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PA Superior Court Holds Statute of Limitations Begins to Run for Insurers’ Declaratory Judgment Actions When Insurer Has Sufficient Factual Basis to Support its Determination

The statute of limitations for the filing of a declaratory judgment action brought by an insurance company regarding its duty to defend and indemnify begins to run when a cause of action for a declaratory judgment arises. According to the Superior Court of Pennsylvania in Selective Way Ins. Co. v. Hospitality Group Servs., No. 1430 WDA 2013, 2015 Pa. Super. 146 (July 7, 2015) (en banc), “[t]his requires a determination by the trial court of when the insurance company had a sufficient factual basis to support its contentions that it has no duty to defend and/or indemnify the insured.”

On June 6, 2012, Selective Way Insurance Company (“Selective”) filed a complaint, seeking a declaration that it did not have a duty to defend or indemnify Hospitality Group Services (“Hospitality”) in an underlying action filed on August 1, 2007 by Terri Nemcheck (“Nemcheck”), individually and as the administratrix of the estate of a seventeen year old who drove off the road and died as a result (“Nemcheck Action”). Hospitality sent a copy of the complaint from the Nemcheck Action to its insurer, Selective. While Selective defended under a reservation of rights, it advised Hospitality in its July 31, 2007 reservation of rights letter that it was unsure as to its duty to defend and/or indemnify Hospitality.

In the declaratory judgment action, the trial court granted Hospitality’s and Nemcheck’s motions for summary judgment based upon its conclusion that the four-year statute of limitations began to run for the filing of the declaratory judgment action regarding the duty to defend and indemnify when Selective received the complaint against Hospitality. As a result, Selective’s complaint, filed five years after Selective received the Nemcheck complaint, was untimely.

The Superior Court began by recognizing that the four-year catchall statute of limitations applies to declaratory judgment actions regarding a parties’ rights and duties under a contract, that the statute of limitations begins to run “from the time the cause of action accrued,” and that “a cause of action accrues when the plaintiff could have first maintained the action to a successful conclusion.” However, the court noted that Pennsylvania case law and guidance were scarce as to the appropriate limitations period for a declaratory judgment. While the court acknowledged Zourelias v. Erie, Ins. Grp., 691 A.2d 963 (Pa. Super. 1997), it rejected Selective’s contention that the denial of coverage is the appropriate triggering event for the statute of limitations for an insurance company’s declaratory judgment action.

The court noted that an insurance company’s duty to defend is “inextricably intertwined with its duty to indemnify because both are based upon a determination of whether the insurance policy provides coverage for the claims made.” According to the court, the two duties cannot be disentangled for the purposes of determining the triggering event for the running of the statute of limitations to file a declaratory judgment action because of both address whether the policy provides coverage for the claim.

The Superior Court also rejected the trial court’s finding that the statute began to run as to Selective’s duty to defend and indemnify Hospital on the date which Selective received the complaint from the Nemcheck Action. No actual controversy or inevitable litigation from Selective’s point of view existed until it concluded that the claims made in the Nemcheck Action were “confined to a recovery that the policy does not cover.” As a result, “[u]ntil an insurance company has a sufficient factual basis to decline to defend (and thus, decline to indemnify) its insured in a third party’s action, there is no justiciable controversy for the trial court to decide, and no cause of action for declaratory judgment.” The four-year limitations period for an insurance company to file a declaratory judgment action on its duty to defend and indemnify begins to run when a cause of action for a declaratory judgment accrues. The Superior Court noted that while it is possible that an insurance company could have sufficient information when it receives the complaint to cause the statute of limitations to begin to run, it also may not occur until the case develops and the claim pared down to where the insurance company believes it is not covered by the policy of insurance. Thus, the trial court must “determine when the insurance company had sufficient factual basis to support its contentions (as set forth in its complaint for declaratory judgment) that it has no duty to defend or indemnify the insured.”

Because the trial court failed to assess whether Selective had sufficient information to decide whether the policies in question did not provide for the claims made against Hospitality in the Nemcheck Action and this was a question of fact to be decided by the trial court, the Superior Court reversed the trial court’s order granting summary judgment. However, because the case was technically moot and the Superior Court had decided the issue based on an exception to the mootness doctrine, it did not remand the case back to the trial court.

Judge Ford Elliot issued a Dissenting Opinion, in which Judges Panella and Shogan joined and Judge Mundy concurred. Judge Mundy also issued a separate Dissenting Opinion.


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