by Christopher Graham and Joseph Kelly

Your company sells financial institution bonds and commercial crime policies. You sell standard industry forms or policies based on them. So your customers must commence legal proceedings against your company within two years of “discovery” of loss. Or your customers must sue your company within two years of a final judgment or settlement from certain legal proceedings brought to determine their liabilities for loss, claim, or damage which, if established, would constitute collectible loss under the bond or policy. You thereby shortened the limitations period for claims against your company. Or at least you have unless a statute or other controlling law prohibits you from doing so. Standard forms explicitly address contrary controlling law by automatically amending the contract to comply with that law.

Due to uncertainty about whether a South Dakota statute prohibits a bond’s standard-shortened contractual limitations period, a Federal District Court recently certified the following question to the South Dakota Supreme Court: “SCDL 53-9-6 prohibits parties from contractually limiting the statute of limitations except in the case of a ‘surety contract.’ Is the Policy a ‘surety contract?'” First Dakota National Bank v. Bancinsure, Inc., Case No. CIV 12-4061-KES (D. S.D. Dec. 31, 2013).

If the court concludes the bond isn’t a surety contract, the six-year South Dakota limitations period for breach of contract claims will apply to the insured’s suit and for all breach of contract suits against financial institution bond insurers in this state, notwithstanding a shorter limitations period in the bond. Similar issues may exist in other states. Stay tuned to this blog for the decision, especially if you do business in this state.

Tags: Financial institution bond, commercial crime policy. Notice/Proof–Legal proceedings against underwriter, contractual limitations period, surety