“Discovery rule” doesn’t toll Statute of Limitation in negligent procurement case against agent (2 Dissenters)

The Illinois Supreme Court, applying Illinois law, held that a two-year statute of limitations applies to an insureds’ claim that their insurance agent negligently sold them a deficient insurance policy.  Moreover, the Illinois Supreme Court held that the cause of action for negligent procurement against an insurance agent accrues as soon as the insured receives the policy, not upon knowledge of an actual injury.

In 2012, Walter and Lisa Krop asked American Family Mutual Insurance Company (“American Family”) agent Andrew Varga to provide them with an American Family homeowner’s insurance policy that was equal to the coverages provided under their old Travelers homeowner’s policy.  American Family issued the Krops their policy on March 21, 2012, and it was renewed for the next three years.  In 2014, the Krops were sued for defamation, invasion of privacy, and intentional infliction of emotional distress.  On August 20, 2014, American Family denied coverage because the policy did not cover personal injury or intentional conduct as alleged in the lawsuit.

American Family sought a declaration that the policy did not cover the lawsuit.  On September 3, 2015, the Krops filed a counterclaim against American Family for vicarious liability for its agent’s negligence and a third-party claim against Varga alleging that he negligently failed to provide them with an insurance policy equal to their Travelers policy, which would have covered the claims of the lawsuit.  The circuit court dismissed the Krops’ claims as untimely.  The appellate court reversed and found that other Illinois courts had distinguished between lawsuits alleging negligence by an insurer, like American Family, and those alleging negligence by an agent, like Varga.  The appellate court held that insurance agents owe their customers a fiduciary duty and that duty is more significant than the customers’ obligation to read their policy.  Thus, the “discovery rule” delayed the start of the limitations period until the Krops knew or should have known of the injury – August 20, 2014 when American Family denied coverage.

The Illinois Supreme Court reversed the appellate court’s decision and held that when insureds have the opportunity to read their insurance policy and can reasonably be expected to understand its terms, the cause of action for negligent failure to procure insurance accrues as soon as the policyholders receive the policy.  According to Section 13-214.4 of the Code, “All causes of action brought by any person or entity under any statute or any legal or equitable theory against an insurance producer … concerning the sale, placement, procurement, renewal, cancellation of, or failure to procure any policy of insurance shall be brought within 2 years of the date the cause of action accrues.”  The statute does not define “accrues.”  According to the Illinois Supreme Court, allegations of negligence in relation to insurance policies are treated as torts arising out of contractual relationships with the earliest date of accrual being the date of the breach of the duty or the breach of the contract, not the date of the damages.  In the instant case, the date of the alleged breach was March 21, 2012, the day Varga procured for the Krops an insurance policy that did not provide the coverage which the Krops alleged they had asked Varga to provide.  According to the Illinois Supreme Court, “[t]he Krops’ alleged injuries included not only their uninsured liability in [the underlying] lawsuit but also their lack of coverage between the purchase of the policy in 2012 and the lawsuit in 2014.”

However, the Illinois Supreme Court did note that “there will be a narrow set of cases in which the policyholder reasonably could not be expected to learn the extent of coverage simply by reading the policy.  In some cases the insurance policies may contain contradictory provisions or fail to define key term.  In others the circumstances that give rise to the liability may be so unexpected that the typical customer should not have expected to anticipate how the policy applies.”  Because the Krops filed their complaint more than two years after they received the American Family policy and because they did not plead facts that would support any recognized exception to the expectation that customers will read the policy and understand its terms, the Illinois Supreme Court dismissed the Krops’ claim as untimely.

According to Justice Thesis’ dissent, which was joined by Justice Kilbride, the majority’s conclusion was based on a mischaracterization of the Krops’ claims against Varga and American Family. The claims should have been characterized as a negligence action accruing at the time of American Family’s denial of the Krop’s claim for coverage.  “To construe the cause of action as a tort arising out of a contractual relationship defeats the purpose of section 2-2201 by rendering negligence actions against insurance producers for failure to procure requested insurance an illusory form of recovery for resulting damage that ensues.”   American Family Mut. Ins. Co. v. Krop, 2018 IL 122556 (Oct. 18, 2018).