Policy statute of limitations did not bar bad faith suit

Thomas and Lana Schlapkohl brought a claim for bad faith against their insurance carrier, American Family Insurance, alleging that during an arbitration with American Family regarding property damage to the Schlapkohls’ roof, the Schlapkohls learned of American Family’s “secret policy” of not paying for roof replacement, unless the insureds experienced more than fifty percent damage.  The couple’s insurance policy stated, “[American Family] may not be sued unless there is full compliance with all the terms of this policy.  Suit must be brought within one year after the loss or damage occurs.”  Sixteen months passed between the roof damage and when the Schlapkohls filed suit for bad faith, seeking their previously paid attorney’s fees as their damages, but only four months passed after the discovery of the “secret” internal policy and the filing of suit.

Although the district court agreed that the one-year statute of limitations barred the bad faith claim, the Iowa Court of Appeals reversed in Schlapkohl v. American Family Insurance Co., No. 15-1612 (Sept. 28, 2016).  The appellate court held that the claim regarding the “secret policy” was not known until the arbitration hearing.  Even if the one-year limitation applied, the insureds were entitled to bring a separate action after the arbitration, because they had no knowledge that the denial of their claim was premised upon the “secret” policy, until the arbitration.  The bad faith claim was not barred, because it did not accrue until it was known.

Although the bad faith claim was allowed to continue, the appellate court had a different view of the insureds’ fraud claim.  To prove fraud, the Schlapkohls were required to show a false representation by the insurer, that was material, made with scienter and intent, and upon which the Schlapkohls relied to their detriment.  After learning of the “secret policy,” the insureds alleged that they were fraudulently induced, because the written policy, which did not mention the internal rule, “induced” them to purchase the policy.

Affirming the district court’s grant of summary judgment in favor of American Family, the appellate court held that the insureds failed to respond to the summary judgment motion with specific facts that showed a genuine issue for trial with respect to the elements of scienter or intent.  The record showed an absence of evidence that misrepresentations by American Family were made knowing they were false or with intent to deceive the Schlapkohls.  The failure to specifically disclose the internal policy did not demonstrate an intent to deceive.  The insurer had previously advised the Schlapkohls that their roof damage was not “significant enough to warrant replacement,” which was consistent with the internal policy.  Since the insureds failed to show a dispute of fact as to scienter or intent to deceive, the district court’s entry of summary judgment was affirmed.

For further information on Schlapkohl v. American Family Insurance Co., contact Mollie Pawlosky.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.