The California Court of Appeal has held that the statute of limitations on an insured’s suit for breach of the duty to defend is equitably tolled until the underlying action is resolved by final judgment. ( Eaton Hydraulics, Inc. v. Continental Casualty Company (2005) 132 Cal.App.4th 966)
Facts
Eaton Hydraulics purchased an umbrella liability policy from Continental Casualty. Various third parties, including the EPA and the State of California, pursued administrative proceedings and litigation against Eaton for alleged soil and groundwater contamination. Eaton filed two insurance coverage actions.
First, in April 1996, Eaton sued its primary-level liability insurers seeking defense and reimbursement of costs related to the EPA’s administrative proceedings. Eaton did not specifically name Continental Casualty as a defendant, although Eaton identified various “Doe” defendants in that suit as “Excess Insurers” that had a duty to defend and indemnify Eaton.
Second, in September 2001, Eaton sued the same primary-level insurers, as well as Continental Casualty, for damages arising from breach of the duty to defend and indemnify Eaton in the EPA administrative proceedings and in a related lawsuit the EPA and State of California filed. In a demurrer, Continental Casualty argued that Eaton’s claims accrued in April 1996 when Eaton filed the first lawsuit, and that Eaton’s second lawsuit filed in September 2001 was barred by the four-year statute of limitations for breach of written contract.
Holding
The Court of Appeal held that an insured’s cause of action for breach of the duty to defend accrues when its liability insurer denies a defense, not when the insured files a lawsuit. Eaton did not allege, in either of its lawsuits, the date on which Continental Casualty denied a defense. Even assuming that Eaton’s claim had accrued by April 1996, an insurer has a continuing duty to defend. Thus, the doctrine of equitable tolling suspended the running of the statute of limitations on Eaton’s duty to defend claim until the underlying actions were resolved by final judgment.
Comment
This case diminishes the effectiveness of a liability insurer’s statute of limitations defense in duty to defend cases by virtue of the equitable tolling doctrine. This case also reiterates the principle that, on demurrer, a statute of limitations defense will prevail only if all the necessary elements for that defense are clearly alleged in the complaint.