Nevada Supreme Court Imposes Excess-Limits Liability on Insurer for Breach of Duty to Defend Despite No Bad Faith
An insurer typically will not be liable to pay more than its policy limits based on a breach of the duty to defend where the insurer denied coverage in good faith. The Nevada Supreme Court, however, recently held that an insurer was required to pay an $18 million judgment against its insured based on its breach of the duty to defend, under a policy that had limits of liability of $100,000, even though the insurer had denied coverage in good faith.
Nevada Takes the Minority Approach
In Century Surety Company v. Andrew, Case No. 73756 (Nev. Dec. 13, 2018), a Nevada federal court certified to the Nevada Supreme Court the question of “whether, under Nevada law, the liability of an insurer that has breached its duty to defend, but has not acted in bad faith, is capped at the policy limit plus any costs incurred by the insured in mounting a defense, or whether the insurer is liable for all losses consequential to the insurer’s breach.” Id. In Andrew, the underlying plaintiff suffered severe brain damage from being struck by the insured, who was driving a truck that he used for personal and work purposes. The insurer denied coverage after determining, based on its investigation at the time of the accident, that the insured was not driving in the course and scope of his employment. The insured then defaulted in the liability action.
After the insured settled with the underlying plaintiff, the insured assigned its rights under the auto policy to the plaintiff. The insurer also agreed to pay the full policy limits of $100,000. A default judgment subsequently was entered against the insured in the amount of approximately $18 million, for which amount the underlying plaintiff then sued the insurer.
The federal court found that the insurer had not acted in bad faith but had breached the duty to defend. Id. at *4. In fact, there were no defense costs because the insured had defaulted in the underlying negligence action. On motion for reconsideration, the federal court determined that the plaintiff was entitled to consequential damages in excess of the policy limits based on the insurer’s breach of the duty to defend because the default judgment “was a reasonably foreseeable result of the breach of the duty to defend.” Id. The federal court also held that bad faith was not required to impose such liability in excess of the policy limits.
Adopting the minority view, the Nevada Supreme Court agreed with the federal court’s decision that bad faith is not required to impose above-the-limits liability on an insurer that has breached the duty to defend. The court stated that the majority view, which limits damages for breach of the duty to defend to the amount of the policy plus attorneys’ fees and costs, “places an artificial limit to the insurer’s liability within the policy limits for a breach of its duty to defend” because such policy limits concern the insurer’s duty to indemnify. Id. at *8, 10.
Instead, the minority view, under which damages based on an insurer’s liability for breach of the duty to defend are “not automatically limited to the amount of the policy” and depend on the facts of the case, affords an aggrieved party all damages “naturally flowing from” the insurer’s breach. Id. at *9. The court reasoned that an insurance policy’s limits of liability restrict “only the amount the insurer may have to pay in the performance of the contract as compensation to a third person for personal injuries caused by the insured; they do not restrict the damages recoverable by the insured for a breach of contract by the insurer.” Id. at *11. Therefore, because the duty to defend is a contractual duty, a breach of such duty is a breach of contract that gives rise to liability for consequential damages.
Caution to Insurers with Claims in Nevada
Insurers who may handle claims in Nevada should approach a denial of coverage with the foregoing case in mind. Although the application of this new case has not yet been tested, the effect of it could be that even a good faith denial results in extra-contractual exposure if a court later determines that such denial of coverage breached the duty to defend, and that the amounts for which the insured became liable in excess of such limits were a “reasonably foreseeable result of” such breach.