A federal judge has ruled that a four-year statute of limitations period doesn’t begin to run until a plaintiff with a common law bad-faith claim against an insurer has been exposed to damages.

In Katzenmoyer v. Allstate, U.S. District Judge Norma Shapiro of the Eastern District of Pennsylvania had to predict how Pennsylvania law would address the impact of limitations periods in common law bad-faith cases.

Shapiro had been asked to decide cross motions for summary judgment in a decade-long case that began with an ATV accident, which injured a rider near the driver’s property. Five years after the property owner’s home insurance company declined to settle with the injured rider for the $100,000 limit of the policy, a jury rendered a $1.5 million verdict against the property owner, Donald Drumheller, in a personal injury case brought by the rider, Ginger Katzenmoyer.

After Drumheller assigned all the claims that he had against Allstate Insurance Co., the insurer, to Katzenmoyer, she brought a common law bad-faith claim against Allstate for its refusal to settle with her in 2004.

Allstate argued that the four-year statute of limitations began to run on that date. Katzenmoyer argued that didn’t start until the jury returned its verdict in the personal injury case in 2009.

“Neither side can cite to on-point, binding precedent,” Shapiro said.

“Although Pennsylvania law is unclear on this issue, it seems unlikely the Pennsylvania Supreme Court would adopt a rule requiring plaintiffs to file bad-faith suits within four years of a failure to settle without an explicit, unambiguous denial of coverage,” Shapiro said in her 14-page opinion.

Because Allstate had initially contested its responsibility to cover Drumheller and was still awaiting an answer from the court regarding its status in 2004 and because Drumheller hadn’t yet suffered any damages at that point — since the jury didn’t render the decision that exposed him to the excess verdict until 2009 — the limitations period wouldn’t begin until 2009, Shapiro said.

“The limitations period should begin when the jury rendered its verdict against Drumheller, not when Allstate denied the settlement offer. When Allstate denied the settlement offer, it was unclear whether Allstate had any duty at all. Drumheller could not have maintained a suit against Allstate for bad faith in July 2004 because he had not yet suffered damages,” Shapiro said.

Although she sided with Katzenmoyer’s argument on the statute of limitations, Shapiro granted Allstate’s motion for summary judgment on the substance of the common law bad-faith claim.

“While it is the insurer’s right under the policy to make the decision as to whether a claim against the insured should be litigated or settled, it is not a right of the insurer to hazard the insured’s financial well-being,” Shapiro quoted from the Pennsylvania Supreme Court’s 1957 opinion in Cowden v. Aetna Casualty and Surety Co. “Good faith requires that the chance of a finding of nonliability be real and substantial and that the decision to litigate be made honestly.”

Katzenmoyer did not give clear and convincing evidence that Allstate acted in bad faith, Shapiro said. She noted that the company had at least six reasons to deny the 2004 settlement offer, including a previous order in its favor, pending litigation that would bear on the case, and advice from counsel to defer.

“To accept the settlement offer in July 2004, Allstate would have had to assume the court of appeals would overturn a favorable district court decision in light of an intervening state court decision,” Shapiro said, ruling that the company didn’t act in bad faith.

Richard Ochroch of Richard Ochroch & Associates in Philadelphia represented Katzenmoyer and said that she is planning to appeal.

Marshall Walthew of Pepper Hamilton in Philadelphia represented Allstate and couldn’t be reached for comment.

Scott Cooper of SchmidtKramer in Harrisburg, who worked on the underlying case, said Shapiro’s opinion is significant because it makes clear that the plaintiffs have to be exposed to an excess verdict before they may file a common law bad-faith claim.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 14-page opinion in Katzenmoyer v. Allstate, PICS No. 12-1667, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •