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).