Professional Liability Claim Against Accountant for Failure to Procure Insurance Limits Accrues when Insurer Pays Lesser Amount, Not when Accountant’s Error Discovered

In Lederer v. Gursey Schneider (No.B276266, filed 4/19/18), the Second Appellate District ruled that the statute of limitations on a cause of action for professional malpractice against an accounting firm for failing to procure the full amount of uninsured/underinsured motorist (UM) coverage as requested by its client does not begin to run until the plaintiff suffers actual injury, which for underinsured motorist coverage is when the UM insurer pays its limit that is less than had been requested by the insured client.

In Lederer, the defendant accounting firm performed financial management services for the plaintiffs. This included procuring insurance for the plaintiffs’ family, which had requested $5 million in UM coverage. However, only $1.5 million in UM coverage was actually procured. The family’s adult son had a serious motorcycle accident with an underinsured driver in February 2010. In January 2012, the other driver’s insurer paid its $15,000 limit. In June 2012, the plaintiffs’ own insurer tendered the balance of its $1.5 million in UM coverage. The plaintiffs thereafter sued the accounting firm in March 2013, claiming damages because of the son’s inability to collect more UM coverage from the family’s own insurer.

The accounting firm moved for summary adjudication, arguing that the lawsuit was time-barred because the cause of action had accrued shortly after the accident, when the plaintiffs first learned that the coverage limits were lower than requested. The trial court agreed based on the two-year statute of limitations for accounting malpractice actions, which, under the “discovery rule,” begins to run when a plaintiff has knowledge or should suspect that injury was caused by wrongdoing. The trial court found that the UM insurer’s actual payment of its lower limits was irrelevant in light of the fact that the mother had learned of the accounting firm’s failure to obtain the correct amount of coverage just after the accident.

The appellate court reversed. The court said that for a professional malpractice claim, including failure to procure coverage, “[t]he statute begins to run when (1) the aggrieved party discovers the negligent conduct causing the loss or damage and (2) the aggrieved party has suffered actual injury as a result of the negligent conduct,” quoting Apple Valley Unified School Dist. v. Vavrinek, Trine, Day & Co. (2002) 98 Cal.App.4th 934, 942. And according to the Lederer court, the plaintiffs’ “actual injury” element could not have been satisfied within two years, even if the mother had “discover[ed] the negligent conduct.”

The Lederer court explained that without actual injury, there is no cause of action in tort – “[t]he mere breach of a professional duty, causing only nominal damages, speculative harm, or the threat of future harm—not yet realized—does not suffice to create a cause of action for negligence,” quoting Budd v. Nixen (1971) 6 Cal.3d 195, 200. And according to the Lederer court, “plaintiffs did not suffer the damages alleged to be caused by Gursey Schneider —diminished benefits under the underinsured motorist coverage—until [the son] received that diminished benefit payment in June 2012.”

The court reasoned that under the UM statute and applicable case law, a right to underinsured motorist benefits does not even arise until after the tortfeasor’s insurer has paid its limits and exhausted coverage. Thus, as a preliminary matter, the son did not even have a right to UM benefits until after he settled with the other driver’s insurer in January 2012.

In contrast, a December 2017 decision of the Sixth District Court of Appeal, Choi v. Sagemark Consulting, et al., 18 Cal.App.5th 308 (2017), reaffirmed the significance of the discovery rule as the ‘gold standard’ for the accrual of claims against financial professionals. There, the court concluded that the threat of potential IRS penalties was sufficient to constitute “injury” for the statute of limitations for a claim against an accountant to begin, even before any such penalties had been assessed. It explained that although under Supreme Court precedent the IRS assessment date controls for purposes of accrual for accountant malpractice actions in tax return matters due to the need for uniformity of decision in such matters, in this instance the discovery of the error and its likely consequences constituted the “injury” for limitations purposes.

With the Lederer decision, there is now an apparent conflict between the Second and Sixth Appellate Districts on the applicability of the “date of discovery” versus the “date of damage” in malpractice cases against accountants. On the one hand, if the facts discovered are given credence as equivalent to “injury,” as the Choi court found, the “date of discovery” of the error would appear to control. On the other, if the discovered facts only suggest or require that future events will necessarily determine the occurrence of “injury,” as the Lederer court determined, then the “date of injury” will control. Given the UM coverage involved and the statutory basis for the Lederer court’s finding that until the lesser UM limits were paid the plaintiffs could not have sued for the difference, that decision may well be limited to its unique facts. However, the two decisions could lead to further confusion as parties struggle to shoehorn the facts of their cases into one school of thought or the other, depending on the location of their action or whichever suits their interests. The Supreme Court may well need to provide guidance to the appeals courts to avoid possibly inconsistent approaches and outcomes regarding statute of limitations defenses in accountants’ liability actions.

This document is intended to provide you with information about professional liability law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

April 24, 2018