The California Court of Appeal has ruled that, even if an insurer’s rescission of a policy was improper, the insured must still file suit within the time prescribed in the policy’s contractual limitation clause. (Akin v. Certain Underwriters at Lloyd’s of London (2006) 2006 WL 1330821)
Facts
Akin purchased a homeowners policy from Certain Underwriters at Lloyd’s of London. The policy contained a standard one-year contractual limitation clause which provided: “No action shall be brought unless there has been compliance with the policy provisions and the action is started within one year after the occurrence causing loss of damage.”
Akin made two claims to Lloyd’s for water damage. Lloyd’s denied the claims and purported to rescind her policy in March 2002.
About two years later, in March 2004, Akin filed a complaint in which she sought to recover for breach of contract and breach of the duty of good faith and fair dealing. Later, she amended her complaint to include a claim for “improper” rescission. She sought damages for nonpayment of policy benefits, personal injury, mental and emotional distress, and punitive damages.
Akin argued that, by purporting to rescind the policy, Lloyd’s had forfeited the right to rely on the policy’s provisions, including its one-year contractual limitation clause. The trial court disagreed, and ruled that Akin’s suit (filed two years after the purported rescission) was time-barred.
Holding
The Court of Appeal held that, even if Lloyd’s rescission of the policy was unjustified, the policy’s one-year contractual limitation clause barred the suit. The Court noted that because Akin sought, among other things, to obtain the benefits of the contract (i.e., payment of policy proceeds), she had elected to affirm the contract. Thus, because Akin had affirmed the contract, she was required to file suit before expiration of the one-year period specified in the policy’s limitation clause.
In addition, the Court held that Civil Code section 1692 did not provide Akin a basis for relief for Lloyd’s alleged “improper” rescission. Instead, the Court held that section 1692 merely provided Akin a basis to obtain return of any premiums that Lloyd’s might have failed to refund.
Comment
Where a claim for “improper” rescission is, in essence, a suit to recover contractual damages, the insured must sue for breach of contract before the expiration of the limitation period—whether the limitation period is based on a statute or on a policy clause. Although it appears California law does not recognize an independent claim for “improper” rescission, an unjustified rescission could provide at least some support for a claim of bad faith.