OSCN Found Document:MORGAN v. STATE FARM MUTUAL AUTOMOBILE INSUR. CO.
¶1 The United States Court of Appeals for the Tenth Circuit certified to this Court two questions of law:
1. Where a plaintiff is injured by entry of an adverse judgment that remains unstayed, is the injury sufficiently certain to support accrual of a tort cause of action based on that injury under 12 O.S. § 95 before all appeals of the adverse judgment are exhausted?
2. Does an action for breach of an insurance contract accrue at the moment of breach where a plaintiff is not injured until a later date?
¶2 We answer the first question with a "no." When the injury alleged in a tort cause of action is an adverse judgment, the claim accrues when the appeal is finally determined in the underlying case. The entry of a judgment, which remains subject to appeal, is not sufficiently certain to support accrual of a cause of action for breach of the implied duty of good faith and fair dealing.
¶3 We answer the second question with a "yes." An action for breach of contract accrues when the contract is breached, not when damages result. The discovery rule does not apply to an action for breach of contract. The claim accrues when the contract is breached, regardless of whether the plaintiff knows, or in the exercise of reasonable diligence, should have known of the breach. However, the limitations period may be tolled if the defendant fraudulently concealed the cause of action.
I. CERTIFIED FACTS AND PROCEDURAL HISTORY
¶4 The federal court's certification order sets out the facts of this case. When answering a certified question, this Court will not presume facts outside those presented in the certification order. See Hamilton v. Northfield Ins. Co., 2020 OK 28, ¶ 4, 473 P.3d 22, 25. Our examination is confined to resolving legal issues. Id.
¶5 Plaintiff/Appellant George Andrew Morgan was driving drunk and hit Jesse Atkins with his truck at more than 40 miles per hour. Atkins was severely injured. Atkins's resulting medical bills totaled more than $2 million.
¶6 Defendant/Appellee State Farm Mutual Automobile Insurance Company provided liability insurance to Morgan at the time of the accident under a policy with a $100,000 limit. State Farm negotiated and executed a settlement with Atkins in April 2010 whereby State Farm paid its policy limit of $100,000 to Atkins and Atkins released his claims against Morgan.
¶7 During the same timeframe, Atkins pursued a workers' compensation claim in Kansas because he had been traveling for work when he was injured. The workers' compensation court issued a preliminary order for compensation, and the workers' compensation insurer began making payments to Atkins.
¶8 The workers' compensation insurer's subrogee, New York Marine and General Insurance Company (NYM), then sued Morgan in Oklahoma state court in June 2011 for reimbursement of the amounts paid to Atkins. NYM served that lawsuit on Morgan in January 2012. Morgan retained personal counsel to represent him in the action, but State Farm also provided counsel to Morgan and mounted a vigorous defense. Morgan and State Farm claimed that by releasing Morgan, Atkins severed any reimbursement claim NYM might have against Morgan due to NYM's status as subrogee. The trial court denied State Farm's motion for summary judgment on this basis on November 22, 2013. Then on February 27, 2014, a jury returned a verdict in favor of NYM in the amount of $844,865.89, finding that State Farm knew about NYM's potential claim but failed to apprise NYM of its pending settlement with Atkins. The judgment was entered against Morgan on April 8, 2014. The Oklahoma Court of Civil Appeals affirmed the judgment on June 10, 2016, and this Court denied certiorari on February 21, 2017. Mandate issued on March 23, 2017.
¶9 Morgan then brought this lawsuit against State Farm on May 23, 2017. He alleged State Farm's failure to secure NYM's release as part of its settlement with Atkins amounted to (1) breach of the implied duty of good faith and fair dealing; and (2) breach of contract. The United States District Court for the Western District of Oklahoma found that Morgan's claims accrued in 2010, when State Farm negotiated the original settlement with Atkins and, therefore, concluded the applicable two and five year statutes of limitations for the tort and contract claims, respectively, barred Morgan's suit.1 Morgan appealed the summary judgment to the Tenth Circuit Court of Appeals. The Tenth Circuit certified two questions to this Court.
¶10 In the certification order, the Tenth Circuit notes the record in this appeal does not contain evidence supporting a finding that Morgan suffered an injury resulting from State Farm's actions before NYM secured a judgment against him in April 2014.
