In my previous blog I discussed how in Arizona, if a policyholder submits a claim that is deemed late, the insurance company cannot deny the claim on that basis unless it can show actual prejudice from the delay. Now, what happens when the policyholder files a lawsuit after the statute of limitations has already expired? Is the policyholder’s lawsuit automatically barred? The short answer is no.

In Arizona, the statute of limitations applicable on a case involving a breach of a written contract is 6 years.1 However, when it comes to insurance contracts or policies, similar to many other states, Arizona permits insurance companies to contractually shorten the limitation period by which to bring suit against the insurance company.2 In most homeowners policies, the time limitation by which a lawsuit must be initiated is shortened to 1 year from the date of loss; in most business policies, the time limitation is 2 years.

The rule of "actual prejudice" that applies to a delayed notice of a claim also applies to a lawsuit that has been delayed, i.e., not filed within the time limitation period. In the seminal case of Zuckerman v. Transamerica Insurance Company,3 the Arizona Supreme Court held that while insurance policies may use provisions that shorten the statute of limitations:

[T]he insurer may be estopped from raising a defense based upon such an adhesive clause where the enforcement of the clause would work an unjust forfeiture. The key factor in the determination of this issue is the question of whether the insurer has shown prejudice by reason of the delay in filing suit.

In the insurance claim context, the usual circumstance that causes a lawsuit to be filed late is not any ignorance of the time limitation, but the claims process itself is often protracted (many policyholders will say unnecessarily so) and, quite frequently, the claim is not resolved within the one or even two year time limitation. In Arizona, as long as the insurance company has had a reasonable opportunity to investigate or evaluate the claim, it is very difficult to show that it suffered prejudice from any delay by the policyholder in bringing suit. Moreover, having personally dealt with a motion filed by an insurance company seeking to dismiss a late lawsuit, the mere fact that the insurance company has to defend a lawsuit when it otherwise would not, if the time limitation was enforced, does not constitute prejudice.

For policyholders and those who represent policyholders, if you have questions as to whether a lawsuit can still be brought even though the time to sue set forth in the policy has already passed, please consult with an insurance professional. At least in Arizona, the old adage "Better Late than Never" might apply.

1 A.R.S. 12-548.
2 A.R.S. 20-1115 (A)(3) [the time limitation shall not be limited to a period of less than one year].
3 Zuckerman v. Transamerica Ins. Co., 133 Ariz. 139, 146 (1982).