Jones v. Hyatt Insurance Agency, Inc.

ELDRIDGE, Judge. This is an action by tort claimants against an insurance agency based upon the agency’s negligent failure to procure motor vehicle liability insurance for its client. The action arose from an underlying tort suit filed by the claimants against the agency’s client, whose employee was involved in a motor vehicle accident during the period in which the client had been uninsured because of the insurance agency’s negligence. After judgment was entered against the client in the tort suit, the tort claimants sued the insurance agency in contract as third-party beneficiaries of the contract to procure liability insurance and in tort for negligent failure to procure the insurance. ⁶⁴² The primary issue before us is whether the statute of limitations for the claimants’ cause of action in contract runs from the time when the claimants and/or the client discovered or should have discovered the agency’s negligent breach of contract, or from the time when the claimants obtained a tort judgment against the agency’s client.

We shall hold that the limitations period for the contract action began to run from the discovery of the agency’s breach of contract. In addition, we shall hold that the tort claimants had no viable direct cause of action in tort against the insurance agency because the agency owed them no duty independent of the contract. I. The petitioners in this case are the tort claimants Charles S. Jones and his wife, Eleanor Jones. The respondents are the Hyatt Insurance Agency, Inc., and John Swem, an employee of Hyatt.

On July 25, 1985, a motor vehicle driven by Mr. Jones was struck by a motor vehicle driven by Robert Smith, an employee of K & D Auto, Inc. K & D, an automobile parts store located in Anne Arundel County, Maryland, leased the vehicle which Smith was driving. Mr. Jones’s vehicle sustained only minor damage, but Mr. Jones claimed that he suffered various personal injuries, including progressively deteriorating neurological damage. Twenty days before the accident, K & D had arranged with Hyatt to obtain liability insurance to meet its various business needs. The negotiations -with Hyatt had been conducted over the telephone by Wayne Silfies at the request of K & D’s principal officers.

Silfies was a life insurance agent who did business with both Hyatt and K & D’s principal officers. Silfies referred K & D to Hyatt for a fee paid by the latter. Based on Silfies’ conversations with Hyatt’s employee Swem, K & D believed that Hyatt had secured motor vehicle liability insurance effective in early July 1985. Soon after notifying Hyatt of Mr. Jones’s claim, however, K & D discovered that motor vehicle liability insurance had not been obtained, with ⁶⁴³ the result that K & D’s motor vehicle was not insured until mid-August 1985, three weeks after the accident.

In a letter dated August 12, 1985, Hyatt informed Mr. Jones that “we do not and have not ever carried insurance on commercial vehicles” for K & D and that Hyatt was therefore returning Mr. Jones’s estimates of property damage. Allstate Insurance Company, with which Mr. Jones had collision and uninsured motorist coverage, notified K & D in a letter dated August 27, 1985, that because K & D had no insurance at the time of the accident, Allstate would seek reimbursement for Mr. Jones’s pending property damage and personal injury claims directly from K & D. In a letter dated March 6, 1986, Allstate informed K & D that it had paid Mr. Jones for property damage and that it was still awaiting reimbursement from K & D as Hyatt “has given us a definite no in regard to your insurance coverage.” At first K & D refused to pay Mr. Jones’s claim for property damage, taking the position that Hyatt should pay the claim. Eventually, K & D settled the property damage claim with Allstate for approximately $650. On February 8, 1988, Mr. and Mrs. Jones filed in the Circuit Court for Baltimore City a personal injury action against K & D and Kobert Smith.

Hyatt was not made a party to the action. The Joneses obtained a default judgment against Smith, and K & D stipulated to its liability for Smith’s accident on the ground of respondeat superior. On June 21, 1989, after a nonjury trial on damages, a judgment in the amount of $450,000 was entered in favor of Mr. Jones. An additional award of $450,000 was entered in favor of Mr. and Mrs. Jones for loss of consortium.

On the same day judgment was entered, K & D assigned to the Joneses its claim against Hyatt for failing to procure motor vehicle liability insurance in the insurance package which K & D had requested from the agency. Thereafter, Allstate paid Mr. Jones $20,000 under his uninsured motorist coverage. On October 6, 1989, about four months after the judgment and assignment, and more than four years after the accident, K & D and the Joneses as assignees filed suit in the Circuit ⁶⁴⁴ Court for Anne Arundel County against Hyatt. The complaint alleged that Hyatt was liable for breach of contract and for negligence in failing to procure the insurance which K & D had requested.

