Massachusetts Appeals Court holds that statute of limitations on breach of duty to defend begins to run on date of denial or at some point after reservation of rights letter

Predecessors to Narragansett Electric Company (NEC) had used sites for manufactured gas plants, electric operations, and waste disposal from the mid-1800's to the 1980's.  Soil and groundwater contamination were eventually discovered at the sites, prompting governmental and private actions against NEC.  Most of the sites were located in Rhode Island. 




NEC sought defense and indemnity from a number of insurers that had issued primary and excess policies to it between 1945 and 1986.




In OneBeacon Am. Ins. Co. v. Narragansett Elec. Co., 2014 WL 9865738 (Mass. App. Ct. 2015)*, the Massachusetts Appeals Court addressed statute of limitations issues with respect to the claims.



* As I remarked in my last post about a different case, although the Westlaw cite indicates the decision was issued in 2014, it was actually issued on June 3, 2015. 




The court first held that the six year statute of limitations for contracts of the forum state, Massachusetts,  rather than the ten year statute of limitations of Rhode Island, where most of the sites were located, would apply unless exceptional circumstances make the result unreasonable.  The court held that there were no such exceptional circumstances.  NEC could have filed suit in Rhode Island.  (That's an interesting and somewhat controversial point, considering that NEC's claims against the insurers were filed as counterclaims to a suit one of the insurers filed in Massachusetts.)


NEC also argued that its claims were timely because they accrued within the six-year limitation period. 




As with any contract action, the statute of limitations for a claim for breach of an insurance policy begins to run on the date of the breach.  The court held that under this rule, NEC's claims accrued when the insurers failed or refused to pay defense and indemnity costs.




However, the court noted, such an action may be tolled until the insured discovers the facts giving rise to its claim.  "When . . . the parties press different events as triggering accrual, the factual inquiry focuses on which was the first event reasonably likely to put the plaintiff on notice that the defendant's conduct had caused him injury."  Citing Massachusetts law, the court held that NEC's claims for breach of the duty to defend accrued when its demand to the insurers for costs associated with defending the claim was refused and NEC began to incur such costs.  (It's interesting that the court seems to hold that the two dates are the same.  An insured can incur defense costs either before or after an insurer refuses to defend.)   




The court rejected NEC's argument that it should adopt the majority rule in other states, which requires resolution of the underlying litigation against the insured before a claim for breach of the duty to defend accrues.  Massachusetts does not follow that rule. 




NEC also argued that the accrual should be tolled because the duty to defend is a continuing obligation which the insurer might cure by the conclusion of the underlying litigation.  The court again rejected that argument because it is not the law of Massachusetts. 




In a footnote the court rejected what, in my opinion, was a stronger argument of NEC:  Some of the policies included a "no action" provision stating that "[n]o action shall lie against the [insurer] . . . until the amount of the Insured's obligation to pay shall have been finally determined either by judgment  . . . or by written agreement."  The court held that that provision does not apply where an insurer has without right refused to defend an action against its insured. 




The court held that with respect to Century, which had issued reservation of rights letter and then failed to make a coverage decision for several years while NEC incurred costs, the failure to make a decision itself constituted a breach that triggered the statute of limitations.  The court held that the delay after the reservations of rights letters "constituted a breach that triggered the statue of limitations at some point well before 2003 [six years before NEC filed claims against the insurers]."




Even if that is the case, the court's ruling is too vague.  The main purpose of a statute of limitations is to have a clear point after which no case can be filed.  (With the discovery rule, among other doctrines, it does not always work that way -- which is why in some cases we have statutes of repose, which are statutes of limitation with no discovery rules and very few exceptions.)  At what point after insurer has stated, "we're thinking about it and we'll get back to you" is an insured to understand that the statute of limitations has started to run?  Thirty days?   Six months?  A year?  What if the insurer continues to let the insured know that it's still looking into the matter?  What if the insurer requests additional factual material from the insured and it takes the insured some time to gather it? 


While the court stated that an insurer can make a decision with respect to the duty to defend by comparing the letter of responsibility issued to it by the governmental agency with the terms of the policy (a/k/a the eight corners test), that doesn't address the issue.  It is the insurer which delays too long in coming to a decision but the insured which must guess how long is too long -- and if it guesses wrong it waives coverage. 




I'll be discussing this case again in my next post. 




Thanks to Mike Tracy of the Law Office of Michael G. Tracy for bringing this case to my attention.