What’s On Their Minds: When Should the Statute of Limitations on Insurance Agent Negligence Claims Begin to Run? LGR Realty, Inc. v. Frank and London Insurance Agency.

“My problem is, I’m still trying to figure out what damage did LGR have before their insurance company refused to defend them?”

Justice O’Neill

On September 12, 2017, the Supreme Court of Ohio heard oral argument in the case of LGR Realty, Inc. v. Frank and London Ins. Agency, 2016-1307. At issue in this case is whether the delayed-damages rule applies to insurance agent negligence claims, or if the statute of limitations began to run when the tortious act occurred. Justice Fischer has recused himself from this case, and Judge Carol Ann Robb of the Seventh District Court of Appeals sat for him on the appeal.

Case Background

Frank and London Insurance Agency (“Frank and London”) obtained a commercial insurance policy for LGR Realty, Inc. (“LGR”), from Continental Casualty Company (“Continental”), which was effective from May 12, 2010 through May 12, 2011. During this time period, a third-party initiated a claim against LGR. Pursuant to the policy, LGR requested that Continental defend and indemnify LGR, which Continental refused on April 26, 2011. Although LGR prevailed on the merits of this lawsuit, it incurred over $420,000 in legal fees and costs.

On April 17, 2015, LGR filed a complaint against Frank and London, alleging that Frank and London negligently obtained unsatisfactory insurance coverage for it in May of 2010. At issue is the statute of limitations. Both parties agree that the four year statute of limitations in R.C. 2305.09(D) applies, but disagree about when it started to run. LGR argued it began when Continental refused to defend or indemnify; Frank and London argued it began at the inception of the policy period.

The trial court found the statute began to run on the day the policy was issued, and was thus time-barred. The court found that although the delayed-damages rule approved by the Supreme Court of Ohio in Kunz v. Buckeye Union Insurance Co. would have saved LGR’s claim, Kunz has been abrogated by later decisions of the high court, even though it has never been expressly overruled.  The trial court granted Frank and London’s motion to dismiss, and LGR appealed.

The Appeal

In a decision authored by Judge Tyack, joined by Judge Horton, with Judge Dorrian concurring in judgment only, the Tenth District Court of Appeals reversed the trial court’s dismissal. According to the appeals court, pursuant to Kunz v. Buckeye Union Insurance Co., which has never been expressly overruled, there could be no tort until the plaintiff has suffered some injury or harm, and thus the statute of limitations did not begin to run until Continental denied LGR’s request for defense and indemnity on April 26, 2011. Therefore, this lawsuit filed on April 17, 2015, was not time-barred.

Noting that there is a legitimate question as to the continued validity of the delayed damages rule in the insurance context, the appeals court observed that Kunz has not been overruled, and thus its holding continues to be binding on it.

Read the oral argument preview of the case here.

Key Precedent

R.C. 2305.09(D) (four-year statute of limitations for certain otherwise unspecified torts.)

Kunz v. Buckeye Union Insurance Co., 1 Ohio St.3d 79 (1982) (Applied the delayed-damages rule to an insurance agent negligence claim, and held, “[t]he statute of limitations as to torts does not usually begin to run until the tort is complete.”)

Investors REIT One v. Jacobs, 46 Ohio St.3d 176, 181 (1989) (“The legislature’s express inclusion of a discovery rule for certain torts arising under R.C. 2305.09, including fraud and conversion, implies the exclusion of other torts arising under the statute, including negligence.”)

DiCenzo v. A-Best Products Company, Inc., 2008-Ohio-5327, syllabus (“An Ohio court has discretion to apply its decision only prospectively after weighing the following considerations: (1) whether the decision establishes a new principle of law that was not foreshadowed in prior decisions, (2) whether retroactive application of the decision promotes or retards the purpose behind the rule defined in the decision, and (3) whether retroactive application of the decision causes an inequitable result.”)

Grant Thornton v. Windsor House, Inc., 57 Ohio St.3d 158 (1991) (Reaffirming the rationale discussed in Investors REIT One v. Jacobs, which held that the discovery rule did not apply to professional negligence claims.)

