This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 18, #22, p. 31 (March 22, 2005). © Copyright Butler 2005.
Imagine your insured is at fault in an accident that kills her and causes devastating injury to another individual. You (the insurer) fail to meet a settlement demand within policy limits. Liability is clear and excess exposure is inevitable. The claimant files a civil lawsuit naming the “estate” of the insured as the defendant. However, the estate of the insured is not set up yet. Having no entity to actually serve with the complaint, the claimant petitions the probate court for administration of the decedent’s estate, has a personal representative appointed, and immediately serves legal process on that representative. A multi-million dollar excess judgment is obtained in the civil action.
So the insurer is going to get hit hard, right? Perhaps, . . . perhaps not.
Does your state’s probate code require that a “claim” against the decedent be filed in the probate court within a specified period of time after the decedent’s death? If the claimant fails to timely file a claim against the decedent’s estate in the probate court, the claimant may not be able to use that excess judgment in a bad faith action against the decedent’s insurer.
Most states have jurisdictional statutes of “nonclaim” which generally require that all claims be brought against a decedent within a specified time following the decedent’s death. This leaves the responsibility to a claimant to be mindful of the nonclaim deadline, to set up an estate (if one is not already created), and to timely file a notice of claim. Nonclaim statutes frequently define what is meant by a “claim” and usually require that a technical “Statement of Claim” be filed in the decedent’s estate. However, a “Statement of Claim” generally cannot be filed when the decedent’s estate has not been set up in the probate court. If a decedent’s estate is not established and/or the claim not filed within the prescribed period, then the claimant may be barred from any recovery against the decedent.
A common exception in nonclaim statutes allows an untimely claim to be brought, but only to the extent of insurance limits. A claimant who brings an action against a decedent’s estate solely to obtain an excess judgment as a prerequisite to sue its insurer for bad faith may be in for a rude awakening. If the claimant failed to timely present a claim in the probate proceeding, the insurer may
A claimant may try desperately to resuscitate an untimely probate claim to pursue an excess judgment and proceed with a bad faith action.
|The Court May Not Extend The Time For Filing A Claim If The Nonclaim Statute Is Jurisdictional
In the absence of any statutory authorization, a court may not extend the time for filing a claim fixed by the nonclaim statute. A probate nonclaim statute generally sets an absolute jurisdictional deadline beyond which no claim against an estate may be entertained. Failure to strictly comply may preclude a claim altogether. The public policy behind the jurisdictional nonclaim statutes is to provide finality and speedy resolution to the administration of an estate. A probate court generally has no jurisdiction to enlarge the time period under a nonclaim statute as it would “frustrate the obvious purpose underlying [the statute] to provide an absolute bar date on the estate’s liability. . . .” The time periods set forth in probate nonclaim statutes are generally not subject to waiver or equitable tolling. While some states will allow equitable tolling or waiver for fraud or other misconduct, other nonclaim statutes do not permit the time for filing a claim to be extended for any reason whatsoever.
|Filing A Civil Lawsuit Within The Probate Nonclaim Time Period May Not Suffice As A “Claim” In The Probate Court
Your state’s probate code may specifically define a “claim” and detail the procedure for filing one. Technical compliance may be strictly required. Filing a lawsuit outside of the probate action is not the equivalent of a “claim” under the nonclaim statute. Even a personal representative’s knowledge of a claim against the estate is not a probate “claim.”
|If The Excess Judgment Is Not Binding On The Estate Of The Insured, Then It Is Not Binding On The Decedent’s Insurer
Uncollectible judgments are commonly used to reach an insurer in a third-party bad faith scenario. An early view in the law of insurer bad faith provided that the insured is not damaged unless he or she had the ability to pay an excess judgment. If the insured could not pay the excess amount, then no actionable bad faith could exist. This “payment rule,” as it became known, has been abandoned in most states. The more prevalent “judgment rule” allows the claimant to proceed with a bad faith action against an insurer as soon as an excess judgment is entered against its insured. The insured’s insolvency is no defense because the judgment is binding, albeit uncollectible.