II. REQUIREMENTS FOR ANSWERING CERTIFIED QUESTIONS
¶11 This Court has the discretionary power to answer certified questions of law if the certified questions are presented in accordance with the provisions of the Revised Uniform Certification of Questions of Law Act, 20 O.S.2011 §§ 1601-1611. When assessing whether we should answer a federal certified question of law, we address both factors mentioned in § 1602: (1) would the answer be dispositive of an issue in pending litigation in the certifying court; and (2) is there established and controlling law on the subject matter? See Siloam Springs Hotel, LLC v. Century Sur. Co., 2017 OK 14, ¶ 14, 392 P.3d 262, 266. In this case, answers to the certified questions would be determinative of issues in the underlying suit and both questions present issues of first impression for which there is no controlling Oklahoma precedent.
III. FIRST CERTIFIED QUESTION
Where a plaintiff is injured by entry of an adverse judgment that remains unstayed, is the injury sufficiently certain to support accrual of a tort cause of action based on that injury under 12 O.S. § 95 before all appeals of the adverse judgment are exhausted?
¶12 Morgan's tort cause of action against State Farm is for breach of the implied duty of good faith and fair dealing in connection with the handling of a third party claim. Morgan alleges that State Farm acted in bad faith by failing to obtain a release of the workers' compensation subrogation claim as part of the settlement with Atkins, which resulted in an adverse or excess judgment against him. The question of law presented is: when does a bad faith tort action based on an adverse or excess judgment accrue?
¶13 A bad faith tort action must be brought within two years "after the cause of action shall have accrued." 12 O.S.2011 § 95(A)(1); see Lewis v. Farmers Ins. Co., 1983 OK 100, ¶ 7, 681 P.2d 67, 70. "The elements of a cause of action arise, that is, the cause of action accrues when a litigant first could have maintained his action to a successful conclusion." MBA Commercial Constr., Inc. v. Roy J. Hannaford Co., 1991 OK 87, ¶ 13, 818 P.2d 469, 473. The essential elements for breach of the duty of good faith and fair dealing are: (1) the insured was covered under the insurance policy issued by the insurer and that the insurer was required to take reasonable actions in handling the claim; (2) the actions of the insurer were unreasonable under the circumstances; (3) the insurer failed to deal fairly and act in good faith toward the insured in their handling of the claim; and (4) the breach or violation of the duty of good faith and fair dealing was the direct cause of any damages sustained by the insured. See Badillo v. Mid Century Ins. Co., 2005 OK 48, ¶ 25, 121 P.3d 1080, 1093. A tort is not complete until there is an injury. "In order for a litigant to maintain a negligence action to a successful conclusion, the litigant must allege injury or damages that are certain and not speculative." MBA, 1991 OK 87, ¶ 15, 818 P.2d at 474 (negligence in preparation of architectural plans); accord Stephens v. Gen. Motors Corp., 1995 OK 114, ¶ 12, 905 P.2d 797, 800 (legal malpractice).
¶14 We look to other cases where the injury alleged is an adverse judgment. In Stephens v. General Motors Corp., 1995 OK 114, 905 P.2d 797, we determined a legal malpractice action does not accrue until the underlying adverse judgment against the client is finally determined on appeal. See id. ¶ 9, at 799. In Stephens, the client claimed counsel allowed the limitations period to run in her breach of warranty case and, as a result, the trial court entered summary judgment against her. Id. ¶¶ 2, 4, at 798. Summary judgment was affirmed by the Court of Civil Appeals on July 9, 1993, and the client's petition for rehearing was denied on November 22, 1993. Id. ¶ 2, at 798.
¶15 The client then brought a legal malpractice action against counsel on February 3, 1994. Id. ¶ 4, at 798. Counsel filed a motion to dismiss based on the two-year statute of limitations in 12 O.S.Supp.1993 § 95. Id. Counsel argued the client knew of her possible malpractice claim no later than December 19, 1990, when she received independent advice that she may have a malpractice claim. Id. ¶¶ 3-4, at 798. The client's position was her cause of action did not accrue until the appeal was decided. Id. ¶ 5, at 798. The trial court granted counsel's motion to dismiss. Id. On appeal, this Court found that "[p]rior to the affirmation of the summary judgment of the underlying case, [the client's] cause of action for malpractice had not accrued" and reversed the dismissal. Id. ¶ 12, at 800. We explained:
The underlying lawsuit in the case at bar, that being the lawsuit [the client] filed against the manufacturer of the mobile home, did not become final until the summary judgment granted by the trial court was affirmed by the Court of Appeals on July 9, 1993, and the petition for rehearing was denied on November 22, 1993. Until that time, the negligence claimed in the malpractice action would have been merely speculative. There were appealable issues that, until addressed by an appellate court, rendered the granting of summary judgment by the trial court non-final. For us to hold otherwise would allow a possible loophole in malpractice law, permitting malpractice to be defeated by merely tying the case up in the appellate system until after the statute of limitations has run.
