Bad Faith by Your Insurer? When Do You Have to File a Bad Faith Lawsuit?

In Rosenberg-Wohl v. State Farm Fire & Cas. Co., No. S281510, 2024 WL 3449266 (Cal. July 18, 2024), the California Supreme Court ruled that the statute of limitations to file a lawsuit for an insurer’s violation of the Unfair Competition Law (UCL) is four years instead of one year as prescribed by the standard form insurance policy set forth in Cal. Ins. Code § 2071. The court found that § 2071 is limited to actions for recovery of policy benefits, whereas Rosenberg-Wohl was not seeking to recover any denied benefits. Instead, Rosenberg-Wohl sought an order enjoining State Farm from applying unreasonable claim handling practices in future claims.

The UCL is not designed to recover damages for tortious conduct or breaches of contract. Instead, it is designed to have protective and preventive benefits, one of which is allowing a plaintiff to seek injunctions requiring defendants to change their future behavior. UCL claims can be a common element in class action lawsuits against insurance companies since it is often difficult to win a breach of contract or bad faith claim on a class-wide basis due to the factual differences and issues of proof from claim to claim. As the insurance companies say, every claim is different. However, class actions often fail when judges find that UCL claims for injunctive relief are just another mechanism for recovering policy benefits, and thus, doomed to succeed as a class action for the same reasons breach of contract and bad faith claims fail. However, the California Supreme Court seems to tacitly approve of plaintiffs using the UCL to obtain court orders preventing insurance companies from continuing certain claims handling practices on future claims.

Getting back to the issues raised in the case itself, Rosenberg-Wohl alleged in their lawsuit:

‘State Farm has a practice of summarily denying and regularly summarily denies property insurance claims unless State Farm believes the particular claim falls into a category of likely coverage.’ State Farm allegedly ‘followed that practice’ with plaintiff’s claim. According to plaintiff, ‘[b]ecause State Farm did not investigate Plaintiff’s claim, State Farm had no reasonable basis for its determination that coverage should be denied.’ State Farm’s conduct allegedly ‘was and is designed to deny claimants coverage for all but the most obvious of covered claims, to the detriment of State Farm’s policyholders and to its own benefit.’

Regarding injunctive relief under the UCL, plaintiff requests an order that would require State Farm, ‘when adjudicating any property insurance claim presented to it, to give at least as much consideration to the interests of its insured as to its own interests.’ Although the complaint does not specify the precise declaratory relief plaintiff seeks, the pleading is fairly read as requesting a declaration concerning State Farm’s allegedly widespread practices of summarily denying claims without proper investigation and not providing sufficiently clear explanations to policyholders regarding why their claims have been denied.

The court also provided some history of the standard form insurance policy:

The development of a standard fire insurance policy more than a century ago responded to market conditions in which ‘every [insurance] company issued a policy that suited its particular needs. These policies were drafted by company experts who did not always have at heart the best interest of the insured.’ (Wenck, The Historical Development of Standard Policies (1968) 35 J. Risk & Ins. 537, 538.) With the San Francisco earthquake and fire of 1906 providing an impetus (see Cal. Dept. of Insurance, Forty-First Ann. Rep. of the Insurance Commissioner for the Year Ending Dec. 31, 1908 (1909) pp. 18–19), this state first enacted a standard form fire insurance policy in 1909. The initial standard policy provided, in relevant part, ‘No suit or action on this policy for the recovery of any claim shall be sustained … unless begun within fifteen months next after the commencement of the fire.’ (Stats. 1909, ch. 267, § 1, p. 409.) The timeliness provision within the standard policy ‘was amended in 1949 to reflect the nearly uniform adoption (by 45 states at the time) of a 1-year limitations period in the ‘Model New York Standard Fire Form Policy,’ ’  a revised model policy that was promulgated in 1943. (Prudential-LMI, supra, 51 Cal.3d at p. 682, 274 Cal.Rptr. 387, 798 P.2d 1230; see also id. at p. 683, 274 Cal.Rptr. 387, 798 P.2d 1230 [describing the development of the 1943 New York standard policy].)

The court held that Rosenberg-Wohl’s UCL claim was not time-barred because section 2071 did not apply to UCL claims. Section 2071 only applies to actions on the policy to recover benefits. The court reasoned that Rosenberg-Wohl’s suit was not an action on the policy to recover benefits because the goal of injunctive relief was not to help them with their denied claim but to serve protective and preventive functions for the future, which is a primary goal of the UCL:

We regard this language, read in the context of the statute as a whole, as concerned with causes of action that in some manner seek a financial recovery attributable to a claimed loss that was coverable under a policy. Plaintiff, however, pursues only broad declaratory relief pertaining to State Farm’s alleged claims-handling practices and an injunction that would require State Farm to ‘give at least as much consideration to the interests of its insured as to its own interests.’ These requests for declaratory and injunctive relief do not directly or indirectly pursue the recovery of benefits under plaintiff’s insurance policy, or for that matter any financial recovery for plaintiff. Instead, these forms of relief are being invoked here on behalf of consumers generally and in service of the UCL’s protective and preventive functions.

Of course, any breach of contract or bad faith claim still must be brought within the timeframe set forth in the insurance policy unless it is shorter than one year, the minimum time prescribed by the standard form policy under Section 2071. The court also made clear that just because UCL claims can be brought later, it doesn’t mean they are of any help to the policyholder, because they do not allow the policyholder to recover denied benefits. So, the value of this ruling to a policyholder seeking justice does nothing if they miss the policy deadline. However, as noted above, this could be a useful tool for cases involving State Farm’s handling of residential water loss claims, particularly slab leaks, which have come under fire lately for being universally denied. Perhaps Rosenberg-Wohl can find a way to turn their case into a class action lawsuit. It will be interesting to see how this case law develops beyond merely determining the deadline to file suit for UCL claims against insurance companies.

Each state has its own statute of limitations. While this case is California-specific, always check with a qualified attorney to learn when the deadline is to file a bad faith lawsuit in your jurisdiction.