Opinion ID: 2633561
Heading Depth: 3
Heading Rank: 2

Heading: A Cause of Action for Breach of the Duty To Defend Accrues when the Insurance Company Denies a Defense, but Is Equitably Tolled Until Entry of Final Judgment.

Text: Continental's obligation to defend its insureds against a third-party claim is contractual. [7] Generally, a cause of action for breach of contract accrues, and the statute of limitations begins to run, at `the time of the breach of the agreement, rather than the time that actual damages are sustained as a consequence of the breach.' [8] A cause of action for denial of coverage under an insurance policy accrues when coverage is disclaimed [9] and the insured is notified. [10] Continental argued below that, per this precedent, the statute of limitations for the claim of breach of the duty to defend began to run on August 13, 1997  when Continental notified Pfleiger that it would not defend him in JROC Fashion Island. The superior court stated that the cases that defendant cites on this issue appear dispositive and held that the statute of limitations on the breach of the duty to defend claim began running on August 13, 1997. The superior court also stated: Where, as here, there is no contractual duty to indemnify, but at most only a duty to defend, the statute of limitations should begin to accrue at the time the defendant first refused to defend Pfleiger. [11] When an action for breach of the duty to defend accrues is an issue of first impression for this court. The Brannons argue that we should hold that the duty to defend does not accrue until the underlying litigation is resolved  here, on August 28, 2003, when Pfleiger's confession of judgment was entered. A majority of the courts examining this issue have determined that a cause of action for breach of the duty to defend accrues with the termination of the underlying litigation which the insurer refused to defend. [12] Although insurance companies normally argue that breach of the duty to defend should be treated like any other breach of contract, [13] numerous courts have reasoned that the duty to defend cause of action is distinguishable from other breach of contract causes of action because the duty to defend is ongoing. [14] For example, the United States Court of Appeals for the Ninth Circuit has stated: The insurer's duty to defend is a continuing duty that may be assumed at any time before final judgment. The insured may therefore elect to wait until a final judgment is entered before filing [its] action against the insurer. [15] The California Supreme Court has taken a slightly different approach. In Lambert v. Commonwealth Land Title Insurance Co., it held that the cause of action for refusal to defend accrues upon discovery of loss or harm, i.e., when the insurer refuses to defend. [16] But the court noted a problem with this accrual date: [T]he underlying litigation may take over two years . . . and would allow expiration of the statute of limitations on a lawsuit to vindicate the duty to defend even before the duty itself expires. This grim result is untenable. [17] It therefore held that [a]lthough the statutory period [for breach of the duty to defend] commences upon the refusal to defend, it is equitably tolled until the underlying action is terminated by final judgment. [18] We adopt the Lambert rule. It achieves the same result as the majority rule but is more consistent with our existing contract case law. We have repeatedly observed that a cause of action for breach of contract usually accrues when the agreement is breached. [19] An insurance company therefore breaches the duty to defend when it refuses to defend the insured and the insured is notified of the refusal. The Lambert rule is also more closely aligned with general Alaska statute of limitations principles than the majority rule. One justification for the majority rule is that the extent of the injury is unknown until the entry of final judgment. [20] But in Alaska it is irrelevant if the full scope of the injury is known; [21] the cause of action accrues when the breach occurs. [22] The doctrine of equitable tolling is also well-rooted in Alaska law. [23] Three conditions must be met before a statute of limitations may be equitably tolled: (1) pursuit of the initial remedy gives defendant notice of plaintiff's claim, (2) defendant's ability to gather evidence is not prejudiced by the delay, and (3) plaintiff acted reasonably and in good faith. [24] An insurance company has notice of a potential duty to defend when the insured tenders the defense. [25] Once the defense is tendered, the insurance company has the ability and motivation to gather evidence; any prejudice that thereafter results likely arises from the insurance company's refusal to defend and should not be held against the insured. Whether an insured has acted reasonably and in good faith is a question of fact for the superior court to determine on a case-by-case basis. The California approach also aligns more closely with Alaska law in that it allows (but does not force) an insured to file suit for breach immediately after the insurance company denies the defense. [26] The majority rule implies that the insured should wait until final judgment is entered. [27] If the cause of action does not accrue until entry of final judgment in the underlying litigation, [28] an insured who files an action before entry of final judgment would be doing so prematurely. In Alaska a party can, during the pendency of the underlying litigation, seek a declaratory judgment on whether the insurance policy requires the insurer to defend the insured in the underlying litigation. [29] But tolling the statute of limitations during the pendency of the underlying litigation avoids requiring the insured to participate in two lawsuits at once. After the insurance company has denied the insured a defense, it would be potentially unfair to require the insured to file a lawsuit against the insurance company while simultaneously defending himself in the underlying lawsuit. [30] The Brannons correctly point out that the holding in Lambert is similar to the way we handle the statute of limitations in some legal malpractice cases. In Shaw v. State we held that the statute of limitations for legal malpractice claims arising out of a criminal case should be tolled during the pendency of a claim for post-conviction relief. [31] We determined that tolling the statute of limitations would promote judicial economy, lead to certainty of damages, and assist courts by establishing a bright-line rule. [32] Our holding here addresses these same issues. It establishes a bright-line rule by tolling the statute of limitations until final judgment in the underlying litigation. Waiting until after entry of final judgment to file against the insurer ensures that the full extent of the insured's damages is known, promoting judicial economy and reducing speculation. We therefore hold that although a cause of action for breach of the duty to defend accrues when the insured is notified of the insurance company's refusal to defend, the statute of limitations is equitably tolled until entry of final judgment in the underlying lawsuit.