Smith v. Allstate Ins. Co.

• Decision Date: 08 April 2005
• Docket Number: No. 03-5589.,03-5589.
• Citation: 403 F.3d 401
• Parties: Homer Matthew SMITH and Deborah Smith, Plaintiffs-Appellants, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

403 F.3d 401

Homer Matthew SMITH and Deborah Smith, Plaintiffs-Appellants, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee.

No. 03-5589.

United States Court of Appeals, Sixth Circuit.

Argued: August 3, 2004.

Decided and Filed: April 8, 2005.

ARGUED: Lawrence R. Webster, Lawrence R. Webster Law Office, Pikeville, Kentucky, for Appellants.

Ernest H. Jones II, Geralds, Jones, Sherrow, Schrader & Rice, Lexington, Kentucky, Roger L. Massengale, Law Offices of Roger Massengale, Paintsville, Kentucky, for Appellee.

ON BRIEF: Lawrence R. Webster, Lawrence R. Webster Law Office, Pikeville, KY, for Appellants.

Ernest H. Jones II, Geralds, Jones, Sherrow, Schrader & Rice, Lexington, Kentucky, Roger L. Massengale, Garland L. Arnett, Jr., Law Offices of Roger Massengale, Paintsville, Kentucky, for Appellee.

Before: DAVID A. NELSON and COOK, Circuit Judges; ROSEN, District Judge.^*

DAVID A. NELSON, Circuit Judge.

After a lengthy investigation of fire insurance claims presented by the plaintiffs, the defendant insurance company rejected the claims. The district court, which had jurisdiction based on diversity of citizenship, entered summary judgment in favor of the company. The court held that the plaintiffs' claims were barred by provisions in the insurance policies that required suit to be brought within one year after the loss. The court further held that, on the facts presented, the company's invocation of the limitations provisions did not constitute bad faith.

We agree that the limitations provisions were valid under applicable state law (the law of Kentucky) and were enforceable against the plaintiffs in the circumstances presented here. The challenged judgment will be affirmed.

I

The plaintiffs, Homer and Deborah Smith, purchased homeowner's and landlord's insurance policies covering their residence and adjacent rental property in Pike County, Kentucky. The policies were issued by Allstate Insurance Company in January of 2000.

Using substantially identical terms, the policies spelled out the steps to be taken by an insured and by Allstate if a loss occurred. First, the insured had to give Allstate prompt notice of the loss, produce all records reasonably requested by the company, and submit to examination under oath if requested to do so. Within 60 days after the loss, the insured was also required to submit a signed and sworn proof-of-loss statement. If the policy covered the loss, Allstate had to notify the insured within 30 days after receiving the proof-of-loss statement whether the company chose to repair the damaged property or to pay for the loss. A covered loss was to be settled within 30 days after its amount was finally determined, whether by agreement, an appraisal award, or a court judgment.

The policies also contained a provision limiting the insureds' right to sue Allstate: "No suit or action may be brought against [Allstate] unless there has been full compliance with all policy terms. Any suit or action must be brought within one year after the inception of loss or damage."

The Smiths' insured properties were damaged by fire of suspicious origin on April 17, 2000. Mr. and Mrs. Smith promptly notified Allstate of the loss. On April 20, 2000, Allstate acknowledged receipt of notice and requested that the Smiths return a completed proof-of-loss form by July 13, 2000 — a date almost four weeks after the time limit specified in the policies. Allstate's April 20 letter expressly reserved "all rights, conditions and/or defenses under the policy of insurance including the policy one year limitation of suit condition." The Smiths signed a non-waiver agreement in which they agreed that Allstate's investigation of their claim "shall not waive or invalidate any of the terms or conditions of the policy."

The parties agreed that Mr. and Mrs. Smith would be examined under oath on July 13, 2000, the date by which the proof-of-loss statements were due. Allstate's lawyer requested that the Smiths bring to the examinations all records supporting their claim of loss. The examinations did not go forward at the agreed time, apparently because the Smiths had yet to return their proof-of-loss statements.

On August 10, 2000, Allstate sent the Smiths' lawyer another proof-of-loss form and advised him that the company could not conclude its investigation without the completed form. The letter further advised that the company would "continue to require strict adherence to all policy ... terms and conditions" and reiterated that the company "specifically reserve[d] any and all rights and/or defenses ... including the policy one year limitation of suit condition."

The Smiths finally gave Allstate their proof-of-loss statements on September 15, 2000. On October 3, 2000, Allstate paid Grundy National Bank, which held a mortgage on the Smiths' properties, approximately $91,000.