This “judgment rule” is intended to prevent the bad faith practice of an insurer refusing to settle simply because of an insured’s insolvency. Many courts find that the entry of an excess judgment itself is damage enough to the insured, whether collectible or not, to reach an insurer for bad faith exposure. Therefore, a majority of jurisdictions have held that an excess judgment against a decedent’s estate, collectible or not, may be used as the vehicle upon which a claimant may bring a bad faith action against an insurer.
However, jurisdictional time lines set forth in the probate codes typically insulate a decedent’s estate from liability in excess of casualty insurance limits. The estate is not liable because a binding excess judgment cannot be entered. This is different from a binding – albeit uncollectible – judgment being entered. No bad faith cause of action against an insurer for failure to settle within policy limits accrues where the excess judgment is not binding on (as opposed to uncollectible from) the estate.
|The Nonclaim Statutes Are Generally Not Subject To Waiver By The Estate
A personal representative cannot waive the requirement for timely presentation of claims. A nonclaim statute, unlike a statute of limitations, is not subject to equitable tolling. The failure of a personal representative to object in a probate proceeding to a creditor’s notice of claim does not waive the statute’s timeliness requirements for a notice of claim. Depending on the wording of the probate code in your jurisdiction, this may not apply to claims brought against an estate to recover up to the decedent’s liability insurance coverage limits. Therefore, an untimely claim against a decedent’s estate may be permitted to proceed, but only to recover up to the limits of defendant’s liability coverage. Either way, both the estate and the insurer will not be liable in excess of policy limits.
Most states have a jurisdictional statute of “nonclaim” which requires that all claims be brought against a decedent within a specified time period. When a claim not filed within the prescribed nonclaim period, then the claimant may be barred from recovery in excess of casualty insurance limits against the decedent’s estate. The estate is thus insulated from any judgment that exceeds policy limits. Indeed, when a claimant’s estate is insulated from excess exposure, an insurer may also avert excess exposure.
The “nonclaim” statutes usually start the time period for bringing a claim from the date of the decedent’s death. It is the responsibility of the claimant to establish an estate and file a claim within nonclaim deadline. If no estate is set up and/or no claim is brought against the decedent before the nonclaim time period expires, then the claimant may be barred from any claim beyond casualty insurance limits.
In the defense of an insured decedent faced with a liability claim which may exceed policy limits, an insurer (and the insured’s defense counsel) should be mindful of the following:
|Look not only for statutes of limitations, but also for statutes of nonclaim. A jurisdictional time limit in the probate code for bringing a claim against a decedent and the failure of a claimant to follow the statutory procedural requirements may insulate the estate and the insurer from any liability in excess exposure.
|Determine whether a probate proceeding for the insured has been timely commenced by an interested party. It is NOT the insurer’s responsibility, since doing so would expose the estate to potential claims, which is clearly not in the best interest of the insured. The responsibility for setting up an estate in which to present a claim is the responsibility of the claimant.
|Determine whether a timely Statement of Claim has been presented in the probate proceeding. If not, then consider petitioning the probate court to have all claims limited to policy limits.
|If the nonclaim time period for bringing a claim against a decedent’s estate has lapsed, but a liability action is nevertheless initiated, then consider asserting the probate nonclaim defense not only in the probate proceeding, but also in the liability matter to prevent the entry of an excess judgment.
Do not be deterred from aggressively defending against excess exposure, even if the claimant presents arguments in an attempt to circumvent his or her failure to comply with the probate statutes. Remember, statutes of nonclaim are more stringent than statutes of limitations. Their requirements are often set in stone. The probate statute of nonclaim is based on an important public policy interest – to ensure the speedy administration of probate estates. The courts vigorously defend this principle of public policy.