Illinois Supreme Court: Two-Year Statute of Limitations for Claims Against Insurance Producers Begins To Run When Policy Is Issued
The insurance placement liability statute, 735 ILCS 5/2-2201, imposes a statutory duty on insurance producers to exercise ordinary care and skill in renewing, procuring, binding, or placing the coverage requested by the insured or the proposed insured. Garrick v. Mesirow Financial Holdings, Inc., 2013 IL App (1st) 122228, ¶35, 994 N.E.2d 986, 374 Ill.Dec. 49. This statutory duty applies to both brokers (producers retained by a potential insured) and agents (producers retained by an insurance company). Skaperdas v. Country Casualty Insurance Co., 2015 IL 117021, ¶¶23 – 27, 28 N.E.3d 747, 390 Ill.Dec. 94. Claims alleging a breach of an insurance producers’ duty, such as a negligent procurement claim, must be brought within two years of the date the cause of action accrues. 735 ILCS 5/13-214.4.
In American Family Mutual Insurance Co. v. Krop, 2018 IL 122556, the Supreme Court of Illinois held that a negligence cause of action against an insurance producer accrues when the negligently procured policy is issued, and the discovery rule does not delay the start of the limitations period until after the insured learns that the negligently procured policy does not provide coverage.
The Krops asked Andrew Varga, an insurance agent, to procure a new homeowner’s insurance policy from American Family Mutual Insurance Company. The Krops provided Mr. Varga with a copy of their old policy and asked him to procure a policy that provided equal coverage. Mr. Varga allegedly promised to procure a policy from American Family that was equal to or better than the Krops’ old policy. On March 21, 2012, American Family issued a policy procured by Mr. Varga. The Krops renewed the policy for the next three years. 2018 IL 122556 at ¶4.
In mid-2014, the Krops were sued. On August 20, 2014, American Family denied coverage for the underlying claim. 2018 IL 122556 at ¶5. American Family filed a declaratory judgment action against the Krops, seeking an order that it did not owe coverage for the underlying lawsuit. 2018 IL 122556 at ¶¶6 – 7.
On September 22, 2015, the Krops filed a counterclaim against American Family and a third-party complaint against Mr. Varga. 2018 IL 122556 at ¶8. In the third-party complaint against Mr. Varga, the Krops alleged that their old policy would have covered the underlying claim, but the American Family policy procured by Mr. Varga did not despite his representation that the American Family policy would provide equal or better coverage. Id.
The circuit court dismissed the Krops claims against Mr. Varga, holding that the two-year statute of limitations period began as soon as American Family issued the policy on March 21, 2012. 2018 IL 122556 at ¶10. According to the circuit court, the statute of limitations ran on March 21, 2014, and thus the Krops third-party complaint filed on September 22, 2015, was barred. Id.
The appellate court reversed, holding that the limitations period did not begin to run when the policy was issued. 2018 IL 122556 at ¶11. Instead, according to the appellate court, the “discovery rule” delayed the start of the limitations period until the Krops knew or should have known of the injury. The appellate court found that the Krops reasonably should have known of the injury only when American Family denied them coverage in August 2014. Therefore, the appellate court found that the third-party complaint filed in September 2015 (only about 11 months later) was timely. Id.
The Supreme Court reversed the judgment of the appellate court and affirmed the judgment of the circuit court. The Supreme Court reasoned that claims against insurance producers are considered torts arising out of a contractual relationship, and therefore the cause of action accrues at the time of the breach of the contract. 2018 IL 122556 at ¶19, citing Hoover v. Country Mutual Insurance Co., 2012 IL App (1st) 110939, ¶52, 975 N.E.2d 638, 363 Ill.Dec. 612. The Supreme Court held that the breach of contract in Krop, supra, occurred on March 21, 2012, the day Mr. Varga procured a policy that did not cover the risk for which the Krops allegedly asked Mr. Varga to procure coverage. 2018 IL 122556 at ¶19.
The Supreme Court declined to apply the “discovery rule” to delay the application of the statute of limitations. The Supreme Court reasoned that, under Illinois law, insurance customers have an obligation to read their policies, understand the terms, and know the specifics of their policy as soon as they purchase it. 2018 IL 122556 at ¶22. The Supreme Court provided two public policy reasons for this rule:
Insurance customers generally know their own goals better than an insurance producer does, and determining whether a policy achieves those goals will be difficult when customers do not read their own policies. 2018 IL 122556 at ¶29.
Insurance customers frequently maintain the same policy for years, and if the cause of action against the producer did not accrue until the customer learned of an uninsured liability, then customers would benefit from their policy throughout the intervening period, while evidence relevant to the producer’s defense would be at risk of deterioration. Id.
Finally, the Supreme Court noted that there may be certain scenarios where an insurance customer may read the policy but cannot reasonably be expected to learn the extent of coverage due to contradictory or undefined terms in the policy. 2018 IL 122556 at ¶36. In those narrow circumstances, not present in the Krop case, the Supreme Court suggested that the “discovery rule” might delay the application of the statute of limitations. Id.
The Krop decision does not present a unique fact pattern. It is common for insurance disputes to arise years after the policy in question is issued. In these circumstances, the Krop decision potentially insulates insurance producers from negligence liability.
For more information on Insurance Law, see Illinois Insurance Law — 2015 Edition. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.