Limitation Periods and Bad Faith Claims For Failure to Settle

March 22, 2012 | Amelia M. Leckey

On
March 22, 2012 the Ontario Court of Appeal released its reasons in
Dundas v. Zurich Canada 2012 ONCA 181 in which the Court discusses the
limitation period for bad faith actions against insurer, where right of
action is assigned by a defendant insured to third party victims.

In
this case the defendant/insured alleged Zurich’s failure to settle an
action resulted in the defendant being exposed to increased personal
liability. As early as April 1993 it was clear the defendant/insured
was going to have personal exposure. In December 1993 the insurance
policy limits were paid into court. A consent judgment in the
underlying tort action was issued on August 21, 1995, based on a
judicial endorsement that was issued on December 21, 1994.

The
defendant/insured issued a “bad faith” claim against Zurich on August
19, 1996. In January 1997 the action was eventually assigned to the
plaintiff’s in the original tort action in exchange for an agreement by
the plaintiffs not to enforce the excess judgment as against the
defendant/insured.

Zurich
brought a summary judgment motion seeking to dismiss the bad faith
action on the basis that, by December 1994, the defendant/insured knew
or ought to have known it had a claim in bad faith against the insurer.
Zurich argued that statutory condition 6(2) required an action by an
insured to recover monies under a contract of insurance to be commenced
within 1 year of the cause of action arising. The motion was
successful. However, the Ontario Court of Appeal allowed the appeal on
the basis that Statutory Condition 6(2) had no application to the bad
faith action. The bad faith action is not an action by an insured to
recover money under a contract of insurance. Rather it is a claim based
on a breach of an insurer’s duty of good faith and fair dealing.
Given the dates involved in the specific case, the applicable limitation
period was 6 years. Under the LImitations Act, 2002, the applicable
limitation period would now be 2 years.

It
should be noted the Court of Appeal also disagreed with the motion
judge’s interpretation of Statutory Conditions 6(2) and 6(3). In
addition, since the defendant/insured was an estate, the Court of Appeal
addressed the limitation period in the Trustee Act.

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