Low, Ball & Lynch’s

WEEKLY LAW RESUME

September 22, 2005 Issue   By: Ray Coates

Coverage – Statute of Limitations  – Suit Against Excess Carrier

Eaton Hydraulics, Inc. v. Continental Casualty Company, et al.

Court of Appeal, Second Appellate District

(September 1,  2005)

Established case law provides that the statute of limitations  in a general liability insurance case accrues when the insurer refuses to defend the insured in the underlying litigation.  However, the statute is tolled until the underlying action is terminated by final judgment.  This case examined whether a suit against primary insurers, which designated excess insurers as DOE defendants, has any bearing on the accrual or tolling of the statute of limitations as to the excess insurers.

Eaton Hydraulics, Inc. filed this lawsuit against its insurers, including Continental Casualty Company and CNA Casualty of California (“CNA”) on September 28, 2001.  CNA was one of the excess, or umbrella, insurers.  The suit alleged that Eaton’s primary and umbrella insurers refused to defend and indemnify it with regard to an underlying environmental lawsuit brought against Eaton and others by Federal and State government entities.  The claims arose in 1990 and culminated in a lawsuit filed against Eaton in 1999, which was globally settled in August of 2000.  Eaton sued its primary insurers on April 11, 2026 in a prior lawsuit and included excess insurers as DOE defendants.  That case was eventually dismissed.  CNA demurred to Eaton’s first amended complaint, contending the suit was barred by the statute of limitations.  The trial court sustained the CNA demurrer and dismissed Eaton’s complaint as to CNA.  Eaton appealed.

The Court of Appeal reversed.  The Court noted that a cause of action for refusal to defend accrues when the insurer refuses to defend.  The Court found it impossible to determine from the allegations of the underlying complaint when Eaton’s cause of action against CNA accrued.  This was because the lawsuit filed in 1996 did not name CNA and CNA was never served as a DOE defendant in that case.  There was no showing that CNA had refused to defend at the time the first lawsuit was filed. 

Second, the Court stated the duty to defend is continuing, so that the limitations period is equitably tolled from the time the cause of action accrues, that is upon refusal to defend, until the underlying lawsuit is terminated by final judgement.  Thus, while a lawsuit can be commenced once an insurer has refused to defend, an insured is not obliged to do so.  The insured has the option to wait until the underlying suit is concluded.  Thus the fact that Eaton had sued its primary insurers and unknown excess insurers was of no importance.  The issue depended upon whether and when CNA refused to defend Eaton, not on when Eaton sued other insurers.

Third, CNA was an umbrella or excess insurer.  Its obligation to defend did not arise until the primary insurance was exhausted.  A primary insurer’s refusal to defend does not trigger an excess insurer’s duty to defend.  Thus, CNA’s duty to defend required  exhaustion of the underlying limits prior to tender of defense and indemnity.  The statute would then begin to run upon denial of that tender.

Since neither the amended complaint nor the judicially noticed underlying complaint disclosed that the statute of limitations had run, the trial court erred in sustaining CNA’s demurrer to the amended complaint.  The judgement was reversed with orders to overrule the demurrer.

COMMENT

This case is interesting for its discussion of the statute of limitations on a refusal to defend case by an excess carrier.  We recommend reading it for that reason.

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