What Is the Prescriptive Period for Louisiana First-Party Bad Faith Claims?

Deborah Trotter | Property Insurance Coverage Law Blog | November 27, 2019

Louisiana federal courts have been split on the issue regarding the applicable prescriptive period (statute of limitation) for first-party insureds’ bad faith claims against their insurers. Recently, the Louisiana Supreme Court granted review of Smith v. Citadel Insurance Company, to definitively rule on the primary legal issue presented: “the proper prescriptive period applicable to a first-party bad faith claim against an insurer.”1

Ms. Smith, pursuant to an assignment of rights from the named insured, which placed her in the position of the first-party insured, brought a bad faith claim against GoAuto. The Louisiana courts agree that Louisiana recognizes an insurer owes its insured a duty of good faith. The split has arisen in the classification of the action in regard to Louisiana law.

The supreme court recognizing this uniqueness of Louisiana law outlined the basis of its ruling by first explaining some of the distinct points of Louisiana law and later demonstrated how its earlier opinions, though not directly addressing the issue before it in Smith, are consistent with Smith:

All personal actions, including an action on a contract, are subject to a liberative prescription of ten years, unless otherwise provided by legislation. La. C.C. art. 3499; Roger v. Dufrene, 613 So. 2d 947, 948 (La. 1993). Delictual actions are subject to a liberative prescription of one year. La. C.C. art. 3492. The nature of the duty breached determines whether the action is in tort or in contract. Roger, 613 So. 2d at 948; Dean v. Hercules, Inc., 328 So. 2d 69, 70 (La. 1976). “The classic distinction between damages ex contractu and damages ex delicto is that the former flow from the breach of a special obligation contractually assumed by the obligor, whereas the latter flow from the violation of a general duty owed to all persons.” Thomas v. State Employees Grp. Benefits Program, 05-0392 (La. App. 1 Cir. 3/24/06), 934 So. 2d 753, 757. See also, Certain Underwriters at Lloyd’s, London v. Sea–Lar Mgmt., 00-1512 (La. App. 4 Cir. 5/9/01), 787 So. 2d 1069, 1074; 6 Saul Litvinoff & Ronald J. Scalise Jr., Louisiana Civil Law Treatise, Law of Obligations § 5.2 (2d ed. 2018) (“Fault is contractual when it causes a failure to perform an obligation that is conventional in origin, that is, an obligation created by the will of the parties, while fault is delictual when it causes the dereliction of one of those duties imposed upon a party regardless of his will, such as a duty that is the passive side of an obligation created by the law.”).2

Basically, the court ruled that a first-party insured’s bad faith claim is a personal action subject to a ten-year prescriptive period, as it arises under the contract of insurance. The court went on to explain how the bad faith statutory laws worked within the personal action:

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. Gourley v. Prudential Prop. & Cas. Ins. Co., 98-0934 (La. App. 1 Cir. 5/14/99), 734 So. 2d 940, 945 (citing Smith v. Audubon Insurance Company, 94-1571 (La. App. 3 Cir. 5/3/95); 656 So. 2d 11, 14, rev’d on other grounds, 95-2057 (La. 9/5/96), 679 So. 2d 372). The duty of good faith is an outgrowth of the contractual and fiduciary relationship between the insured and the insurer, and the duty of good faith and fair dealing emanates from the contract between the parties. In the absence of a contractual obligation, the duty of good faith does not exist. See La. C.C. art. 1759 (“Good faith shall govern the conduct of the obligor and the obligee in whatever pertains to the obligation.”); La. C.C. art. 1983 (“Contracts have the effect of law for the parties and may be dissolved only through the consent of the parties or on grounds provided by law. Contracts must be performed in good faith.”). Because we find an insurer’s bad faith is a breach of its contractual obligation and fiduciary duty, we hold the insured’s cause of action is personal and subject to a ten-year prescriptive period. See also 15 William McKenzie & H. Alston Johnson, Louisiana Civil Law Treatise: Insurance Law and Practice § 11:25 (4th ed. 2018) (“Unless otherwise provided by statute, claims under the penalty statutes prescribe in ten years.”).3

This ruling by the court is a win for policyholders, as they are no longer restricted in some Louisiana venues to the previously misapplied one-year prescriptive period for their bad faith claims. Note—Louisiana does allow parties to enter into contracts of insurance with a suit limitation for breach of contract of not less than two years from the inception of loss.4

So, the next question is … how many bad faith claims from the past ten years remain to be pursued? The previous, potential one-year timeframe, which only aided the insurers in their “arbitrary, capricious, and without probable cause” actions has ended. We will be happy to evaluate your potential bad faith claims. Happy Thanksgiving!
__________________________
1 Smith v. Citadel Ins. Co., __ So. 3d __, 2019 WL 5445086 (La. Oct. 22, 2019).
2 Id. (emphasis added).
3 Id. (emphasis added).
4 LA Rev Stat § 22:868 (2018).