Id. ¶ 11, at 799-800.
¶16 We are also guided by decisions involving bad faith claims arising from the insurer's failure to settle. This Court has not yet had the occasion to address when a bad faith action based on the insurer's failure to settle accrues. But, courts in other jurisdictions have determined the bad faith action does not accrue until the adverse or excess judgment in the underlying case is final and non-appealable.2 The Arizona Supreme Court explained its rationale behind this conclusion:
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. 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.
Taylor v. State Farm Mut. Auto. Ins. Co., 913 P.2d 1092, 1095-96 (Ariz. 1996). We recognize Morgan is not alleging facts typical of an excess judgment case where the insured alleges the insurer's unreasonable failure to settle within policy limits resulted in the insured being exposed to an excess judgment. But, as we know, there are a variety of ways in which a liability insurer can violate its duty of good faith and fair dealing. We are persuaded by these decisions because, while the bad faith conduct alleged may be different, the injury or damages alleged are the same: an adverse or excess judgment. Furthermore, these decisions are consistent with our principle that a tort cause of action accrues when an injury to the plaintiff is certain and not merely speculative.
¶17 Like a legal malpractice action or a bad faith action arising from the insurer's failure to settle, the injury upon which Morgan's bad faith action can proceed is an adverse judgment. The adverse judgment must be certain and not merely speculative. A bad faith cause of action based on an adverse judgment does not accrue until the underlying judgment becomes final and non-appealable.3 Where the underlying judgment is appealed, the injury is not certain and the cause of action does not accrue until it is affirmed and mandated. Only at that point can the plaintiff maintain the bad faith action to a successful conclusion.
¶18 Therefore, we answer the first certified question with a "no." When the injury alleged in a tort cause of action is an adverse judgment, the claim accrues when the appeal is finally determined in the underlying case. The entry of a judgment, which remains subject to appeal, is not sufficiently certain to support accrual of a cause of action for breach of the implied duty of good faith and fair dealing.
IV. SECOND CERTIFIED QUESTION
Does an action for breach of an insurance contract accrue at the moment of breach where a plaintiff is not injured until a later date?
¶19 This Court possesses discretionary authority to reformulate the questions certified. See 20 O.S. § 1602.1. We invoke that authority here. In an effort to be consistent with the language used for the elements of breach of contract, the second question is reformulated to provide:
Does an action for breach of an insurance contract accrue at the moment of breach where a plaintiff does not sustain damages resulting from the breach until a later date?
¶20 Morgan alleges State Farm breached the contract when it negotiated a settlement with Atkins and failed to obtain a release of the workers' compensation subrogation claim but that the resulting damages were not fully ascertained until the $844,865.89 judgment against him was affirmed and made final on appeal. The fundamental question of law presented is: when does a breach of contract action accrue?
¶21 The same general principles of claim accrual apply here. A cause of action accrues when a litigant can first maintain the action to a successful conclusion. See Wille v. GEICO Cas. Co., 2000 OK 10, ¶ 10, 2 P.3d 888, 891. A breach of contract action accrues when the plaintiff has a legal right to sue. Id. ¶ 10, at 891-92; Samuel Roberts Noble Found., Inc. v. Vick, 1992 OK 140, ¶ 8, 840 P.2d 619, 622. The elements of a breach of contract action are: (1) formation of a contract; (2) breach of the contract; and (3) damages as a result of that breach. See Digital Design Grp., Inc. v. Info. Builders, Inc., 2001 OK 21, ¶ 33, 24 P.3d 834, 843.
