Paul Holt Drilling, Inc. v. Liberty Mut. Ins. Co., 80-1390

• Citation: 664 F.2d 252
• Decision Date: 16 November 1981
• Docket Number: No. 80-1390,80-1390
• Parties: PAUL HOLT DRILLING, INC., and Paul Holt, an individual, Plaintiffs-Appellants, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 252

664 F.2d 252

PAUL HOLT DRILLING, INC., and Paul Holt, an individual, Plaintiffs-Appellants, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Appellee.

No. 80-1390.

United States Court of Appeals, Tenth Circuit.

Argued and Decided Oct. 2, 1981.

Decided Nov. 16, 1981.

Burton J. Johnson of Looney, Nichols, Johnson & Hayes, Oklahoma City, Okl., for plaintiffs-appellants.

David D. Wilson of Baker, Baker & Wilson, Oklahoma City, Okl., for defendant-appellee.

Before BARRETT and LOGAN, Circuit Judges, and KUNZIG, Judge ^*.

LOGAN, Circuit Judge.

Paul Holt Drilling, Inc. and Paul Holt, an individual (collectively the "insureds"), appeal from the trial court's dismissal of their diversity action against Liberty Mutual Insurance Company alleging breach of its duty to defend the insureds. The single issue on appeal is when the statute of limitations begins to run on such a breach. By agreement of the parties, the case was submitted on the briefs.

In December 1971 a third party sued Paul Holt Drilling, Inc. for damages allegedly caused by the blowout of an oil well it had been drilling. In March 1972 Liberty Mutual denied policy coverage for any liability Paul Holt Drilling might incur and denied any obligation to defend the insureds. ¹ In November 1977, as the protracted litigation against Paul Holt Drilling was finally winding down, the insureds brought this action against Liberty Mutual. The trial court concluded that the insureds' cause of action alleging breach of contract for failure to defend arose on March 7, 1972, when Liberty Mutual notified the insureds that it was denying coverage; the trial court therefore dismissed the action as barred by the five-year statute of limitations. ²

The insureds' principal contention on appeal is that they could not bring suit against Liberty Mutual until the underlying litigation had been completed, and therefore the statute of limitations should not be considered to have commenced to run until November 10, 1977. ³ They rely primarily upon a no action clause in their policy "No action shall lie against the (insurance) company unless, as a condition precedent thereto, there shall have been full compliance with all of the terms of this policy, nor until the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company."

Alternatively, they argue that if the statute begins to run when the insurance company first refuses to defend, in the event of protracted litigation an insured would have to file suits every few years to protect against running of the limitations period. Asserting that this multiplicity of suits would be undesirable, they contend the limitations period should not begin until the underlying litigation has been completed.

Liberty Mutual argues that the no action clause applies only to claims third parties make against the insured and, alternatively, that the no action clause is void, citing Okla.Stat.Ann. tit. 36, § 3617 (1971):

"No policy delivered or issued for delivery in Oklahoma and covering a subject of insurance resident, located, or to be performed in Oklahoma, shall contain any condition, stipulation or agreement ... (2) preventing the bringing of an action against any such insurer for more than six months after the cause of action accrues .... Any such condition, stipulation or agreement shall be void, but such voidance shall not affect the validity of the other provisions of the policy."

If the no action clause does not apply, then according to Liberty Mutual, the limitations period began on the date it notified the insureds it would not defend them.

A few courts have relied upon a no action clause in a policy to hold that the statute of limitations does not begin to run until the underlying litigation has concluded. See Ginn v. State Farm Mut. Auto. Ins. Co., 417 F.2d 119 (5th Cir. 1969); Kielb v. Couch, 149 N.J.Super. 522, 374 A.2d 79 (Super.Ct.Law Div.1977). However, most courts have held that the no action clause does not apply to a suit the insured brings for breach of the insurer's obligation to defend. See Dryden v. Ocean Accident & Guarantee Corp., 138 F.2d 291, 295 (7th Cir. 1943); Scott v. Inter-Insurance Exchange, 352 Ill. 572, 186 N.E. 176, 179 (1933); Ratner v. Canadian Universal Ins. Co., 359 Mass. 375, 269 N.E.2d 227, 228-29 (1971); Satterwhite v. Stolz, 79 N.M. 320, 442 P.2d 810, 816-17 (1968); Patterson v. Allstate Ins. Co., 34 A.D.2d 1081, 312 N.Y.S.2d 147, 148 (App.Div.1970); Gulf Ins. Co. v. Parker Prods., Inc., 498 S.W.2d 676, 679 (Tex.1973); Liberty Mut. Ins. Co. v. General Ins. Corp., 517 S.W.2d 791, 798 (Tex.Civ.App.1974). The Oklahoma courts have not treated the issue, so we must determine how the Oklahoma Supreme Court would decide the issue.