Flagstar Bank, F.S.B. v. Airline Union’s Mortgage Co., 2011-Ohio-1961, ¶ 13 (A cause of action for professional negligence exists from the time the wrongful act is committed.)

Chateau Estate Homes, LLC v. Fifth Third Bank, 2017-Ohio-6985 (1st Dist.)(Flagstar implicitly overruled the delayed-damages rule as discussed in Kunz, and therefore time begins to accrue when a policy was obtained in professional negligence claims against insurance agents.)

At Oral Argument

Arguing Counsel

Syed H. Ahmad, Hunton &Williams, LLP, Washington, D.C. for Appellant Frank and London Insurance Agency

Edwin J. Hollerern, Hollern & Associates, Westerville, for Appellee LGR Realty, Inc.

Frank and London’s Argument

This appeal involves the proper interpretation of R.C. 2305.09 (D), the statute of limitations that both parties agree applies in this case. The claims asserted in this case by LGR against Frank and London are professional negligence claims. Professional negligence claims must be brought within four years of the accrual of the claims. In its most recent trio of cases on this topic—REIT One, Grant Thornton, and Flagstar, the Court has unequivocally held that such a claim accrues when the negligent act took place. In that trio of cases, the Court addressed the same arguments that are being made here, that the tort wasn’t yet complete, and damages could not yet be ascertained, and in all three decisions, held that those determinations don’t matter because the negligent act is what triggers the statute of limitations.

Under Ohio law there is a duty to review the policies one has purchased. As soon as the insured ends up with a policy that doesn’t provide the protection sought, the insured has been harmed, and the  tort is in fact complete. In this case, the statute accrued at the latest, May 12, 2010, the inception of the policy period.  Thus the suit filed by LGR on April 17, 2015 was barred by the four-year statute of limitations. There should not be a separate exception for insurance agents.  R.C. 2305.09(D) specifies when the discovery rule applies—for fraud and some other things. It does not apply in the professional negligence context.

The decision in Kunz is definitely incompatible with the more recent decisions, particularly Flagstar. The Court is either going to need to overrule Kunz if it hasn’t already, or create a brand new regime just for insurance agency negligence.

Finally, the decision in this case should be applied retroactively. Any overruling of Kunz has clearly been foreshadowed, making retroactive application fair.

LGR’s Argument

This is not a professional negligence claim. With all due respect to insurance agents, they are not professionals in the same sense as lawyers, doctors or accountants. There is a difference between using professional judgment and selling a product. Insurance agents use their skill and experience to sell a product written by others. A claim against an insurance agent is more akin to a products liability claim—if a defective product is sold, it is defective at the time of sale, but the statute of limitations does not accrue on the date of sale. It accrues on the date harm is caused. That’s what exists here.  The insurance policy was not harmful when it was issued because there was no claim.  It may never become harmful. But when coverage is denied, the harm occurs.

The rule that works best in this case is the delayed damages rule. The tort is complete once the insurance company denies the claim. No reasonable person would have known of the problem with this coverage when it was purchased. It is not like a life insurance policy with an incorrect beneficiary, which is apparent immediately from the face of the policy. LGR didn’t realize anything was wrong with this policy until there was no coverage and it had to pay for its defense.

Furthermore, while there is no tolling exception in R.C. 2305.09(D) for  professional negligence, this court has created such exceptions, as with the cognizable event trigger for legal malpractice claims.  The Court should follow Kunz, and make it very clear to the lower courts that actions against insurance agents for placing a policy that doesn’t provide protection is subject to the delayed damages rule. The cause of action accrues when the claim is denied. In this case damages accrued once the defense was denied.

In any case, whatever rule is written should be prospective only. LGR relied upon Kunz, and had the right to rely on it, to timely file this lawsuit.

What Was On Their Minds

Kunz Versus Investors REIT, Grant Thornton, and Flagstar

Is this a generally confused area of law in Ohio, asked Justice O’Donnell? Has Flagstar given one indication and Kunz another? Do we disavow one and adopt the other? Should any decision be prospective only?

Accrual

When did the negligent act occur in this case, asked Justice O’Donnell? Was it the issuance of the policy? How would a claimant have knowledge of negligence at that point? If the negligence was the date of the inception of the policy, what was negligent about it at that time?

