Commercial Union Ins. Co. v. Lewis and Roca

Decision Date21 February 1995
Docket NumberCA-CV,No. 1,1
Citation183 Ariz. 250,902 P.2d 1354
PartiesCOMMERCIAL UNION INSURANCE COMPANY, a foreign corporation, Plaintiff-Appellant, v. LEWIS AND ROCA, an Arizona general partnership, Defendant-Appellee. 93-0227.
CourtArizona Court of Appeals
OPINION

TOCI, Judge.

In this appeal we must decide, for purposes of commencement of the statute of limitations, when a cause of action accrues for an attorney's negligent advice.

In 1982, the Lewis and Roca law firm provided its client, Commercial Union Insurance Company ("Commercial Union"), with a legal opinion. The opinion concluded that, because of a policy exclusion, Commercial Union's insured, Maxon Construction Company ("Maxon"), was not entitled to liability coverage for a lawsuit against Maxon for negligent construction of certain townhouses. In reaching this conclusion, however, Lewis and Roca overlooked an Arizona Supreme Court decision (the "Federal Insurance" decision) holding a similar policy exclusion unenforceable. 1

After Commercial Union denied coverage and later refused a settlement demand for the policy limits, judgment was taken against Maxon. In 1987, after Maxon's bankruptcy trustee sued Commercial Union for breach of contract and bad faith refusal to settle (the "coverage case"), Commercial Union learned of Lewis and Roca's negligence. In 1991, when Commercial Union settled the coverage case, it sued Lewis and Roca for legal malpractice. 2 The trial court dismissed the suit, ruling that it was barred by the statute of limitations.

This appeal raises the following issues: (1) what sort of harm or damage must a plaintiff sustain before a cause of action accrues for legal malpractice; and (2) before a cause of action accrues, must the plaintiff know or have reason to believe that the harm or damage was caused by the attorney's negligence? The answer depends on the scope of the discovery rule.

In resolving these issues, we hold that a cause of action for legal malpractice accrues when the client both: (1) has sustained appreciable, non-speculative harm or damage as a result of such malpractice and (2) knows, or in the exercise of reasonable diligence should know, that the harm or damage was a direct result of the attorney's negligence. Thus, we hold that the discovery rule applies not only to the discovery of negligence, but also to discovery of causation and damage.

Here, Commercial Union knew of Lewis and Roca's negligence when Commercial Union's counsel in the coverage case discovered that Lewis and Roca had overlooked the Federal Insurance decision. Nevertheless, Commercial Union's counsel thought Federal Insurance could be distinguished. Although Commercial Union sustained appreciable damage when it incurred costs for attorneys' fees in the coverage suit, until the trial court relied on Federal Insurance to deny Commercial Union's motion for summary judgment, Commercial Union had no reason to know that such defense costs were the direct result of Lewis and Roca's negligence. Thus, because the trial court's denial of summary judgment in the coverage case occurred less than two years before Commercial Union's tolling agreement with Lewis and Roca, Commercial Union's malpractice claim was timely.

I. FACTS AND PROCEDURAL HISTORY

This case was decided on a motion for summary judgment with the following stipulated statement of facts. Because the facts are not disputed, our function simply is to determine whether, as a matter of law, the defendant was entitled to summary judgment dismissing the complaint as barred by the statute of limitations. 3 See Ariz.R.Civ.P. 56(c).

Commercial Union provided liability insurance coverage to Maxon. In April of 1982, Maxon was sued by Delores A. Pruitt and others ("Pruitt") for negligence and breach of contract in the construction of certain townhouses in Pima County. Maxon's attorney tendered the defense of the suit to Commercial Union.

In July 1982, a Lewis and Roca attorney rendered an opinion to Commercial Union that certain policy exclusions precluded coverage for Pruitt's suit against Maxon. Unknown to Commercial Union, in rendering the opinion the attorney negligently overlooked Federal Insurance, which held an identical policy exclusion invalid because of ambiguity. After receiving the attorney's advice, Commercial Union notified Maxon's attorney that Commercial Union was denying coverage.

In February 1984, Maxon's attorney wrote to Commercial Union, advising it that Maxon's case was in trial and that Pruitt had offered to settle for the policy limits of $100,000. The case, however, did not settle, and on March 22, 1984, judgment was entered in favor of Pruitt on a jury verdict of $880,700 against Maxon. Not long after, Pruitt filed an involuntary petition in bankruptcy against Maxon.

