Can a Failed Insurance Mediation Trigger the Start of a Statute of Limitations?

A recent Ninth Circuit decision addresses an interesting question in the context of an insurance dispute: can a failed mediation trigger the start of a statute of limitations? See Gallahan v. Philadelphia Indem. Ins. Co., No. 18-35057, 2019 WL 2595502, at *1 (9th Cir. June 25, 2019).

On February 5, 2012, the appellant, Kimberly Gallahan, was involved in an auto accident with Dennis Knox, who was deemed at fault. Gallahan’s vehicle was owned by her employer and insured under a commercial lines policy issued by Philadelphia Indemnity Insurance Company. The policy provided underinsured motorist (“UIM”) coverage subject to the following condition — “any legal action against us under this [coverage] must be brought within one year after the date on which the cause of action accrues.” (emphasis added). Thus, we need to pay attention to the dates, and consider what triggers accrual of a cause of action to sue for insurance coverage.

On July 23, 2012, Gallahan’s then-counsel wrote Philadelphia about UIM coverage. Philadelphia responded three days later with the information requested.

On May 27, 2014, Gallahan, through a new attorney, informed Philadelphia that she had settled her claim against Knox back on July 8, 2013.

On September 29, 2014, Gallahan demanded Philadelphia pay her the full UIM policy limits (which appeared to be $1 million).

Philadelphia investigated Gallahan’s claim, and on November 10, 2015, the two parties participated in an unsuccessful mediation.

Fourteen months later, on January 3, 2017, Gallahan sued Philadelphia in state court, and Philadelphia removed the case to federal court.

Philadelphia moved for summary judgment on the ground that the one-year statute of limitations to commence suit under the UIM endorsement began to run on November 10, 2015 — the date of the failed mediation — because on that date, according to Philadelphia’s declaration, “Ms. Gallahan demanded more in UIM benefits than Philadelphia was willing to pay.” In turn, since Gallahan only commenced her lawsuit on January 3, 2017, she missed the one-year deadline.

Gallahan responded that the events of the mediation were not properly before the trial court on summary judgment because mediation communications are privileged under Washington state law, and thus there was a genuine issue of material fact regarding what occurred at the mediation. Instead, Gallahan maintained, the clock never started ticking because Philadelphia never sent her a letter denying her claim.

The trial court granted summary judgment, holding that Philadelphia had not breached mediation confidentiality since it did not disclose any mediation communications. Instead, the trial court held, it could infer on its own from the failure of the mediation that Philadelphia had refused to accede to Gallahan’s demands. Thus, there was no genuine issue of material fact that Philadelphia had breached the contract as of the date of the mediation. As the court explained:

The parties agree that a failed mediation took place between them, represented by counsel, on November 10, 2015, more than a year before this action was filed. The parties agree that this mediation was about the UIM claim at issue. This failed mediation did or should have put Ms. Gallahan on notice that Philadelphia had either denied her UIM claim, refused to honor its obligation under the policy, or offered only to pay her less than she believed she was entitled. Accordingly, Philadelphia engaged in the necessary actions for Ms. Gallahan’s cause of action to accrue.

Buttressing its conclusion, the trial court noted that Gallahan’s attorney sent an email to Philadelphia’s counsel in December 2015 (one month after the mediation), warning that Gallahan was preparing to sue, thus indicating that Gallahan was aware she had claim shortly after the mediation concluded.

The Ninth Circuit reversed on appeal. It noted that, under Washington caselaw, “the contract statute of limitations begins to run against an insured on the date the insurer breaches the contract of insurance.” In turn, under that same caselaw, a breach of an insurance contract occurs when the insurer wrongfully denies coverage (either in whole or in part). There was no caselaw, however, supporting Philadelphia’s position that a breach may occur in the absence of a definitive act by an insurer. Thus, since Philadelphia neither affirmatively denied coverage nor offered to pay Gallahan less than she was demanding, there was never any breach by Philadelphia.

The Ninth Circuit did not address Gallahan’s argument that the trial court erroneously relied on privileged mediation communications. Instead, it held that the trial court was wrong to infer from the outcome of the mediation that Philadelphia had denied Gallahan’s claim since “[m]ediations can fail for many reasons, and a failed mediation alone does not equal a breach of contract nor even the end of negotiations.” Indeed, after the mediation, Philadelphia asked Gallahan for additional medical records, which suggested that Philadelphia was still evaluating Gallahan’s claim even after the mediation concluded.

Finally, the Ninth Circuit rejected the trial court’s reliance on the December 2015 email from Gallahan’s counsel threatening to commence litigation. Notwithstanding that threat, Philadelphia never put Gallahan on notice that it was rejecting her claim, and thus there was no notice of any breach (this is an interesting conclusion since statutes of limitations typically begin to run when a plaintiff knows or should have known of the existence of a claim, and a letter threatening to sue surely evidences knowledge of a potential claim; still, at least under Washington law, the accrual of a claim for breach of an insurance contract appears to be subject to a different standard requiring affirmative action by the insurer to remove any doubt concerning its position – something Philadelphia failed to do).

A recording of the oral argument before the Ninth Circuit is available on YouTube.

Gallahan’s counsel made an interesting point at the oral argument concerning the lower court’s reliance on the outcome of the mediation to trigger the start of the limitations period. As noted, the lower court inferred from the failure of the mediation that Philadelphia had rejected Gallahan’s claim. But as Gallahan’s counsel noted, that inference was unfairly drawn since Gallahan was powerless to rebut it without disclosing further confidential mediation communications.

Overall, based on the questions it directed at counsel, the Ninth Circuit seemed troubled by the trial court’s reliance on the outcome of the mediation (especially Philadelphia’s declaration in its summary judgment papers that Gallahan had demanded more at the mediation than Philadelphia was willing to pay).

We think the Ninth Circuit got that right — any characterization by either party concerning what positions led to the failure of a mediation breaches mediation confidentiality.