¶22 While this Court has not squarely addressed the question certified, it is generally understood that a breach of contract action accrues when the contract is breached. See U.S. Fid. & Guar. Co. v. Fid. Trust Co., 1915 OK 946, ¶ 3, 153 P. 195, 198 ("Whenever one person may sue another, a cause of action has accrued, and the statute begins to run. In the law of contracts, the statute of limitations begins to run against a party to the contract, himself not in default, when the contract is broken by the other party, but not before that time."); 54 C.J.S. Limitations of Actions § 185 ("Generally, a cause of action for breach of contract accrues immediately on a breach, and the statute of limitations begins to run at that time."); see also OUJI-CIV 1.20.4 In Wille v. GEICO Casualty Co., 2000 OK 10, 2 P.3d 888, this Court considered when an action to recover uninsured/underinsured motorist benefits accrues. See id. ¶ 2, at 888. The issue was whether the action accrued when the insurer breached the insurance contract, i.e., refused to pay benefits on a valid claim, or the date of the underlying accident. Id. ¶ 9, at 890. We recognized that because the cause of action was based on contract, the action accrued when the insurance contract was breached. Id. ¶¶ 2, 7, 10-12, at 888-89, 891-92.
¶23 Only a handful of states have codified whether a breach of contract claim accrues when the contract is breached or when damages result.5 Most states addressing this issue have done so through decisional law. The prevailing view is that a breach of contract action accrues when the contract is breached even if the plaintiff does not sustain damages resulting from the breach until later.6
¶24 The third element of a breach of contract action is damages. But, unlike a tort claim, a breach of contract is a legal wrong independent of the existence of actual damages. See Textana, Inc. v. Klabzuba Oil & Gas, 2009 MT 401, ¶ 36, 353 Mont. 442, 450, 222 P.3d 580, 587; see also Tolbert v. Conn. Gen. Life Ins. Co., 778 A.2d 1, 5 (Conn. 2001) ("[T]he cause of action is complete at the time the breach of contract occurs, that is, when the injury has been inflicted." (quoting Kennedy v. Johns-Manville Sales Corp., 62 A.2d 771, 773 (Conn. 1948))). The plaintiff acquires the legal right to sue when the first two elements are present: formation of a contract and breach of the contract. At that point, the cause is actionable and the plaintiff is entitled to nominal damages. See Gourley v. Lookabaugh, 1915 OK 454, ¶ 0, 149 P. 1169, 1169 (Syllabus by the Court, No. 1) ("In an action for breach of contract, if proven, the plaintiff may recover nominal damages, even though no appreciable injury has been shown."); Gabriel v. Kildare Elevator Co., 1907 OK 35, ¶ 0, 90 P. 10, 10 (Syllabus by the Court, No. 2) ("A petition which alleges the making of an enforceable contract and a breach by the defendant will entitle the plaintiff to nominal damages, and is sufficient to withstand a general demurrer."). A plaintiff can maintain a breach of contract action to a successful conclusion without proof of actual damages, because nominal damages are all that is required.
¶25 Therefore, we answer the second certified question with a "yes." An action for breach of contract accrues when the contract is breached, not when damages result.
¶26 In the certification order, the Tenth Circuit further inquires whether the "injury rule" examined in the first question--that a plaintiff suffer an injury that is certain and not speculative before a tort action accrues--applies to breach of contract actions. Because accrual of a breach of contract action is not dependent upon damages, we find no such requirement. This inquiry and our conclusion that an action for breach of contract accrues when the contract is breached begs the question:
Does the tort-based discovery rule apply to a breach of contract action and toll the running of the statute of limitations until the plaintiff knows, or in the exercise of reasonable diligence, should have known of the breach?7
¶27 The common law discovery rule is a concept of tort law. The discovery rule tolls the limitations period until the injured party knows or, in the exercise of reasonable diligence, should have known of the injury. See Calvert v. Swinford, 2016 OK 100, ¶ 11, 382 P.3d 1028, 1033.
¶28 Some state legislatures have enacted laws clarifying that the discovery rule applies to an action for breach of contract. See Colo. Rev. Stat. Ann. § 13-80-108(6) (West 1995); La. Rev. Stat. Ann. § 9:5606 (West 1999). The Oklahoma Legislature has not. The Legislature did not create a discovery exception for an action on a written contract, as it did for an action based on fraud.8 The maxim expressio unius est exclusio alterius--that the mention of one thing in a statute impliedly excludes another thing--is helpful in understanding legislative intent. See Patterson v. Beall, 2000 OK 92, ¶ 24, 19 P.3d 839, 845. The Legislature expressly provided that the discovery rule applies to actions based on fraud, but it declined to do so for actions based on contract. Furthermore, it has statutorily disavowed application of the discovery rule to an action for breach of a contract for the sale of goods but applies the discovery rule to certain actions for breach of warranty under the Uniform Commercial Code. See 12A O.S.2011 § 2-725.9
¶29 In Oklahoma, the discovery rule has developed primarily in the common law. This Court has articulated the purposes behind its application of the discovery rule:
1) [T]he negligence was not readily discoverable by a plaintiff utilizing ordinary due diligence; 2) the negligence was hidden from being readily discoverable by the plaintiff; or 3) the plaintiff was prevented from knowing of it, and it did not become apparent until problems arose and the negligence was uncovered without any apparent negligence on the part of the plaintiff.
