Louisiana’s Supreme Court Speaks:  Prescription and First Party Bad Faith Insurance Claims


How long do you have to bring a bad faith claim against your insurance company?  Is it the one-year period applicable to tort claims or the 10-year period applicable to claims that sound in contract?   For some time, Louisiana courts have grappled with the issue and, in some cases, have reached conflicting decisions.  

Last week Louisiana’s highest court put an end to the uncertainty  and determined that first-party bad faith claims against an insurer are governed by a ten-year prescriptive period.

 This article will take you through the facts and reasoning of the Court in Smith v. Citadel Insurance Company As Successor to Gramercy Insurance Company and GoAuto Insurance Company. 

 The case stemmed from a bad faith claim based on GoAuto’s alleged violation of its duties under Louisiana’s good faith and fair dealings duty statute. GoAuto filed an exception of prescription and argued that the prescriptive period for a bad faith claim against an insurer is a delictual action and is subject to a one-year prescriptive period. A “delictual action” is a tort action or an action seeking damages for injury caused by the act of another. The Plaintiff, conversely, opposed the exception by arguing a bad faith claim against an insurer is a contractual action and subject to a ten-year prescriptive period.

 The district court agreed with the Plaintiff’s argument finding that “the nature of the duty of the insurer to its insured… is a contractual duty… and, therefore, the claim for breach of contractual duties the insurer owes to an insured under … is subject to the ten-year prescriptive period.”

The Supreme Court cited to cases that illustrate the insurer’s duty owed to its insured of good faith and fairly handling claims. The Court also relied on its prior reasoning by recognizing the jurisprudentially established duty of good faith and fair dealings owed to an insured as an offspring of the contractual and fiduciary relationship between the insured and insurer. The Court also acknowledged that the duty of good faith and fair dealings originates from the contract between the parties, and, therefore, if there is no contractual obligation, the duty of good faith does not exist. The Court then held that the insured’s cause of action is personal and subject to a ten-year prescription period due to its finding that the insurer’s bad faith is a breach of its contractual obligation and its fiduciary duty.

 In support of this holding, the Court points out that its decision is in line with a recent historical review of the majority of the Louisiana Circuit Courts’ consideration of the proper prescriptive period for actions under the insurance penalty statutes. The Court recognized that there is a split between Louisiana federal courts on the issue, but still endorsed the “body of jurisprudence addressing this issue [which] favors application of a ten-year prescriptive period to first-party bad faith claims.”