Murray v. San Jacinto Agency, Inc.

800 S.W.2d 826, 1990 WL 44285

• Court: Texas Supreme Court
• Decided: January 23, 1991
• Docket: C-8299
• Status: Published

Opinions

GONZALEZ, Justice.

This appeal involves limitations on claims against an insurer for breach of the duty of good faith and fair dealing.

Debra Kay Murray brought this action against San Jacinto Agency (SJA) and Ector County Independent School District (ECISD) alleging wrongful denial of insurance coverage. SJA and ECISD moved separately for summary judgment. The trial court granted ECISD’s motion for summary judgment on the ground that governmental immunity precluded suit against the school district. The trial court granted SJA’s motion on the ground that Murray’s suit was barred by limitations. The court of appeals affirmed. 759 S.W.2d 778. Murray did not appeal as to ECISD so we address only the summary judgment in favor of SJA. We reverse the judgment of the court of appeals and in so doing, modify the limitations holding announced in Arnold v. National County Mut. Fire Ins. Co., 725 S.W.2d 165, 168 (Tex.1987). Because we have modified the law, this cause is remanded to the trial court in the interest of justice.

Facts

ECISD established a self-funded group medical insurance program for its employees and their dependents. Under this program, ECISD paid premiums into a trust that was administered by SJA for a fee. Murray was covered under the plan as a dependent of her husband, Alvin Murray. She filed for divorce in the spring of 1984; she remained married, however, throughout the calendar year 1984. Three days after Murray filed for divorce, her husband requested that ECISD and SJA drop her from the insurance coverage.

In the summer of 1984, Murray learned that she had developed chronic pancreatitis. She sought coverage for treatment of her condition under the health insurance policy. Due to her husband’s request that she be taken off the insurance program, SJA refused to verify coverage on September 5, 1984. This refusal to verify coverage, essentially a denial of coverage, left Murray unable to obtain much-needed medical treatment. On March 15, 1985, however, SJA admitted that its denial was unwarranted and reinstated coverage retroactive to spring 1984.

Murray filed suit against SJA on March 27, 1986, alleging only negligent denial of coverage. Citation was not successfully served until January 21, 1987, 10 months later. Murray subsequently amended her petition on September 2, 1987 to plead her good faith claim for the first time.¹

Commencement of Limitations

The issue presented is whether Murray’s good faith claim is barred by limitations as a matter of law. The statute of limitations governing this cause of action is set forth in Tex.Civ.Prac. & Rem.Code Ann. § 16.003(a) (Vernon 1986):

A person must bring suit for trespass for injury to the estate or to the property of another, conversion of personal property, taking or detaining the personal property of another, personal injury, forcible entry and detainer, and forcible detainer not later than two years after the day the cause of action accrues.

Thus, we must determine the date Murray’s cause of action accrued. The parties dispute whether this should be the date coverage was denied (September 5,1984) or the date SJA admitted its denial was unwarranted (March 15, 1985).

In Arnold, we recognized the duty of an insurer to deal fairly and in good faith with its insured in the processing and payment of claims and that breach of that duty is compensable in tort. 725 S.W.2d at 167; see also Aranda v. Insurance Co. of N. America, 748 S.W.2d 210, 212 (Tex.1988); Chitsey v. National Lloyds Ins. Co., 738 S.W.2d 641, 643 (Tex.1987). We further held that limitations on a good faith claim does not begin to run until the underlying contract claims are finally resolved. Arnold, 725 S.W.2d at 168; see also Street v. Second Court of Appeals, 756 S.W.2d 299, 302 (Tex.1988).

Murray contends that her underlying contract claims were not “finally resolved,” and limitations did not begin to run, until SJA admitted on March 15, 1985, that its September 5, 1984 denial of coverage was unwarranted. This argument must fail. SJA voluntarily admitted that it had made a mistake in denying coverage. Under this theory, if SJA had never admitted coverage, the contract claim would never have been “finally resolved,” and limitations would never have begun to run. Such a result was not intended in Arnold.

Limitations statutes afford plaintiffs what the legislature deems a reasonable time to present their claims and protect defendants and the courts from having to deal with cases in which the search for truth may be seriously impaired by the loss of evidence, whether by death or disappearance of witnesses, fading memories, disappearance of documents or otherwise. The purpose of a statute of limitations is to establish a point of repose and to terminate stale claims. Safeway Stores, Inc. v. Certainteed Corp., 710 S.W.2d 544, 545-546 (Tex.1986); see also Moreno v. Sterling Drug, Inc., 787 S.W.2d 348 (Tex.1990); United States v. Kubrick, 444 U.S. 111, 117, 100 S.Ct. 352, 356, 62 L.Ed.2d 259 (1979).