Calvert, 2016 OK 100, ¶ 15, 382 P.3d at 1034. This Court has applied the tort-based discovery rule to a variety of actions10 but has never extended it to contract. In fact, we have refused to apply the discovery rule in actions for breach of construction contracts. See Kirby v. Jean's Plumbing Heat & Air, 2009 OK 65, ¶¶ 16-17, 222 P.3d 21; Vick, 1992 OK 140, ¶¶ 11-13. We reasoned:
[U]nder a discovery rule, a defendant is never completely certain that time has extinguished his liability. Whereas in tort this concern was remedied by Section 109, the Oklahoma architects' and builders' statute of repose, the law of contracts is not affected by this legislation. Were we to allow application of a discovery rule in contract cases, the legislatively-adopted public policy expressed by Section 109 of limiting a builder's liability after a certain time lapse would be defeated; a builder's liability for breach of contract could extend indefinitely. We reject extension of the discovery rule to suits for breach of contracts involving construction.
Vick, 1992 OK 140, ¶ 13, 840 P.2d at 623. There is no statute of repose at play in the matter before us. Hence, an insurer's liability for breach of contract could extend indefinitely.11 We agree with the New Jersey Supreme Court's observations as to why the tort-based discovery rule does not make a smooth transition to contract law:
The rationale for employing the discovery rule in tort- or fraud-type actions, however, does not carry over to most contract actions, and therefore, the discovery rule generally has not been applied in such suits. Although some negligence or malpractice actions involve inherently undiscoverable types of injuries, most contract actions presume that the parties to a contract know the terms of their agreement and a breach is generally obvious and detectable with any reasonable diligence. Because the discovery rule imposes on plaintiffs an affirmative duty to use reasonable diligence to investigate a potential cause of action, and thus bars from recovery plaintiffs who had "reason to know" of their injuries, the discovery rule generally does not apply to contract actions.
Cnty. of Morris v. Fauver, 707 A.2d 958, 972 (N.J. 1998).
¶30 Other jurisdictions are split as to whether the discovery rule applies to breach of contract actions. Courts have, generally, answered the question five ways: (1) by establishing a bright-line rule that the discovery rule does not apply to an action for breach of contract;12 (2) by applying the discovery rule to an action for breach of contract, thereby tolling the statute of limitations until the plaintiff knows or, in the exercise of reasonable diligence, should have known of the breach;13 (3) by tolling the statute of limitations when there is fraudulent concealment of the cause of action;14 (4) by tolling the statute of limitations when the breach is inherently undiscoverable;15 or (5) applying the discovery rule to breach of contract actions in other specific circumstances.16
¶31 The discovery rule does not apply to an action for breach of contract under Oklahoma law. The claim accrues when the contract is breached, regardless of whether the plaintiff knows, or in the exercise of reasonable diligence, should have known of the breach.17
¶32 We recognize, occasionally, this answer may have a harsh result when the breach is not obvious. However, our determination that the discovery rule does not apply to breach of contract actions does not abrogate the fraudulent concealment doctrine. Oklahoma has long recognized fraudulent concealment as an implied exception to a statute of limitations. If a defendant fraudulently conceals material facts and thereby prevents a plaintiff from discovering his wrong or the fact that a cause of action has accrued against him, the limitations period is tolled. See Masquat v. DaimlerChrysler Corp., 2008 OK 67, ¶ 18, 195 P.3d 48, 54-55. In some cases, equitable tolling of the limitations period may be appropriate.
V. CONCLUSION
¶33 A bad faith action based on an adverse or excess judgment does not accrue until the judgment is affirmed on appeal and mandated. A breach of contract action accrues when the contract is breached, not when damages result. The discovery rule does not apply to an action for breach of contract. However, the statute of limitations may be tolled if the plaintiff can show the defendant fraudulently concealed the cause of action.
CONCUR: Darby, C.J., Kane, V.C.J., Winchester, Edmondson, and Rowe, JJ.
CONCUR IN PART, DISSENT IN PART: Kauger, Combs, and Gurich, JJ.