Louisiana Supreme Court Considers First-Party Bad Faith Claim Prescriptive Period

On October 22, 2019, the Louisiana Supreme Court issued a decision finding that first-party bad faith claims against insurers arise from a contractual relationship and are therefore subject to a ten-year prescriptive period, rather than the one-year prescriptive period applicable to most Louisiana torts.

Smith v. Citadel Ins. Co. – Background

In Smith v. Citadel Ins. Co., 2019-00052 (La. 10/22/19); 2019 WL 5445086, a Gramercy Insurance Company insured’s assignee brought an action against Gramercy’s successor, Citadel Insurance Company d/b/a GoAuto Insurance Company, to recover for bad faith. Previously, the assignee, Beverly Smith, obtained a judgment against Darlene Shelmire and her insurer, GoAuto Insurance Company, in excess of Ms. Shelmire’s insurance policy limits. Ms. Shelmire then assigned her right to pursue a bad faith action against GoAuto to Ms. Smith. Ms. Smith then sued GoAuto asserting bad faith claims pursuant to La. R.S. §22:1973(A) and pre-statute Louisiana jurisprudence recognizing an insurer’s good faith duties.

In response, GoAuto filed an exception of prescription, arguing that the prescriptive period (Louisiana’s statue of limitations) on a bad faith claim against an insurer is one year because it arises in delict (tort). Ms. Smith countered that the claim was contractual and therefore subject to a ten-year prescriptive period.

The trial court overruled the exception, agreeing with Ms. Smith. The First Circuit Court of Appeal denied GoAuto’s application for supervisor writ, and GoAuto then field a writ application with the Louisiana Supreme Court.

Louisiana Supreme Court’s Decision

Ms. Smith first argued that her action was timely even under the one-year prescriptive period applicable to delictual actions, because she brought suit within one year of the court of appeal’s affirmation of the underlying judgment against Ms. Shelmire on March 10, 2016. The Louisiana Supreme Court disagreed. The judgment had been entered March 5, 2015, and Ms. Shelmire did not appeal. GoAuto filed a devolutive appeal of that judgment but not a suspensive appeal. After the delay for a suspensive appeal has elapsed, a judgment creditor is entitled to execute on the judgment.

The Court reasoned that after April 15, 2015, that is, the deadline for filing a suspensive appeal, the excess judgment against Ms. Shelmire could have been enforced against her at any time. Because Ms. Shelmire suffered injury when she was exposed to an excess judgment, her bad faith action (and thus Ms. Smith’s action, by assignment) accrued on April 15, 2015, when Ms. Shelmire, as the judgment debtor, was exposed to an excess judgment. Ms. Smith’s suit, filed on March 10, 2017, was therefore not timely under a one-year prescriptive period.

Turning to the primary issue before the court, the question of the applicable prescriptive period, the Court noted that, although the duty of good faith owed by the insurer to the insured is codified in La. R.S. §22:1973, the bad faith cause of action by an insured against the insurer does not rest solely on this statute. Rather, the duty of good faith stems also from the contractual and fiduciary relationship between the insured and the insurer, and the duty of good faith and fair dealing comes from the insurance agreement. In the absence of a contractual obligation, the duty of good faith does not exist. The Court concluded that an insurer’s bad faith is a breach of its contractual obligation and fiduciary duty, and therefore, an insured’s cause of action is personal and subject to a ten-year prescriptive period.

As a result, insureds are granted a significantly extended time period in which to pursue bad-faith claims against their own insurers. These claims often arise following an excess judgment, with the insured assigning the right to pursue the bad faith claims to the judgment creditor in exchange for a release of the excess exposure, as was done in Smith. The Court’s decision does not address third-party bad-faith claims.

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