The Smiths' examinations under oath were rescheduled for October 19, 2000, but did not begin, for some reason, until November 17, 2000. It was agreed that the examinations would be completed on December 19, 2000, but that date fell through because of inclement weather. Unhappy with the delay, the Smiths' lawyer threatened to "file suit the day after Christmas unless someone pays this claim." Allstate's lawyer responded with a suggestion that the examinations be completed on December 26, 2000.

The examinations were in fact concluded on that date, but Allstate's lawyer requested additional data from the Smiths. Some (but not all) of the requested information was provided in January of 2001. Although Mr. and Mrs. Smith were sent their examination transcripts promptly, they did not sign and return the transcripts until June 17, 2002.

Meanwhile, in September of 2001, Allstate completed its investigation and denied the Smiths' claim. Mr. and Mrs. Smith brought suit against Allstate in a Kentucky court on January 22, 2002 — more than one year and nine months after the fire. Allstate removed the case to federal district court, filed an answer, and asserted a counter-claim for the money it had paid Grundy National Bank.

In due course the district court granted Allstate summary judgment on the plaintiffs' claim that the company had committed a breach of contract by not paying the claims in full. The court held that the one-year limitations provision was valid and that Allstate had not waived its limitations defense.

In a separate order, the court granted summary judgment to Allstate on a bad faith claim asserted by the plaintiffs. Finding that it would have been possible for the Smiths to comply with all of the prerequisites for suit and still bring their action within one year of the loss, the court concluded that Allstate's invocation of the limitations provision did not constitute bad faith.¹

Allstate's counterclaim remained pending. Having determined that there was no just cause for delay, however, the district court directed the entry of final judgment on the Smiths' claims. See Rule 54(b), Fed.R.Civ.P. Mr. and Mrs. Smith perfected a timely appeal.

II

As we have seen, the Smith's insurance policies prohibited any suit from being brought more than "one year after the inception of loss or damage." The fire loss occurred in April of 2000, and the Smiths did not sue Allstate until January of 2002. If the one-year limitation was valid and enforceable, therefore, the Smiths' claims are barred.

Contract provisions limiting the time within which an insured may sue are generally valid under Kentucky law. See, e.g., Edmondson v. Pennsylvania National Mutual Casualty Insurance Co., 781 S.W.2d 753, 756 (Ky.1989); Webb v. Kentucky Farm Bureau Insurance Co., 577 S.W.2d 17, 18-19 (Ky.Ct.App.1978). In fact, a Kentucky statute specifically allows foreign insurers² to limit the time for commencing actions against them. See Ky.Rev.Stat. § 304.14-370; Webb, 577 S.W.2d at 18. The statute provides that such a contractual limitations period may not be "less than one (1) year from the time when the cause of action accrues." Ky.Rev.Stat. § 304.14-370.

The logic of this provision would seem to be that Allstate's one-year limitation period is not valid unless, as a matter of law, an insured's cause of action accrues on the date of his or her loss. Allstate, as might be expected, contends that the Smiths' cause of action accrued on the date of the fire. But there is a long line of Kentucky cases holding in a variety of contexts that a cause of action does not accrue until the plaintiff has the right to institute and maintain a suit. See Philpot v. Stacy, 371 S.W.2d 11, 13 (Ky.1963); Forwood v. City of Louisville, 283 Ky. 208, 140 S.W.2d 1048, 1051 (1940); Carter v. Harlan Hospital Association, 265 Ky. 452, 97 S.W.2d 9, 10 (1936). And under the insurance contracts at issue here, the Smiths had no right to sue Allstate prior to "full compliance with all policy terms." We understand this to mean that the Smiths could not sue until they had taken each of the steps required of them under the policies — furnishing proof-of-loss statements, e.g., and submitting to examination under oath. If cases such as Philpot, Forwood, and Carter are controlling in the insurance context, therefore, the Smiths' cause of action could not have accrued on the date of the fire.

We are not persuaded that the Philpot line of cases is controlling here. None of those cases involved Ky. Rev. St. § 304.14-370, and Kentucky courts have repeatedly enforced insurance contract provisions under which the time for suit began to run before the insured had a right to sue. In Ashland Finance Co. v. Hartford Accident & Indemnity Co., 474 S.W.2d 364, 365-66 (Ky.1971), for example, Kentucky's highest court gave effect to a one-year limitations period running from discovery of the insured's loss, even though the insurance contract provided that suit could not be brought for at least three months following the loss. In the subsequent case of Edmondson v. Pennsylvania National, similarly, the Kentucky...