We hold that Murray’s good faith claim accrued and limitations commenced on the day SJA wrongfully denied coverage (September 5, 1984). This holding comports with well-established precedent and other authorities. See, e.g., S. Ashley, Bad Faith Liability: A State-By-State Review § 4.05 (1987) (one would expect that in a first party case the insured’s bad faith “cause of action accrues the moment an insurer should pay a claim but fails to do so. At that moment, the insurer’s wrongful conduct first causes harm to the insured.”).

For the purposes of application of statute of limitations, a cause of action generally accrues at the time when facts come into existence which authorize a claimant to seek a judicial remedy. Robinson v. Weaver, 550 S.W.2d 18, 19 (Tex.1977). Put another way, “a cause of action can generally be said to accrue when the wrongful act effects an injury.” Moreno, 787 S.W.2d at 351. Murray was unable to obtain much-needed medical attention because of SJA’s September 5,1984 denial and had sufficient facts that day to assert her good faith claim. See Arnold, 725 S.W.2d at 167 (“A cause of action for breach of the duty of good faith and fair dealing is stated when it is alleged that there is no reasonable basis for denial of a claim ... ”).

The fact that damage may continue to occur for an extended period after denial does not prevent limitations from starting to run. Limitations commences when the wrongful act occurs resulting in some damage to the plaintiff. Atkins v. Crosland, 417 S.W.2d 150, 153 (Tex.1967); First Nat. Bank v. Nu-Way Transports, Inc., 585 S.W.2d 813, 816 (Tex.Civ.App.—Fort Worth 1979, writ ref’d n.r.e.).

When, as SJA has done, an insurance company denies a claim, other jurisdictions have decided that the good faith cause of action accrues on the date of denial.² See, e.g., Frazier v. Metropolitan Life Ins. Co., 169 Cal.App.3d 90, 103, 214 Cal.Rptr. 883, 890 (1985); Safeco Ins. Co. of America v. Sims, 435 So.2d 1219, 1222 (Ala.1983). The Alabama Supreme Court, in Farmers & Merchants Bank v. Home Ins. Co., 514 So.2d 825, 831-832 (Ala.1987), determined that a cause of action for bad faith refusal to pay insurance benefits accrues when the insured has actual knowledge of facts which would put a reasonable mind on notice of the possible existence of bad faith. The court, however, went on to decide that, as a matter of law, the bad faith cause of action in that case accrued on the date insurance coverage was denied. Id.; see also Alfa Mut. Ins. Co. v. Smith, 540 So.2d 691, 692-93 (Ala.1988).

Modification of Arnold

Our decision today modifies the limitations holding in Arnold because in retrospect it cannot withstand critical scrutiny. In Arnold, a motorcyclist, Arnold, was injured in an accident involving an uninsured driver. Arnold was insured by National County Mutual under a policy that included “uninsured motorist” protection up to $10,-000. Although no specific date is known, denial of coverage occurred no later than June 1974, because in that month, Arnold sued both National County and the uninsured motorist. Evidence before the trial court showed that National County was relying on the opinion of an inexperienced lawyer and did not conduct an investigation to determine the merits of the claim. Arnold obtained a favorable judgment in excess of the policy limit in December 1977. One year later, in December 1978, Arnold filed his good faith claim against National County. This was over four years after denial. We held, nevertheless, that the two year statute of limitations did not bar this claim. Because Arnold had filed the initial or “underlying” suit to determine coverage, we analogized to Linkenhoger v. American Fidelity & Casualty Co., 152 Tex. 534, 260 S.W.2d 884 (Tex.1953), overruled in part on other grounds in Street, 756 S.W.2d at 301, and in Hernandez v. Great American Ins. Co., 464 S.W.2d 91, 95 (Tex.1971), to determine that limitations did not run until Arnold’s underlying contract claims were finally resolved. Arnold’s contract claim was resolved with a favorable judgment in December 1977. His good faith claim, filed one year later, was therefore held to be timely.

