California Supreme Court holds that insurer may be estopped from asserting statute of limitations defense

The California Supreme Court recently addressed the issue of where an insured presents a timely claim to his insurer for property damage under a policy, and the insurer's agent inspects the property but does not discover the full extent of covered damage, does Insurance Code section 2071 bar a claim brought by the insured more than one year after the damage was sustained but within one year of his discovery of the additional damage?

The Supreme Court held that an unconditional denial of coverage commences the running of the one-year statute of limitation of Insurance Code section 2071. However, under certain circumstances, an insurer may be estopped to raise the statute of limitations defense if the insured can show that he refrained from bringing a timely action because he reasonably relied upon the insurer's factual misrepresentation that his damages were less than his policy's deductible amount.

The Supreme Court accepted certification of the issue from the Ninth Circuit Court of Appeals in the case of Vu v. Prudential Property & Casualty Co., 172 F.3d 725 (9th Cir. 1999).)

The Vu case involved an insurance claim for damages to Mr. Vu's home arising from the 1994 Northridge earthquake. Prudential's adjuster told Mr. Vu that his damages amounted to only $3,962.50, well below his $30,000 deductible. Twenty months later, Mr. Vu's expert determined that Mr. Vu suffered $348,024.20 in damages to his home.

The Supreme Court made a distinction between denial of coverage, which offers no grounds for estopping the insurer from raising the statute of limitations defense, and a misrepresentation of fact, which could lead to estoppel.

The Court concluded that the Vu case involved a representation of fact. Prudential's inspector provided Mr. Vu with a worksheet showing specific items of damages and costs to repair. The adjuster's worksheet and explanation did not merely convey a denial of coverage or an interpretation of Prudential's policy. Instead, the adjuster "communicated specific facts describing the nature and amount of damage" and advised Mr. Vu not to file a claim, as it was less than the policy's deductible.

If Mr. Vu had reasonably relied upon these representations, Prudential would be estopped from raising the statute of limitations defense. Whether Mr. Vu's reliance was reasonable would depend upon a number of factors such as whether Mr. Vu himself was qualified to evaluate the damage or had to rely upon an expert. Other factors included whether Mr. Vu told the inspector about his damage, whether Mr. Vu knew the inspection was limited, what led Mr. Vu to suspect his damage was greater and other factors. The Supreme Court left it to the federal courts to make this determination.

(Vu v. Prudential Property & Casualty Co., (November 5, 2001) 2001 WL 1352284.)