We see an important difference between claims by a third party alleging the insured is responsible for the third party's injuries and claims by the insured asserting the insurer is withholding benefits due the insured under the policy. The purposes of the no action clause are to prevent nuisance suits against the insurance company and to prevent an injured party or an insured from bringing the insurance company into the underlying litigation with possible resultant prejudice. See St. Louis Dressed Beef & Provision Co. v. Maryland Cas. Co., 201 U.S. 173, 182-83, 26 S.Ct. 400, 403-04, 50 L.Ed. 712 (1906); Simon v. Maryland Cas. Co., 353 F.2d 608, 612 (5th Cir. 1965). We think the Oklahoma court would hold the no action clause is intended to apply only to claims made by third parties.

The wording of the clause itself supports the conclusion that it does not apply to the insureds' claims against the insurer. The clause requires delay of suit "until the amount of the insured's obligation to pay shall have been finally determined, either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company." If the no action clause applies to the insureds' claims, when would it no longer bar suit to recover for legal expenses they bear when the insurer wrongfully refuses to defend? ⁴ Unless insureds refuse to pay their attorney, no judgment for those fees will ever be entered against them. There will never be a written agreement of "the insured, the claimant and the company" with respect to these attorneys' fees and litigation costs. Additionally, "claimant" in this context obviously refers to a third party claiming against the insured.

Having found the no action clause is inapplicable, we must determine whether the insurance company breached its obligation to defend at the time the insured first incurred legal expenses, at the time the underlying litigation was complete, or continuously or periodically during the course of that litigation. There are no Oklahoma cases except the trial court's decision below. We have found three cases that have concluded that the statute begins to run upon completion of the underlying action. Moffat v. Metropolitan Cas. Ins. Co., 238 F.Supp. 165, 175-76 (M.D.Pa.1964); Oil Base, Inc. v. Continental Cas. Co., 271 Cal.App.2d 378, 76 Cal.Rptr. 594, 601 (1969); Colpan Realty Corp. v. Great Am. Ins. Co., 83 Misc.2d 730, 373 N.Y.S.2d 802, 804-05 (Sup.Ct.1975). We disagree with them.

We think it clear that a breach occurred when the insureds first incurred legal expenses because the insurer refused to defend them. ⁵ At that time the insurer failed to fulfill its contractual obligation. See Bloom-Rosenblum-Kline Co. v. Union Indem. Co., 121 Ohio St. 220, 167 N.E. 884, 886 (1929). If the insureds had no cause of action at that point, they might incur legal expenses they would be wholly unable to pay. See Arenson v. National Auto. and Cas. Ins. Co., 48 Cal.2d 528, 310 P.2d 961 (1957); cf. Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178, 1185 (7th Cir.) (a basic purpose of the insurance policy is protecting the insured from the expenses of litigation), cert. denied, 449 U.S. 1033, 101 S.Ct. 608, 66 L.Ed.2d 495 (1980). We should encourage early suit to determine the parties' liabilities; if the insurer is found liable, it no doubt will quickly assume its defense obligations.

Because we find that the insureds' cause of action arises as soon as they must incur the expenses of defense as a consequence of the insurer's refusal, we disagree with those courts that have concluded the cause of action does not arise until the underlying litigation has terminated. But we agree with those courts' characterization of the insurer's obligation to defend as one that continues throughout the course of the litigation against the insureds. Other courts, too, have held the duty is continuing. See Coblentz v. American Sur. Co., 416 F.2d 1059, 1062 (5th Cir. 1969); Burton v. State Farm Mut. Auto. Ins. Co., 335 F.2d 317, 323 (5th Cir. 1964). We conclude the Oklahoma courts would find that the insurer's obligation to defend the insureds is a "continuing contract," about which Professor Corbin says the following:

"There are contracts, however, that have been said to require continuing (or continuous) performance for some specified period of time, a period that may be definite or indefinite when the contract is made. These contracts too are capable of a series of 'partial' breaches, as well as of a single total breach by repudiation or by such a material failure of...