Judgment of the Supreme Court from 17 March 2016
The initial date for the calculation of the two year statute of limitations stipulated in section 23 of the Insurance Contract Act for cases where there is a judicial claim.
The Supreme Court interprets that the statute of limitations applicable to civil liability insurance does not begin to count until the date on which the judgment against the insured becomes final. This means that insurers can continue to receive claims from the insureds to indemnify third parties following the expiry of the policy, provided that the claim is notified to the insurer within the limitation period of two years, counting from the date on which the judgment becomes final.
A Company was found liable in first instance for injuries suffered by an employee in an accident at work. The company appealed to second instance. The second instance court upheld the company’s liability with the judgment being notified to the company on the 16 March 2007.
The Company lodged an appeal against the second instance judgment. Nevertheless, the Supreme Court denied leave to appeal with the consequence that the judgment became final on the 5 May 2009.
The Company notified their insurer of the content of the first instance judgment dated 22 March 2007 but did not provide further information until 8 February 2010, almost three years after the initial notification. The company issued proceedings against the insurer requesting that the insurer paid the corresponding indemnity arising from the accident at work and established in the final judgment.
The insurer argued that the two year statute of limitations was applicable, with the claim thus being time barred. This exception was upheld in first and second instance and appealed to the Supreme Court.
The judgment analyses sections 23 and 73 of the Insurance Contract Act, in relation with sections 1961 and 1969 of the Civil Code, in order to determine the date on which the applicable statute of limitations of two years applicable for insurance contracts begins to count.
The Supreme Court analyses whether, as established by the judgment being appealed, the starting point for the statute of limitations should be the date on which the insured received the lawsuit or whether it should commence on the date in which the judgment ordering an indemnity to a third party becomes a final judgment.
Legal reasoning of the Supreme Court
The Supreme Court determines and declares as judicial doctrine that the statute of limitations of two years to exercise actions arising from an insurance contract commences from the moment that a judgment that condemns an insured to indemnify a third party becomes a final judgment. It is stated that it is from that moment that the action against the insurer can be effectively exercised as there is plain knowledge of the obligation to indemnify.
It is considered, in line with section 1969 of the Civil Code, that it is from that moment when the action can be exercised given that the insured has all of the necessary factual and legal elements to be able to litigate, i.e. the obligation to indemnify has been determined judicially together with the quantum that must be satisfied.
As the Supreme Court rejected that the claim was time barred, the proceedings were returned to second instance so that, on the understanding that the claim was made within the applicable statute of limitations, the court can rule on the other substantive questions raised in the proceedings.
The Supreme Court, despite ruling out the statute of limitations, emphasises the need to differentiate between (i) exercising a legal action with its origins in an insurance contract within the necessary time limits and (ii) the insured fulfilling legal and contractual obligations towards the insurer. Therefore, without prejudice to the fact that the action was exercised in time, the substantive questions still need to be resolved to determine whether or not the insured’s claim will be upheld or not.
It is also important to highlight that this judgment exclusively refers to cases in which judicial proceedings have existed against the insured which gives rise to a doubt related to cases which involve extrajudicial claims:
- When does the statute of limitations of two years commence for the insured to claim coverage?
- Is it from the date on which the insured could claim coverage?
- Could it be understood that it is the time when the insured receives the first claim that their action can be exercised?
What appears clear is that this judgment gives rise to legal uncertainty for insurers in the management of claims as nothing impedes the possibility that claims notifications could be received after the policy period has expired and even after the two year statute of limitations specified in section 23 of the Insurance Contract Act which does not begin to run until the judgment condemning the insured becomes final.