On March 21, 1986, Maxon's bankruptcy trustee filed the coverage case against Commercial Union. The trustee asserted claims for breach of contract and bad faith based on Commercial Union's failure to settle Pruitt's claim within the policy limits. While the coverage case was in litigation, the attorney representing Commercial Union advised Commercial Union, by letter dated August 31, 1987, that the Lewis and Roca attorney had overlooked Federal Insurance. The attorney stated in the letter, however, that he thought Federal Insurance could be distinguished from the coverage case because of additional provisions in Commercial Union's policy not discussed in Federal Insurance.

In early October 1987, Commercial Union filed a motion for summary judgment in the coverage case, seeking a determination that its policy provided no liability coverage to Maxon for Pruitt's claim against Maxon. Maxon's trustee filed a cross-motion for summary judgment in which he argued that Federal Insurance was dispositive. Commercial Union attempted to distinguish Federal Insurance and further argued that it was not applicable. Commercial Union did not succeed. By minute entry dated December 23, 1987, the court in the coverage case denied Commercial Union's motion for summary judgment.

In its minute entry, the court explained that it relied in part on Federal Insurance and concluded that Commercial Union's policy provided coverage for property damage resulting from a breach of warranty of workmanlike performance. The court found, however, that there was no coverage for the other theories advanced by Pruitt in her suit against Maxon. The court also denied Maxon's trustee's cross-motion for summary judgment on the ground that there were material questions of fact that precluded a determination that Commercial Union was guilty of bad faith as a matter of law.

On December 21, 1989, less than two years after the date of the minute entry, Commercial Union and Lewis and Roca executed an agreement tolling the statute of limitations (the "standstill" agreement). In the standstill agreement, they agreed that the statute of limitations, to the extent it had not already run, would cease to run on that date. On the date Commercial Union and Lewis and Roca executed the standstill agreement, the coverage case was still pending against Commercial Union in the Pima County Superior Court. It was settled in February of 1990 for $500,000.

II. DISCUSSION
A. Introduction
1. Accrual Does Not Occur Until Client Knows or Should Know That He Has Been Injured By Attorney's Negligent Conduct

The statute of limitations for attorney negligence begins to run when a cause of action accrues. A.R.S. § 12-542. The determination of when a cause of action accrues on a claim for legal malpractice is governed by the discovery rule. Traditionally stated, this rule provides that a claim for attorney negligence cannot accrue until the client knows or should know of his attorney's negligent conduct. See Lawhon v. L.B.J. Inst'l Supply, Inc., 159 Ariz. 179, 181, 765 P.2d 1003, 1005 (App.1988); Arizona Management Corp. v. Kallof, 142 Ariz. 64, 66, 688 P.2d 710, 712 (App.1984); Amfac Distrib. Corp. v. Miller, 138 Ariz. 155, 156, 673 P.2d 795, 796 (App.) (Amfac I ), approved as supplemented, 138 Ariz. 152, 673 P.2d 792 (1983) (Amfac II ).

Seldom noted, however, is an implicit requirement of the discovery rule--that the client also sustain "actual and appreciable" harm as a result of such negligence. Kallof, 142 Ariz. at 68, 688 P.2d at 714. Harm is actual and appreciable when it becomes irremedial, see Amfac I, 138 Ariz. at 156, 673 P.2d at 796, or, as described in Amfac II, "irrevocable." see 138 Ariz. at 154, 673 P.2d at 794. If the element of injury or damage is speculative or remote, the cause of action for professional malpractice is premature. Amfac I, 138 Ariz. at 156, 673 P.2d at 796.

Accordingly, the limitations period does not commence until actionable negligence exists, that is, negligence that results in appreciable, non-speculative harm to the client. William L. Prosser, Handbook of the Law of Torts § 30, at 143 (4th ed. 1971), states, "Nominal damages, to vindicate a technical right, cannot be recovered in a negligence action, where no actual loss has occurred. The threat of future harm, not yet realized, is not enough." (Footnotes omitted.) Consequently, negligence that results in no immediate harm or damage delays accrual of the cause of action until such damage is sustained. Tullar v. Walter L. Henderson, P.C., 168 Ariz. 577, 579, 816 P.2d 234, 236 (App.1991).

Furthermore, a cause of action does not accrue until a "plaintiff discovers or by the exercise of reasonable diligence should have discovered that he or she has been injured by [the] defendant's negligent conduct." Lawhon, 159 Ariz. at 183, 765 P.2d at 1007. Thus, unless the client knows, or in the exercise of...

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