In early July 2013, the Rhode Island Supreme Court quietly issued a decision in American States Insurance Company v. LaFlam, Supreme Court No. 2012-80-M.P. (July 2, 2013), relating to the enforceability of an insurance contract that sought to shorten the statutory limitations period for bringing a claim under the policy. Specifically, the policy at issue required that any claims by an insured for uninsured or underinsured motorist (“UM”) benefits be made within three years of the date of the motor vehicle accident giving rise to the claim. This contractual clause differed significantly from Rhode Island law, which affords a ten year limitations period for contractual claims such as an UM motorist claim. In addition, the statute of limitations for UM claims only begins to run when the insurer has breached the insurance contract; the ten-year period does not run from the date of the accident.
In the LaFlam case, the defendant, JoAnn LaFlam, was involved in a motor vehicle accident in April 2007 in which she sustained injuries. The tortfeasor driver of the other car involved in the accident had insurance policy limits of $50,000.00, an amount that Ms. LaFlam believed was inadequate to compensate her for her damages. As such, in 2008, Ms. LaFlam put American States on notice of her potential UM claim under her automobile insurance policy. She thereafter settled with the tortfeasor-driver for the policy limits of his policy, after obtaining American States’ approval of that settlement. This settlement occurred shortly before the three-year limitation period for UM claims proscribed by Ms. LaFlam’s American States’ policy ran.
After settling with the tortfeasor-driver, Ms. LaFlam made a formal claim for UM benefits in May 2010, a few weeks after the three-year period expired. American States never denied this claim. Instead, it filed an action seeking a declaratory judgment from the United States District Court for the District of Rhode Island that the insurance policy barred Ms. LaFlam from seeking UM benefits. The District Court granted American States’ motion for summary judgment, however on appeal, the First Circuit certified this issue to the Rhode Island Supreme Court for review.
In voiding the UM limitations provision in Ms. LaFlam’s policy, the Court noted that by the terms of the contract, the limitations period for an UM claim would expire three years after the motor vehicle accident giving rise to the claim, which expiration could occur before the cause of action even arises, i.e. before the UM claim has been filed or denied, as it would have done in the LaFlam case. This decision is quite significant in Rhode Island because it undermines an insurance company’s ability to limit its risk of exposure in the face of an exceptional contractual limitations period. This is compounded by the fact that in Rhode Island, pre-judgment interest begins to accrue from the moment the cause of action arises at the rate of 12% per year. Thus, in any contract claim – including UM claims – the plaintiff can file suit when interest has reached nearly 120%. These facts provide compelling reasons for an insurance company to seek a contractually reduced limitations period as American States did, and it remains to be seen whether the Court would permit an insurer to contractually limit the period in which a UM claim must be filed to 3 years from the date of the breach. This would allow insurers to “hedge their bets” and reduce both the amount of time in which a claim may be filed and the amount of pre-judgment interest that will have accrued by the time of filing, while also protecting the insured’s right to seek judicial intervention if necessary.
It is noteworthy that in Rhode Island, causes of action based on personal injury claims, including motor vehicle accidents, must be filed within three years of the date of the accident. Therefore, if an insurer sought to limit the time allowable to file a UM claim as described above to three years from the date of the breach, the insured would be afforded the same limitations period as he or she would have against the tortfeasor.
Most interestingly, the Court could have come to a less restrictive remedy in this case by concluding that while the limitations period itself could be contractually shortened, the date on which the cause of action accrues cannot be changed. This would have resulted in a three-year period in which claims may be filed, however this period would only begin once the insurance contract has been breached. However, in going so far as to void the entire clause, the Court sent a clear message that it will continue to take steps it deems necessary to “protect” the interests of insured individuals, even if doing so undermines the contractual process by depriving the contracting parties of certainty. Indeed, the LaFlamdecision could be construed as indicating that any steps taken to revise the statute of limitations in UM and other contracts must be undertaken by the Legislature and cannot be achieved through contractual provisions
There are a number of unknowns relating to the Court’s decision in LaFlam and how it may be applied moving forward. The safest application of the LaFlam ruling in future automobile insurance policies is to avoid altering the UM claim limitations period altogether. However, this fails to provide any respite from the harsh pre-judgment interest rule and the exceptionally long breach of contract limitations period in Rhode Island. This, in turn, offers a disincentive to insurance companies seeking to do business in Rhode Island. The repercussions of this result could include a smaller number of automobile insurers writing policies in this state, thereby driving up the cost of automobile insurance.
There also remain a number of questions relating to whether the Court may use this case as grounds for voiding other, non-insurance contracts that modify the applicable statute of limitations. As discussed above, the Court could have come to a less-harsh result; the fact that the Court voided the entire clause suggests that the Court will go to whatever length necessary to protect “individuals,” such as the insured in this instance. It therefore is conceivable that the Court would void clauses in contracts that shorten the limitations period, including employment contracts and lease agreements, among countless others. If the Court does indeed expand the LaFlam ruling to apply in other contract cases, it will undermine one of the benchmarks to contractual law: certainty of the contractual relationship between the parties. It also is conceivable that the Court could expand this ruling beyond the statute of limitations arena by voiding portions of contracts that the Court deems unfair to individuals. Indeed, this decision could support the notion that any contract, regardless of the subject matter and despite representing a “meeting of the minds,” can be judicially undermined if a contracting party later determines that the terms of the contract are undesirable.
Finally, it is not clear whether the Court’s ruling in LaFlam only applies to contracts between a corporation/company and an individual, rather than between two corporations/companies. Generally, corporations are deemed to be more “sophisticated” than individuals when it comes to contractual agreements. As such, one may expect the Court to uphold contractual language more readily when the contracting parties are two companies, including modifications to statutes of limitations. However, it remains to be seen how far-reaching the LaFlam decision will be.