Allstate intervened as plaintiff, seeking to recover from Hyatt the $20,000 uninsured motorist damages which it had paid to the Joneses. Hyatt filed a third-party complaint against Silfies, alleging that Silfies negligently induced K & D to believe falsely that Hyatt had procured motor vehicle liability insurance. Hyatt moved for summary judgment on the ground that the suit was barred by the three-year statute of limitations governing civil actions set forth in Maryland Code (1974, 1998 Repl.Vol.), § 5-101 of the Courts and Judicial Proceedings Article. On December 30, 1991, the circuit court granted Hyatt’s motion for summary judgment against K & D and against the Joneses as K & D’s assignees.

The court held that K & D was aware of Hyatt’s breaches of contractual and tort duties, and had first sustained harm resulting from Hyatt’s negligence more than three years before K & D filed suit against Hyatt on October 6, 1989. Moreover, the court held that the Joneses, as K & D’s assignees, were subject to the same limitations bar as K & D. The court, however, stated that if the Joneses pursued a “direct action” against Hyatt, instead of relying upon the assignment, their cause of action might not accrue and the statute of limitations might not begin to run until June 21, 1989, the date judgment was entered against K & D in the underlying tort suit. Thereupon the Joneses, on January 22, 1992, amended then-complaint, claiming that Hyatt was liable to them because the Joneses were third-party beneficiaries of the agreement between K & D and Hyatt to procure motor vehicle liability insurance. The Joneses also asserted that Hyatt was liable to them directly for its negligence in failing to procure the insurance policy.

In addition, the Joneses added two defendants: Silfies, whom Hyatt had already sued as a third-party defendant, and Swem, the Hyatt employee who allegedly failed to procure the insurance package which K & D had requested. The defendants moved to dismiss the amended ⁶⁴⁵ complaint, arguing that the Joneses had no direct causes of action against them and that, even if they did, such direct causes of action were nonetheless barred by the statute of limitations. The circuit court denied the motions to dismiss in July 1992, holding that “[wjhatever rights the Joneses may have, either as third party beneficiary or otherwise, accrued only after judgment was obtained against K & D.” The parties then pursued discovery and filed numerous pretrial motions. 1 In September 1995, the case proceeded to trial solely on the issue of the defendants’ liability. The jury returned a special verdict that Hyatt and Swem had negligently broken their promise to procure automobile liability insurance.

In addition, the jury found that the independent agent Silfies had not acted negligently. The circuit court entered judgment in favor of the Joneses for $1,440,500, consisting of the $900,000 judgment which the Joneses had obtained against K & D plus pre-judgment interest. 2 ⁶⁴⁶ The defendants Hyatt and Swem timely noted an appeal to the Court of Special Appeals which, in an unreported opinion, reversed. 3 The intermediate appellate court assumed, without deciding, that the Joneses, as third-party beneficiaries, did at one time have a viable contractual cause of action against Hyatt but held that such cause of action was barred by the statute of limitations. The intermediate appellate court rendered no holding on the Joneses’ asserted negligence cause of action, as its reading of the record suggested that the Joneses’ cause of action was entirely contractual, founded upon the third-party beneficiary theory. The Joneses filed a petition for writ of certiorari in this Court, and Hyatt and Swem filed a cross-petition, both of which we granted.

Jones v. Hyatt Insurance, 346 Md. 632 , 697 A.2d 915 (1997). Although both petitioners and respondents raised many issues in their certiorari petitions, we need decide only two of them. We shall affirm the judgment of the Court of Special Appeals and hold that the statute of limitations had run on the third-party beneficiary contract action before the Joneses filed suit against Hyatt in October 1989. In addition, although we read the record as indicating that the Joneses did assert direct tort causes of action against Hyatt and Swem based on negligence, we shall hold that the Joneses had no viable tort causes of action because the defendants owed them no duty independent of the contract.