4th Annual Southeast CDDC Agenda Announced

4th Annual Southeast CDDC
October 12, 2018
New Orleans, LA | Loyola University College of Law
$197
6.5 Continuing Legal Education credits (LA – other states upon request) including 1 ethics credit!

Check-in with Continental Breakfast will start at 8:15 AM.
Lunch and post conference reception is included.

Check out this AWESOME agenda – come enjoy, network, learn and have a great day getting those pesky CLE credits out of the way!

Criminal Statutes for Contractors
Carl Barkemeyer | Carl Barkemeyer Attorney at Law

How to Evaluate a Delay Claim from General and Subcontractors Based on Changing Design and Site Conditions
Larry Mobley | Baldwin Haspel Burke & Mayer

Proving Damages in Construction Cases
Ben Aderholt | Coats Rose

Claims Against Architects and Engineers/Design Professionals
Andrew G. Vicknair | Shields Mott

Ethics Challenge
Eric Barefield | Louisiana State Bar

Do Right to Repair Statutes “Suit” an Insurance Company’s Duty to Defend?
Alexis Joachim | Phelps Dunbar

Top 5 Litigated Construction Defect Issues
Stewart Schmidt | Advise & Consult, Inc.
———————————————————-
Insurance professionals are $77, but must still pre-register – CE credits not included.
email jeff@adviseandconsult.net from a work email to get discount code.

GET TICKETS

New Louisiana Law Requires Public Entities to Pay Interest on Late Payments to Contractors

Mark W. Mercante and Nicholas R. Pitre | Baker Donelson | June 20, 2018

On May 30, 2018, Louisiana Governor John Bell Edwards signed into law Act No. 566 of the 2018 Regular Session, amending Louisiana Revised Statute Section 38:2191(B) effective August 1, 2018, to provide for interest on late payments by public entities. Under the amendment, a payment is considered late and interest begins to accrue 45 days following the public entity’s receipt of a proper request for payment. Interest is set at 0.5 percent daily, not to exceed 15 percent. The amended statute will require contractors to distribute late interest payments among the contractor and subcontractors in proportion to the principal amount due within ten days of the contractor’s receipt of an interest payment.

The text of the amendment is set forth below (bold and underlined words are additions to prior law; no words were deleted):

B. (1) Any public entity failing to make any progressive stage payment within forty-five days following receipt of a certified request for payment by the public entity without reasonable cause shall be liable for reasonable attorney fees and interest charged at one-half percent accumulated daily, not to exceed fifteen percent. Any public entity failing to make any final payments after formal final acceptance and within forty-five days following receipt of a clear lien certificate by the public entity shall be liable for reasonable attorney fees and interest charged at one-half percent accumulated daily, not to exceed fifteen percent.

(2) Any interest received by the contractor pursuant to Paragraph (1) of this Subsection shall be disbursed on a prorated basis among the contractor and subcontractors, each receiving a prorated portion based on the principal amount due within ten business days of receipt of the interest.

False Claims to the Government: What They Are and How to Avoid Them

Catherine Maraist | Breazeale Sachse & Wilson LLP | April 11, 2018

Louisiana and the Gulf Coast Region are set to receive hundreds of millions of dollars in federal money earmarked for transportation and other construction projects. However, the significant influx of federal spending brings with it the significant risk of fraud, waste, and abuse. Where the government finds such fraud waste, and abuse, it can recover significant damages and spending under the False Claims Act. The following is a brief overview of the federal government’s most powerful tool in recovering for false claim violations, as well as some guidance on the best measures to minimize the risk of violations.

What Is The False Claim Act

The Federal False Claims Act gives the federal government the power to recover damages and penalties for the false and/or fraudulent claims for payment. The False Claims Act applies to federal funding of projects through contracts as well as federal grants. Under the Act, the government can recover up to three times the amount that was paid under the false claims as well as statutory penalties between $10,957 to $21,916 per claim. When does a claim for payment rise to the level of a violation of the Act? To be considered a “false claim” under the act, the claim must be (1) false; (2) knowingly made; and (3) material.

  • To find that a payee “knowingly” submitted the false claim, the government does not have to prove actual knowledge that the claim was false; rather, it need only show that the payee acted with “deliberate ignorance” of the truth of falsity of the claim, or with “reckless disregard for the truth.”
  • Further, the Act does not cover any and all misrepresentations or any and all failures to follow regulatory requirements; to be “material” the false claim must affect the government’s decision to pay.
  • The materiality requirement prevents all garden variety contract and regulatory disputes from coming within the scope of False Claims Act liability. However, it’s important to realize that such disputes may give rise to False Claims Act exposure if the falsity of the claim was done with knowledge and the falsity affected the government’s payment decision.

The Whistleblower The majority of False Claims Act brought by the government are brought by a whistleblower. The majority of whistleblowers are current and former employees with knowledge of the employer’s government billings, although sometimes competitors can blow the whistle on their competition.

