Opinion ID: 1179883
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Heading: When does a third-party bad faith claim accrue?

Text: The general rule is that a tort claim accrues when a plaintiff knows, or through the exercise of reasonable diligence should know, of the defendant's wrongful conduct. Sato v. Van Denburgh, 123 Ariz. 225, 227, 599 P.2d 181, 183 (1979). Applying this principle, and citing Henderson, the court of appeals held that the two-year statute of limitations began to run on March 30, 1981, when the jury returned the excess verdict. Taylor II, 182 Ariz. at 42-43, 893 P.2d at 42-43. Thus, it found Taylor's bad faith claim, filed in July 1985, time barred. We disagree with both the court's reading of Henderson and its ultimate conclusion. In Henderson, this court examined for the first time the extent of an insurer's obligation to settle a third-party claim within the policy's liability limit. 82 Ariz. at 337, 313 P.2d at 405. We stated that an insurer is liable to the insured for failing to terminate the underlying litigation when good faith would oblige it to settle within policy limits. Id. at 341, 313 P.2d at 408. The insurance carrier argued that the bad faith action against the insurer did not accrue until the insured paid the underlying judgment. We disagreed, stating that a better rule is that when the insured has become obligated to pay [the excess] judgment ... his cause of action accrues. Id. Borrowing this language, the court of appeals held that Taylor became legally obligated to pay when the excess judgment was entered. Taylor II, 182 Ariz. at 43, 893 P.2d at 43. In the present case, the court of appeals misapplied the Henderson language. The above quoted language responded to the insurer's assertion that the insured had no cause of action until he had in fact paid the judgment. We held only that the insurer could not require the insured to personally pay the underlying judgment to trigger his bad faith action against the insurer. Henderson, 82 Ariz. at 342, 313 P.2d at 408. We were not asked to decide, nor did we decide, whether the underlying judgment against the insured had to be final before the bad faith claim accrued. In fact, this court has never before determined when an action for bad faith failure to settle accrues in the context presented in the present case. That is not to say that bad faith accrual is a rare issue. Those jurisdictions that have addressed the issue have held that an insured's claim for its insurer's bad faith refusal to settle accrues when the excess judgment in the underlying case becomes final. [5] Neither the court of appeals nor State Farm cites any case to the contrary, and our research has produced none. Rather, State Farm attempts to exempt Arizona from what appears to be the consensus because [our] bad faith law is based upon the unique relationship between the insured and the insurance company. Taylor II, 182 Ariz. at 43 n. 2, 893 P.2d at 43 n. 2 (citing Rawlings, 151 Ariz. at 154-55, 726 P.2d at 570-71). Because Arizona bad faith law does not require breach of an express covenant in the contract, the argument goes, the injury results when the excess verdict is rendered. Under this rationale, the determinative issue is that any injury resulting from the insurer's bad faith would activate the statute of limitations. However, while it might be said that an excess verdict causes some immediate injury, such as emotional distress, the economic injury necessarily remains uncertain and speculative until final judgment on appeal either establishes that exposure or dissolves any liability. Vanderloop v. Progressive Casualty Ins. Co., 769 F. Supp. 1172, 1175 (D.Colo. 1991). The rationale expressed in Vanderloop forms the basis of the final judgment accrual rule that we now choose to follow. We believe such a rationale is equally applicable in Arizona, notwithstanding the unique relationship between the insured and insurer expressed in Rawlings. The policy underlying the final judgment rule is clear. First, it is impossible to determine if the insurer acted in bad faith, or the extent of the insured's damages, until the underlying liability is finally determined. Lexington Ins. Co. v. Royal Ins. Co., 886 F. Supp. 837, 841 (N.D.Fla. 1995). Second, because the usual essential element of the insured's third-party bad faith case  the entry of a judgment in excess of policy limits  may be reversed or modified on appeal, a different rule would result in precautionary and duplicitous litigation  a waste of both the courts' and the parties' time and resources. See Romano v. American Casualty Co., 834 F.2d 968, 970 (11th Cir.1987); Amdahl v. Stonewall Ins. Co., 484 N.W.2d 811, 813 (Minn.App. 1992); State ex rel. American Home Ins. Co. v. Seay, 355 So.2d 822, 824 (Fla.App. 1978); see also BAD FAITH LAW REPORT, Oct. 1994, at 174-75. As Rivers, amicus in this case, points out, we have used the same rationale to apply a similar accrual date in legal malpractice cases. Amfac Dist. Corp. v. Miller, 138 Ariz. 152, 673 P.2d 792 (1983). In Amfac, we considered the accrual date for a cause of action for legal malpractice that occurred during the course of civil litigation. We held that because the plaintiff's injury is uncertain until the appellate process concludes, by resolution of or failure to appeal, the malpractice action does not accrue until such time as the judgment in the underlying action becomes final. Id. Another policy issue addressed in Amfac involves the impact of the accrual date on the relationship between the lawyer and the client. We adopted the court of appeals' rationale: If we were to hold that a cause of action for legal malpractice in litigation accrues at the time of the conduct or initial judgment rather than at the time the damage has become irremedial, a client would constantly be required to second-guess his attorney and would be forced to obtain other legal opinions on the attorney's handling of the case. Nothing could be more destructive [to] the attorney-client relationship. Amfac Dist. Corp. v. Miller, 138 Ariz. 155, 157-58, 673 P.2d 795, 797-98 (App. 1983). Similarly, an accrual rule for bad faith claims that requires the insured to bring an action before the judgment becomes final would force an insured to sue his carrier while, at the same time, depend on the carrier to zealously represent him at the appeal of his third-party claim. The relationship between the parties, the nature of the claim, and judicial efficiency combine to militate in favor of a rule that the insured not be required to sue until the damages are final and irrevocable. Sound judgment and public policy convince us to follow the final judgment accrual rule. Thus, we hold that a third-party bad faith failure-to-settle claim accrues at the time the underlying action becomes final and non-appealable. Accordingly, Taylor's bad faith claim against State Farm accrued in 1984, when the excess verdict became final; thus, the 1985 bad faith action was timely filed within the applicable two-year limit.