II

We shall assume, arguendo, that the Joneses had a viable cause of action in contract as third-party beneficiaries of the agreement between Hyatt and K & D for Hyatt to procure motor vehicle liability insurance. We have recognized a simi- ⁶⁴⁷ lar third-party beneficiary cause of action in contract when a tort claimant sues the tortfeasor’s liability insurer for a declaratory judgment concerning coverage or for breach of the contractual duty to indemnify. See, e.g., Mesmer v. M.A.I.F., 353 Md. 241, 267 , 725 A.2d 1053, 1065 (1999); Harford Mutual v. Woodfin, 344 Md. 399, 412-413 , 687 A.2d 652, 658-659 (1997), and cases there discussed; Washington Transit v. Queen, 324 Md. 326, 332 , 597 A.2d 423, 426 (1991) (“Once there is a verdict or judgment in the tort action, a direct action may be maintained against the liability insurer” by an injured tort claimant). 4 Nevertheless, we agree with the Court of Special Appeals that any contract action which the Joneses had against Hyatt and Swem was barred by limitations. 5 It is a well-settled principle that a third-party beneficiary to a contract “takes subject to the same defenses against ⁶⁴⁸ the enforcement of the contract, as such, as exist between the original promisor and promisee.” Shillman v. Hobstetter, 249 Md. 678, 690 , 241 A.2d 570, 577 (1968). See also Assurance Corporation v. Perkins, 169 Md. 269, 284 , 181 A. 436, 443 (1935) (tort claimants who have obtained judgments against the insured “have no right superior to that of the assured.

They stand in his place, and the same defenses which the insurance carrier had against the right of action on the part of the assured on the policy of insurance are available to the assurer” against the tort claimants). That such defenses include the expiration of the limitations period was established by this Court in Spates v. Spates, 267 Md. 72 , 296 A.2d 581 (1972), which held that the defense of limitations barred suit by a son who was the third-party beneficiary of a separation and property settlement agreement between his parents. The statute of limitations on the Joneses’ contract claim began to run when the cause of action for breach of contract accrued. Under the principles set forth in our cases, the cause of action accrued when Hyatt breached its contract to procure insurance and when the breach was or should have been discovered.

See, e.g., Himelfarb v. American Express Co., 301 Md. 698, 703 , 484 A.2d 1013, 1015 (1984), quoting Federalsburg v. Allied Con., 275 Md. 151, 157 , 338 A.2d 275, 280 , cert. denied, 423 U.S. 1017 , 96 S.Ct. 452 , 46 L.Ed.2d 389 (1975) (“ ‘In contract cases, the general rule is that the period of limitations begins to run from the date of the breach, for it is then that the cause of action accrues and becomes enforceable’ ”); Wlodarek v. Thrift, 178 Md. 453, 461, 467 , 13 A.2d 774, 778, 781 (1940) (“For every breach of a contract, there is a right of recovery of at least nominal damages. * * * [T]he right of action accrue[s] immediately on the breach”). Since the discovery rule is now generally applicable in civil actions, accrual of the cause of action was postponed until K & D and/or the Joneses knew or should have known of the breach. See Poffenberger v. Risser, 290 Md. 631, 636 , 431 A.2d 677, 680 (1981) (holding the discovery rule “applicable generally in all actions and the cause of action accrues when the claimant in fact knew or reasonably should have known of the wrong”). ⁶⁴⁹ The determination of when a breach of contract occurs usually depends on the nature of the promises made in the contract and the times for performing those promises. There is a significant difference between an agent’s or broker’s breach of an agreement to procure insurance and an insurer’s breach of a liability insurance policy.

In relying on this Court’s past decisions in cases involving insurers’ alleged breaches of liability insurance policies, the circuit court and the Joneses ignored this distinction. Determining when a typical liability insurance policy has been breached depends on which promise under the policy the insurer has broken. An insurer’s contractual duty to indemnify an insured is ordinarily not breached until an injured tort claimant has obtained a determination of liability and damages in an underlying tort action, and the insurer refuses to pay. The insurer’s promise is to indemnify or to pay what its insured is legally obligated to pay.

The time for performance is when there is a settlement or a judgment against the insured, and the breach is the insurer’s refusal to pay that settlement or judgment. The statute of limitations does not begin to run until that time. Washington Transit v. Queen, supra, 324 Md. at 333-334 , 597 A.2d 423, 426 (“The statute of limitations against the insurer would ordinarily not begin running until the insurer, after a judgment in the underlying tort case, breaches the policy by refusing to pay”). See Vigilant v. Luppino, 352 Md. 481, 487-488 , 723 A.2d 14, 17 (1999); Lane v. Nationwide Mut.

Ins. Co., 321 Md. 165, 176-177 , 582 A.2d 501, 506-507 (1990). A liability insurer’s contractual duty to defend an insured, however, is a continuing duty that runs throughout the course of the underlying tort litigation against the insured. Vigilant v. Luppino, supra, 352 Md. at 489 , 723 A.2d at 18 (1999) (“the duty to defend, by its very nature, is a continuing one that extends throughout the tort suit by the third party against the insured”).