  • The whistleblower files a case under seal in the court against the defendant and alleges false claims.
  • While the case is still sealed, the government investigates the allegations and determines whether it will go forward with the prosecution of the case. If it does not, the whistleblower (known legally as a “relator”) may proceed with the suit.
  • There is a strong financial incentive for the whistleblower: if the government recovers, the whistleblower is awarded a percentage of the recovery, from 15% to 30%. If whistleblower is successful, the defendant will have to pay reasonable attorney fees as well.
  • A whistleblower may also be awarded damages if he or she can prove that the employer retaliated against him or her for the whistleblowing.

What’s most frustrating for a defendant in such a case is that by the time the defendant learns of it, the government (with the whistleblower’s help) is at the point to ask for settlement of the claims. Very often these cases are settled to avoid the costly litigation process because the case has already been made.

The False Claims Act in Construction Claims

At the outset, it’s important to note that a company can be liable under the False Claims Act even if it was not the person submitting the claim. In the context of construction, this means that subcontractors who present false claims can be liable to the same extent as the contractor. Further, if the contractor is aware of the falsity of the subcontrator’s claim, or conspires with the contractor to submit a false claim, it can be liable as well.

It’s also important to note that, under the False Claims Act, the knowing retention of an overpayment can give rise to a False Claims Act. Known as a “reverse false claim,” this is a common theory of recovery in construction claims. For example, if a government authority reimburses for payroll taxes, and a subcontractor is overpaid such taxes, the failure to remit back to the government the amount of an overpayment may result (and has resulted in the past) in liability under the False Claims Act.

Although there is no comprehensive list of the types of suits, the following are suits that are common in the construction industry context:

  • Bid rigging
  • Product substitution/substandard products
  • Substandard workmanship
  • False reports and certifications
  • Bribes/kickbacks
  • Overcharging for materials/wages
  • Falsifying minority status
  • Failure to follow contract specifications

In many suits, the government will have several theories of liability, i.e., more than one basis for a finding that the claims were false. The difficulty of defending such suits increases with each theory of liability.

Minimizing Liability

Although it’s impossible to eliminate all risks of liability, there are some steps that a company can take to help minimize its exposure to false claims act liability. These include:

  • Written policies against false claims (including bribes/kickbacks)
  • Development of procedures for review of all submissions for payment
  • Written document retention policies for all cost-based reporting
  • Mandatory periodic training for employees who handle documentation/claim submissions
  • Procedures for screening subcontractor claims for reimbursement
  • Establish procedures for hearing employee complaints and institute exit interviews for employees

On a final note, if a contractor should discover any issue involving potential False Claims Act liability, he or she should contact an experienced attorney. An early evaluation of a claim, especially where there is a potential whistleblower, is key in minimizing government exposure.

Negligence Against a Construction Manager-Agent

David Adelstein | Florida Construction Legal Updates | March 9, 2018

Can a construction manager-agent / owner’s representative hired directly by the owner be liable to the general contractor in negligence?  An argument likely posited by many general contractors on projects gone awry where there is a separate construction manager.  Well, here is an interesting case out of Louisiana that supports a negligence claim against a construction manager-agent.

 

In Lathan Company, Inc. v. State, Department of Education, Recovery School District, 2017 WL 6032333 (La.App. 1st Cir. 2017), a general contractor entered into a contract with a public owner to renovate a school.  The public owner hired a separate construction manager (as the owner’s agent) for the project.  The general contractor claimed that the construction manager was negligent through its: unreasonable refusal to approve payment applications; delayed responses to submittals and questions; refusal to recommend substantial completion; refusal to properly manage construction oversight; and its interference with the progress of the project.   The contractor claimed, in particular, that given the scope of the construction manager’s supervisory and management responsibilities for the project, the construction manager owed a duty to exercise its responsibilities in a professional manner (akin to a professional negligence claim).  These factual assertions are not unusual facts asserted by a general contractor on a problematic project with a separate construction manager / owner’s representative.

 

The trial court granted summary judgment in favor of the construction manager on the negligence claim. But, the appellate court reversed finding that the construction manager did owe a duty to the general contractor:

 

Accordingly, after careful review of the record herein, we find that although Jacobs [construction manager] was not in direct contractual privity with Lathan [contractor], Jacobs must be deemed and held to know that its services were not only for the protection or interests of the owner but also third parties, including, specifically, Lathan, who was acting as the general contractor on the project. As outlined above, it was foreseeable and to a degree certain that Lathan would suffer economic harm if Jacobs failed to perform, or negligently performed, many of its professional duties.  Moreover, as outlined above, there is a close connection between Jacobs’s alleged failure to act according to industry standards, and the alleged economic harm suffered by Lathan.

***

Thus, after carefully considering the record herein, and applying the balancing test enunciated in the jurisprudence noted above, we are unable to find any reason why the courts’ rationale in such prior jurisprudence, extending the liability of architects and engineers, should not likewise apply to a project management professional, under the facts of this case.

 

 

Lathan Company, supra, at *13-14 (internal citations omitted).