5.2.7 Statute of Limitations

• Jurisdiction: Arizona

The statute of limitations for a third-party bad faith failure to give equal consideration to the insured's interest accrues once a judgment in excess of the policy limits is entered against the insured and becomes final.^[206]

A significant case regarding the accrual of the statute of limitations in a third-party context was rendered by the Arizona Court of Appeals in Manterola v. Farmers Insurance Exchange.^[207] In Manterola, the tort victim, as the insured's assignee, brought an action against a liability insurance company to recover for bad faith. A simultaneous Declaratory Judgment Action was also being prosecuted. The insurance company was defending a personal injury action under a reservation of rights. A Morris agreement was reached whereby a stipulated judgment was given to the tort claimants in the amount of $2,000,000 and which assigned to the tort claimants all of their rights under their insurance policies including any cause of action that the insureds might have against their insurance company for bad faith. A stipulated judgment in the personal injury action was entered by the court on April 9, 1996. Because neither side appealed that judgment, that judgment became final 30 days later. After the tort claimant filed her personal injury action against the insureds but before the parties executed the Morris agreement and the stipulated judgment, the insurance company filed a Declaratory Judgment Action in December 1995. The Declaratory Judgment Action was brought against the tort claimant and the insureds and sought a determination of the insurance company's rights and obligations under the insurance policy.

The trial court granted the insurance company's Motion for Summary Judgment finding no coverage. However, the trial court's judgment of no coverage was reversed by the Arizona Court of Appeals concluding that the insurance company was obligated to provide coverage for the claims. In May 1999, a judgment adverse to the insurance company was filed in the Declaratory Judgment Action following the appeal. In September 1999, a tort claimant, as the insured's assignee, filed a bad faith action against the insurance company alleging in relevant part that the insurance company did not have a reasonable basis for denying the claim. The insurance company moved to dismiss the complaint, contending that it was time barred under A.R.S. Sec. 12-542, the two-year statute of limitations. The trial court granted the Motion to Dismiss with the trial court finding that the tort claimant/assignee had "caused the [bad faith] action to accrue and the clock to tick" by "choosing to enter to the [Morris] covenant after the [Declaratory Judgment Action] was filed by [the insurance company] and entering a judgment."^[208] Essentially, the trial court ruled that the tort claimant/assignee's bad faith claim had accrued when the judgment in the personal injury action had become final in May, 1996, and that the two-year statute of limitations expired in May, 1998; the Declaratory Judgment Action did not toll the limitations period.^[209]

The court in Manterola began its analysis by recognizing that it was undisputed under Arizona law that A.R.S. Sec. 12-542, which requires that certain actions be "commenced and prosecuted within two years after the cause of action accrues, and not afterward," applies to third-party bad faith claims.^[210] Acknowledging that the Arizona Supreme Court had previously held in Taylor v. State Farm Mutual Automobile Insurance Co.^[211] that a third-party bad faith failure to settle claims accrues at the time that the underlying action against the insured becomes final and not appealable, the issue before the Manterola court involved an insurance company's denial of coverage as the predicate for the bad faith action. Because of this, the tort claimant/assignee argued that when an insurance company files a Declaratory Judgment Action to contest coverage, as the insurance company did in that case, the bad faith claim does not accrue until the Declaratory Judgment Action results in a final determination of coverage under the policy. This was particularly true when the bad faith claim was predicated upon the denial of coverage to the insured and the gravamen of the insurance company's bad faith was that failure.

The Manterola court observed that the primary obstacle to the tort claimant/assignee's argument to circumvent the statute of limitation was...