Opinion ID: 1258604
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Heading: Delayed Discovery and Inception of the Loss

Text: (3) The purpose of a statute of limitations is `to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. The theory is that even if one has a just claim it is unjust not to put the adversary on notice to defend within the period of limitation and the right to be free of stale claims in time comes to prevail over the right to prosecute them.' ( Bollinger, supra, 25 Cal.2d at pp. 406-407, quoting Order of Railroad Telegraphers v. Railway Express Agency (1944) 321 U.S. 342, 348 [88 L.Ed. 788, 792, 64 S.Ct. 582].) Although the concept of a standard policy was intended to provide policyholders with a clear indication of their duties under the policy, courts have not uniformly agreed when the limitation period begins to run in cases involving property damage not discovered until years after damage actually occurs. All courts recognize, however, that determination of when the statute of limitations period commences depends on the interpretation of the phrase inception of the loss in section 2071. Some courts, strictly construing inception of the loss, define it as the occurrence of the physical event causing the loss. (See Annot., Validity of Contractual Time Period, Shorter Than Statute of Limitations, for Bringing Action (1966) 6 A.L.R.3d 1197; Annot., Property Insurance: Insured's Ignorance of Loss or Casualty, etc. (1969) 24 A.L.R.3d 1007.) As observed in Naghten v. Maryland Casualty Company (1964) 47 Ill. App.2d 74 [197 N.E.2d 489, 24 A.L.R.3d 1001]: We realize that ascertainment of a loss which has resulted from a progressive latent condition is more difficult than the immediately obvious results of a fire. We do not believe, however, that the time of discovery of the loss can be left completely to the whimsy of the insured. (197 N.E.2d at p. 490.) The Naghten court affirmed dismissal of the insured's suit because the insured had failed to bring suit within one year of the time the loss actually occurred. California courts have more leniently interpreted the provision in property loss cases not involving fire. In Zurn Engineers v. Eagle Star Ins. Co. (1976) 61 Cal. App.3d 493 [132 Cal. Rptr. 206] ( Zurn ), the court explained that a strict construction of the term inception of the loss for purposes of triggering the limitation period of section 2071 (e.g., that it is the actual occurrence of the physical event causing the loss), should not be followed in this state. The Zurn court summarized California law as follows: California does not follow the strict rule of construction of the phrase `inception of the loss.' Rather, our law requires that the policy be read as a whole so that, if the right to sue upon an insurance policy is postponed by action that must be taken by the insured as a prerequisite to suit, the limitation period does not commence to run until the insured has an opportunity to comply with the conditions precedent to litigation. (61 Cal. App.3d at p. 499.) The court found that the limitation period was tolled when the insured was unable to file a proof of loss under oath because it was asserting a claim against a third party that was inconsistent with its own first party coverage. ( Ibid. ) As the present Court of Appeal observed, the Zurn court confined its holding to the context of the policy and factual situation in that case. ( Zurn, supra, 61 Cal. App.3d at p. 495.) Indeed, Zurn involved a lengthy dispute with a third party (that had apparently contracted with the insured for the work leading to the claimed loss) about which party would pay for the damage resulting from the work. Nonetheless, we find instructive Zurn's recognition that a strict construction of the term inception of the loss may lead to an inequitable technical forfeiture of insurance coverage. ( Ibid. ) Several first party cases have acknowledged support for a delayed discovery rule that holds an insured responsible for initiating a claim based on the date on which the insured could reasonably have concluded his property suffered a loss. These cases agree that the term inception of the loss means that point in time at which appreciable damage occurs so that a reasonable insured would be on notice of a potentially insured loss. For example, in Lawrence v. Western Mutual Ins. Co. (1988) 204 Cal. App.3d 565 [251 Cal. Rptr. 319], the insured received a soils report in 1983 revealing defects in his property dating back to the creation of the lot before he purchased it in 1968. Nevertheless, the insured failed to submit a notice of loss to his insurer within one year of receiving the report. In holding his action against the insurer was time-barred under section 2071, the court found unmeritorious the insured's contention he did not discover his cause of action until he consulted his attorney in 1985 and acquired the specialized knowledge needed to determine the cause of the damage to his home. ( Lawrence, supra, 204 Cal. App.3d at p. 573.) Next, in Abari v. State Farm Fire & Casualty Co. (1988) 205 Cal. App.3d 530, 534 [252 Cal. Rptr. 565] ( Abari ), an absentee landlord sued his property insurer for coverage five years after discovering cracks in the walls, driveway, counter, and fireplace of the home he owned. The insured filed the complaint for breach of contract and bad faith two days after filing proof of loss. The insurer demurred on the ground that the action was barred by the one-year suit provision, arguing that the insured's status as an absentee landlord until 1984 should not toll accrual. ( Id. at p. 535.) The Abari court ruled in favor of the insurer. The court emphasized that in first party property loss cases, it is the occurrence of some cognizable event rather than knowledge of its legal significance that triggers the insured's notice duties under the policy. The court believed that the insured reasonably could have found the cracks so trivial that he would not have been alerted to the gravity of the damage. ( Abari, supra, 205 Cal. App.3d at p. 535.) Nonetheless, the insured's complaint lacked any allegation showing his delayed notice was reasonable; instead the insured merely pled he discovered the cracks in 1979; the cracks worsened over time; and upon reentering the property in 1984, he observed further damage. ( Ibid. ) The court upheld the demurrer after rejecting the insured's argument that the one-year suit provision did not apply because the action sought recovery for bad faith. The court explained that because the insured alleged he was damaged in an amount equal to the benefits payable under the policy, his bad faith and unfair practices claims are an apparent attempt to recover on the policy, notwithstanding his failure to commence suit within one year of accrual. (205 Cal. App.3d at p. 536.) [4] (4) We agree that inception of the loss should be determined by reference to reasonable discovery of the loss and not necessarily turn on the occurrence of the physical event causing the loss. Accordingly, we find that California law supports the application of the following delayed discovery rule for purposes of the accrual of a cause of action under section 2071: The insured's suit on the policy will be deemed timely if it is filed within one year after inception of the loss, defined as that point in time when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered. To take advantage of the benefits of a delayed discovery rule, however, the insured is required to be diligent in the face of discovered facts. The more substantial or unusual the nature of the damage discovered by the insured (e.g., the greater its deviation from what a reasonable person would consider normal wear and tear), the greater the insured's duty to notify his insurer of the loss promptly and diligently. (See, e.g., April Enterprises, Inc. v. KTTV, supra, 147 Cal. App.3d 805, 833 [generally question of fact whether reasonable diligence has been exercised in discovering claim].) (5) Determining when appreciable damage occurs such that a reasonable insured would be on notice of a potentially insured loss is a factual matter for the trier of fact. The insured's unreasonableness in delaying notification of the loss until a particular point in time may be raised as a separate affirmative defense by an insurer in response to a complaint by the insured for recovery of benefits under the policy. The insurer has the burden of proving those allegations by a preponderance of the evidence. (See, e.g., Olson v. Standard Marine Ins. Co. (1952) 109 Cal. App.2d 130, 137 [240 P.2d 379].) In this case, plaintiffs' policy required notice of loss to be given without unnecessary delay, and proof of loss to be filed within 60 days of the loss. A factual question remains as to the properly calculated accrual date under the delayed discovery principles announced above. Plaintiffs therefore should be allowed to amend their complaint to allege facts showing their discovery of the loss was reasonable.