Moreover, a breach of the duty to defend can be cured at any time prior to termination of the underlying litigation. 352 Md. at 492 , 723 A.2d at 19 (“An ⁶⁵⁰ insured should be allowed to expect the insurer to step in and cure its breach so long as the underlying action is continuing”). In contrast, a contract to obtain insurance is ordinarily breached immediately upon the agent’s or broker’s failure to procure the insurance in a timely manner. The promise of the agent or broker is not to provide a defense or to pay a judgment. Instead, the promise is to obtain an insurance policy, and the breach occurs when the agent or broker does not timely obtain that policy.

This breach cannot be cured after the insurance applicant commits a tort for which he or she rightfully believes that insurance coverage has been obtained. The consequence of the agent’s failure to procure the insurance prior to the accidental tort is that the client will not be insured. There will be no insurer-furnished defense or indemnity. Thus, the Joneses’ reliance on our eases involving breaches of insurance policies, most notably Washington Transit v. Queen, supra, and Vigilant v. Luppino, supra, is misplaced.

The essential difference between the nature of the two contracts, i.e., an insurance policy and an agreement to procure such a policy, necessitates our holding that the statute of limitations on the Joneses’ third-party beneficiary cause of action in contract began to run as soon as Hyatt’s failure to procure insurance for K & D was discovered. The contract was clearly breached long before the Joneses obtained a judgment against K & D. Moreover, both K & D and the Joneses discovered or should have discovered Hyatt’s breach of its contract to procure insurance more than three years before the present action was filed. 6 The record shows that within a few days after the July ⁶⁵¹ 25, 1985, accident, John Swem of the Hyatt Insurance Agency informed K & D that its “vehicles were not covered.” The Joneses were aware that K & D was uninsured as early as August 1985. For example, in a letter dated August 12, 1985, Hyatt advised Mr. Jones that “we do not and have not ever carried insurance on commercial vehicles” for K & D and that Hyatt was therefore returning the estimates and letter which Mr. Jones had sent to Hyatt. In an August 27, 1985, letter from Allstate Insurance Company to K & D, Allstate informed K & D that the insurer had paid a property damage claim resulting from the accident, that “[s]ince there is no insurance to cover this loss we are looking to you or Mr. Smith personally to pay” Allstate, and that, as to Mr. Jones’s larger claim, Mr. Jones wished to “wait a few days and see if your insurance is straightened out” before seeking uninsured motorist coverage from Allstate.

Mr. Jones received a check from Allstate issued on September 19, 1985. By letter of March 6, 1986, Allstate told K & D that “Hyatt Insurance has given us a definite no in regard to your insurance coverage.” Certainly by this point (more than three years before filing suit against Hyatt in October 1989), K & D and the Joneses were aware, or at least were on inquiry notice, concerning Hyatt’s failure to procure motor vehicle liability insurance coverage for K & D. The Court of Special Appeals correctly held that the Joneses’ third party beneficiary contract cause of action was barred by limitations. 7 ⁶⁵² III. As previously indicated, we agree with the Joneses that, in their amended complaint, they did assert direct tort causes of action against Hyatt and Swem. Hyatt and Swem, however, argue that Maryland law does not recognize such tort causes of action under the circumstances here and that, even if such causes of action are- recognized, they were barred by limitations.

The Joneses respond by arguing that their status as third-party beneficiaries of the contract between K & D and Hyatt warrants recognition of a direct tort cause of action. In addition, according to the Joneses, they “seek a rule of law that the agent who fails to provide the insurance coverage is liable to the injured motorist under the same terms and in the same amount as the insurer would have been, had the agent met his or her duty and provided the insurance coverage requested by the client.” (Petitioners’ brief at 11). The Joneses further assert that Maryland law recognizes that a client has a tort cause of action against an insurance agent when the agent negligently breaches its agreement to obtain an insurance policy for the client; they contend that tort claimants should similarly be entitled to maintain a tort action against the agent. The Joneses also rely upon the foreseeability of harm to persons in their position resulting from an insurance agent’s breach of the contract with the client.

Finally, the Joneses contend that the statute of limitations with ⁶⁵³ regard to such direct tort cause of action did not begin to run until, in the underlying tort suit against K & D, the Joneses recovered a judgment. 8 In our view, Hyatt and Swem owed no tort duty directly to the Joneses under the circumstances here. Because there was no direct tort cause of action, the case presents no issue concerning the running of the statute of limitations in such a tort action. A. In order to maintain a tort cause of