Isn’t there a difference between this commercial liability policy versus a life insurance policy where if a mistake were made naming he beneficiary that would be immediately obvious, asked Chief Justice O’Connor?

Damages

Until a claim was made and denied, how would the policyholder know it was injured, asked Justice O’Donnell?

Justice O’Neill commented that there could be no cause of action until there was a loss, because the tort was not complete. Didn’t LGR suffer a loss in having to defend a lawsuit? Isn’t it the law of Ohio that a cause of action in negligence is not complete until the plaintiff suffers some actual damage?

What would be the amount of damages at the time the incorrect policy was issued, asked Judge Robb? In this situation, we may have had a duty and a breach, but I am having a problem finding the injury and the flowing damages, she commented later. Did the premium reflect the type of risk that was being undertaken by the insurer? Was a breach of contract action filed against the insurer?

What if the insurance company offers to defend under a reservation of rights, asked Justice DeWine?

Discovery and Delayed Damages

Isn’t there an exception for medical negligence, asked Justice O’Donnell?

Analogizing to Defective Products

Isn’t the only reason a party can sue the insurance agent based on the sale of a product to third parties because of their professional judgment, asked Justice DeWine, who then asked a string of questions challenging LGR’s analogy to a defective product. Don’t you have damage any time you buy a product and you don’t get what you pay for?

How It Looks From The Bleachers

To Professor Emerita Bettman

Of course, given my notorious plaintiff’s heart, I would find there was no damage here until the insurance company refused to defend LGR. And it seemed that Chief Justice O’Connor, Justices O’Donnell and O’Neill and Judge Robb all felt that way, harkening back to the old saw that the tort isn’t complete until the plaintiff suffered an injury.  I thought Mr. Ahmad’s attempts to explain why the injury occurred when the policy was issued were impractical and academic.  But Mr. Ahmad is absolutely right that the Court’s most recent trio of cases, Investors REIT, Grant Thornton, and especially Flagstar make it totally clear that the statute starts to run when the negligence occurs, which is when the policy was issued or the policy period began.  The Flagstaff court in particular emphasized the fact that R.C. 2305.09(D) has its own exceptions—“If the action is for trespassing underground or injury to mines, or for the wrongful taking of personal property, the causes thereof shall not accrue until the wrongdoer is discovered; nor, if it is for fraud, until the fraud is discovered”– but there is no exception for professional negligence.

So, it really boils down to the question asked by Justice O’Donnell—Flagstar has given one indication and Kunz another. It’s not clear how the court is going to resolve this disparity. It could buy LGR’s argument that this is not really a professional negligence action, and keep the sale of insurance policies in a separate category, with a delayed damages rule. I’d go for the cognizable event approach, but that would indeed be judicial activism, even though it was judicially created in the first place.  It works for doctors and lawyers, but they are governed by a different statute of limitations than R.C. 2305.09(D) . And while the legislature does set the duration of statutes of limitations, the courts decide when they start to run.

To Student Contributor Jefferson Kisor  

Duty, breach, causation, and damages. That is a mantra from my 1L Torts class that I will never forget. In line with that, I found myself wondering while reading the briefs and during the argument, where was the damage? Thankfully, it appeared that more than one justice shared my reservations.

Specifically, Justice O’Donnell and Judge Robb from the Seventh District were adamant about getting Mr. Ahmad to nail down exactly when the negligence occurred. I thought he answered admirably as he tried to reframe this issue as one of an actionable harm, instead of actual damages. Therefore, it was a complete tort under Flagstar and even Kunz. Especially since knowledge of the harm is not material to this finding.

On the other hand, Mr. Hollern started off arguing to a cold bench, going over five minutes without a question. However, I believe this bodes well for his argument. Justice DeWine seemed to be the only vocal opposition to Mr. Hollern’s argument.

Even with the duty to review these insurance plans, there appears to be a gap in the law, which can leave innocent plaintiffs without a remedy for these long-term insurance plans. I believe the Court will take this opportunity to rectify this problem by applying a delayed-damages rule and reaffirming Kunz.  However, if the majority reversed the Tenth District, it is likely that holding would not be retroactive. At the end of the day, LGR Realty will not be deprived a remedy.

 

 

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