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In Connelly v. State Farm Mut. Auto. Ins. Co., 2016 WL 836983 (Del. 2016), a case of first impression in Delaware, the Delaware Supreme Court ruled that an insured’s cause of action for bad faith failure-to-settle accrues on the date that an excess judgment becomes final and non-appealable and not on the date that the insurer rejected an offer to settle within the policy limits.

In the underlying case, the insured rear-ended Christina Connelly. The insured’s insurer appointed counsel to defend him in the personal injury action and assumed exclusive control of his defense. On May 10, 2011, the insurer rejected Connelly’s offer to settle her claim against the insured for $35,000. At trial, the insurer and insured stipulated that the insured’s negligence was the proximate cause of the accident. After trial on damages, the jury awarded Connelly $224,000. The trial judge further awarded pre-judgment interest close to $100,000, costs over $5,000 and post-judgment interest over $10,000. The insurer then paid Connelly about half of the amount of the award.

On April 29, 2012, the 30-day period within which the insured could appeal the judgment expired. On September 3, 2014, Connelly filed suit against the insurer and the insured to collect the full amount of the judgment and later obtained an assignment of the insured’s rights to pursue a bad faith claim against the insurer.

Connelly alleged that the insurer acted in bad faith by wrongfully refusing to settle within the policy limits and, therefore, was liable for the excess judgment. The insurer moved to dismiss Connelly’s bad faith claim on the basis that the suit was barred by the three-year statute of limitations under 10 Delaware Code Section 8106 that began to run either on the date Connelly offered to settle or when the settlement offer expired.

The trial court granted the insurer’s motion to dismiss Connelly’s suit, ruling that the statute of limitations began to run on the date the insurer breached its contractual duties by wrongfully rejecting Connelly’s settlement demand. Connelly filed an appeal.

The Supreme Court of Delaware reversed and held that Connelly’s action accrued after the excess verdict became final and non-appealable. The Court noted that a prior unpublished decision in Hostetter v. Hartford Ins. Co., 1992 WL 179423, supported the position that the statute of limitations for bad faith begins to run on the date the insurer commits the wrongful act. However, the Court disagreed with the prior decision because a majority of courts in other jurisdictions have held that a cause of action for bad faith failure-to-settle only accrues when the judgment becomes final and non-appealable.

The Court further observed that a bad faith failure-to-settle claim requires proof of damages, which can only be established after an excess judgment has been entered against an insured. Finally, the Court observed that ruling that a cause of action accrues before an excess verdict is entered against an insured would possibly put the insured and the insurer at odds in the defense of the case before verdict.

Tressler Comments

The Court’s ruling in this case, that a cause of action for bad faith failure-to-settle does not accrue until the judgment in excess of the policy limits becomes final and non-appealable, is consistent with breach of contract claims in other settings. That is, before a cause of action for a breach of contract accrues, one must suffer damages.