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Insurers Cannot Contractually Shorten The Statute of Limitations
(February 2010) By Kevin M. Cox, Associate
For more information, contact Paul Farquharson.
St. Paul Travelers v. Millstone,
No. 31 (Md., Jan. 15, 2010)
http://mdcourts.gov/opinions/coa/2010/31a09.pdf
St. Paul Travelers v. Millstone deals with an insurer's
efforts to proscribe the time period for its insured to bring an action against
it under the insurance policy between the two. The policy at issue, insuring
against loss by theft, requires any action to be brought under the policy within
three years from discovery of loss by the insured. The Court of Appeals held
that the discovery term in the policy was void under MD. CODE ANN., INS. §
12-104, as it impermissibly attempts to require action within a shorter time
period than required by Maryland's general statute of limitations, MD. CODE
ANN., CTS. & JUD. PROC. § 5-101.
In the instant case, an employee stole $49,000 from a Profit
Sharing Plan (the "Plan") of his employer between 1997 and 2002. The Plan
discovered the loss in October of 2002, and the employee was prosecuted. The
employer reimbursed the Plan. The employer submitted notice of the loss to St.
Paul Travelers ("St. Paul") in March 2005 and provided a Proof of Loss in April
2005. On January 23, 2006, suit was instituted against St. Paul by the
employer/insured. St. Paul argued that the claim was barred by both the statute
of limitations and the terms of the policy.
The Court noted that under normal circumstances, the cause
of action would not arise until St. Paul breached the contract by erroneously
denying the claim in whole or in part, or by withholding any decision on the
claim for an unreasonable length of time. Thus, unless otherwise valid, St.
Paul's "three years from discovery of loss" would shorten the statute of
limitations for such a claim.
St. Paul argued that its endorsement in the policy did not
shorten the statute of limitations, but merely contractually established when
such cause of action would begin to accrue, which it argued did not violate MD.
CODE ANN., INS. § 12-104. The Court found this view "myopic" and that St. Paul's
construction would allow an insurer to contractually anchor the beginning of the
limitations period at any point in real time, including anchoring the beginning
of the contractual period at a point in time that has the practical effect of
shortening, to less than three years from accrual of the cause of action, the
time within which suit must be brought.
The Court held that a cause of action against St. Paul for
breach of contract could not possibly have begun to accrue until, at a minimum,
the date the Proof of Loss was submitted, and could even accrue at a later date,
such as when St. Paul denied the claim. The Court found nothing in § 12-104
indicating a legislative intent to permit, by the device of contractually
accelerating the time of accrual, a shortening of the otherwise applicable time
for filing suit by an insured against an insurer. Thus, this case reinforces the
general rule that a cause of action against an insurer upon denial of a claim
accrues when the claim is denied.
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