Our limitations holding in Arnold is not consistent with the rule that limitations commences at the time facts come into existence which authorize a claimant to seek a judicial remedy. Robinson, 550 S.W.2d at 19; Moreno, 787 S.W.2d at 357; Linkenhoger, 260 S.W.2d at 886. In Arnold, it is not clear when the facts indicating a breach of the duty of good faith and fair dealing came to light. In the instant case, however, the insured had sufficient facts to seek a judicial remedy on the date that coverage was denied.

Moreover, Arnold incorrectly analogized to the reasoning used in Linkenhoger, which was a Stowers case.³ The injury producing event in a Stowers third party case is not the same as it is in a first party case. A Stowers third party claim accrues when the insurer unreasonably fails to settle a claim against the insured within policy limits. The injury producing event is the underlying judgment in excess of policy limits. Linkenhoger, 260 S.W.2d at 887. A first party claim, such as Arnold and this case, accrues when an insurer unreasonably fails to pay an insured under the policy. The injury producing event is the denial of coverage. See Note, Arnold v. National County Mutual Fire Ins. Co.: Texas Adopts First-Party Bad Faith, 39 Baylor L.Rev. 835, 853-854 (1987). Limitations on a first party claim appropriately begins to run at denial, not the date a separate suit to determine coverage under the contract is resolved.

Expiration of Limitations

Whether Murray’s claim is barred under the facts of this case depends on whether she interrupted the running of limitations. Murray filed her original petition on March 27, 1986, well within the two-year limitations period. Mere filing of suit, however, will not interrupt the running of limitations unless due diligence is exercised in the issuance and service of citation. Riga Mfg. Co. v. Thomas, 458 S.W.2d 180, 182 (Tex.1970). Citation was first issued and returned unserved in September 1986. Citation was issued a second time and successfully served on January 21, 1987, outside the limitations period. The court of appeals held that, as a matter of law, Murray did not exercise due diligence. We disagree with the court of appeals.

When a defendant (SJA) has affirmatively pleaded the defense of limitations, and when failure to timely serve the defendant has been shown, the burden shifts to the plaintiff (Murray) to explain the delay. See Liles v. Phillips, 677 S.W.2d 802, 809 (Tex.App.—Fort Worth 1984, writ ref'd n.r. e.); Williams v. Houston-Citizens Bank & Trust Co., 531 S.W.2d 434, 436 (Tex.Civ.App.—Houston [14th Dist.] 1975, writ ref d n.r.e.).

It is reasonable to assume that Murray, relying on Arnold, concluded that her cause of action accrued on the date SJA admitted its denial was unwarranted (March 15, 1985); thus, she could have believed that even if there was no diligence and limitations was not interrupted until the date of service (January 21, 1987), her claim would be timely. In preparing her response to the motion for summary judgment, Murray could have relied on this interpretation of Arnold and thus would not have felt compelled to argue diligence in the service of process.

Our decision today, however, modifies Arnold so that limitations on Murray’s good faith claim commenced on the day SJA denied coverage. Her claim is therefore barred unless she exercised diligence in serving citation. Since we have modified the law, we will remand this case in the interest of justice to the trial court. Tex.R. App.P. 180; see also L.M.B. Corp. v. Gurecky, 501 S.W.2d 300, 303 (Tex.1973). This will give Murray an opportunity to show diligence in serving citation and if successful, to assert her good faith claim. See Texas Real Estate Comm’n v. Nagle, 767 S.W.2d 691, 695 (Tex.1989).

For the reasons stated, the judgment of the court of appeals is reversed and this cause is remanded to the trial court.

SPEARS, J., files a dissenting opinion, joined by RAY, MAUZY and DOGGETT, JJ.

1 . “Good faith" is occasionally used in this opinion to encompass the tort duty of good faith and fair dealing,

2 . When, unlike this case, there is no outright denial of a claim, the exact date of accrual of a cause of action becomes more difficult to ascertain and should be a question of fact to be determined on a case-by-case basis. See Safeco Ins. Co. of America v. Sims, 435 So.2d 1219, 1222 (Ala.1983). Clearly, though, if an insurance company strings an insured along without denying or paying a claim, limitations will be tolled.

3 . G.A. Stowers Furniture Co. v. American Indemnity Co., 15 S.W.2d 544 (Tex.Comm'n App.1929, holding approved) (action by an insured against automobile indemnity insurer based on failure to accept reasonable settlement offer when defending action against insured).