled on the applicable statute of limitations in statutory bad faith actions until, on November 3, 2004, in Ash v. Continental Ins. Co., the Superior Court held that an action under Section 8371 sounds exclusively in tort and, thus, is subject to a two-year statute of limitations.

The statute of limitations issue in Ash arose from a first-party claim under a policy issued by Continental Insurance Company. After the plaintiffs’ property was damaged by fire, and after they submitted a notice of loss, Continental denied the claim based on concealment and/or fraud. The plaintiffs subsequently filed a breach of contract action against Continental. When they sought leave to amend their complaint to add a claim for bad faith under Section 8371, however, the trial court refused their request on the ground that the claim was barred by the two-year statute of limitations.

On appeal, the Superior Court noted that many Pennsylvania trial courts and federal courts had addressed the issue of whether a two-year statute of limitations or six-year statute of limitations applied. Ultimately, the Ash Court found "persuasive" the reasoning of the majority of recent decisions that had addressed the issue and found that a bad faith action under Section 8371 is a statutorily-created tort action subject to a two-year statute of limitations.

Pennsylvania trial courts are now bound to apply the Ash decision, as it is the only Pennsylvania appellate authority regarding the limitations period applicable to violations of Section 8371. It will certainly be persuasive authority for federal courts which must predict how the Pennsylvania Supreme Court would rule on the issue, but the impact of the Superior Court’s Ash decision may be only momentary. On December 10, 2004, the Ashes filed a petition for allowance of appeal with the Supreme Court of Pennsylvania, which petition is now docketed at 631 WAL 2004. Considering the diversity of court opinion on the issue and the importance of the issue to statewide bad faith litigation, it is certainly possible that the Supreme Court will grant their petition and finally resolve the issue of the applicable statute of limitations in statutory bad faith actions.

In attempting to predict how the Supreme Court would rule on the issue, an admittedly risky proposition, one may look to the Court’s decision in Birth Center v. St. Paul Co., Inc., 567 Pa. 386, 787 A.2d 376 (2001). Therein, of the members of the current Supreme Court, two Justices - Justice Nigro and Justice Castille - indicated that a statutory bad faith action sounds in tort, 567 Pa. at 408-15, 787 A.2d at 390-94, and would presumably agree with the Ash holding. On the other hand, Chief Justice Cappy, Madame Justice Newman, and Justice Saylor seemed to believe that, in addition to the statutory bad faith action, a common law bad faith action based in contract exists in Pennsylvania. 567 Pa. at 402-08, 787 A.2d at 387-90. It may be argued that they feel that Section 8371 merely provides remedies in addition to this common law cause of action, and is, likewise, based in contract. In that case, the four-year statute of limitations, applicable to contract claims, would apply to Section 8371 actions. However, if a separate statutory claim exists, it could be subject to a two-year or six-year limitations period, even if the four-year period applies to the common law bad faith action.

Unless the Supreme Court definitively speaks on the issue, the application of Ash means that, where bad faith failure to defend, indemnify, or make payment is alleged, suit must be filed within two years after the initial denial of coverage to the insured, and where bad faith delay in payment is alleged, the bad faith action must be filed within two years of the date that payment is finally made. Otherwise, a bad faith suit must be filed within two years of the happening of the alleged breach of duty by the insurer or within two years of the date the insured knew, or reasonably should have known, that he was injured and that his injury was caused by the insurer's conduct. Stay tuned.

*Tom, an associate in our Scranton, PA office, can be reached at (570) 496-4658 or tspecht@mdwcg.com.