("Good Faith" Breach of Duty to Defend May Leave Insurer Liable for Excess Judgment)
(April 2019) - In Century Surety Company v. Dana Andrew (Dec. 13, 2018), the Nevada Supreme Court ("NSC") considered the appropriate measure of damages for an insurer's breach of the duty to defend, where the insurer did not act in bad faith.
Ryan Pretner ("Pretner") and his guardian ("Respondents") initiated a personal injury action after a truck owned and driven by Michael Vasquez ("Vasquez") struck Pretner, causing significant brain injuries. Vasquez used the truck for personal use, as well as for his mobile auto detailing business, Blue Streak Auto Detailing, LLC ("Blue Streak"). At the time of the accident, Vasquez was covered under a personal auto liability policy issued by Progressive Casualty Insurance Company ("Progressive") and Blue Streak was insured under a commercial liability policy issued by appellant Century Surety Company ("Century"). The Progressive policy had a $100,000 policy limit, whereas the Century policy had a $1 million dollar policy limit.
Upon receiving the accident report, Century conducted an investigation and determined that Vasquez was not driving in the course and scope of his employment with Blue Streak at the time of the accident, and that the accident was not covered under its insurance policy. Century therefore rejected Respondents' demand to settle the claim within the policy limit.
Respondents then sued Vasquez and Blue Streak in state district court, alleging that Vasquez was driving in the course and scope of his employment with Blue Streak at the time of the accident. Century refused to defend and Vasquez and Blue Streak defaulted. Vasquez and Blue Streak thereafter entered an agreement with Respondents wherein they assigned their rights against Century to Respondents and Respondents agreed not to execute on any judgment against Vasquez and Blue Streak. Respondents then obtained a default judgment against Vasquez and Blue Streak for $18,050,183. The factual findings of the default judgment included that "Vasquez negligently injured Pretner, that Vasquez was working in the course and scope of his employment with Blue Streak at the time, and that consequently Blue Streak was also liable."
Respondents then filed suit against Century asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair claims practices, which Century removed to federal court.
The federal district court first found that Century had breached its duty to defend, that Century was not bound by the default judgment entered against the defendants in the underlying action, and that the plaintiffs could recover the damages incurred as a result of Century's breach of its duty to defend that were reasonably foreseeable at the time of the contract, but those damages were capped by the $1 million limit of the Century policy. The court thereafter reconsidered and found that the default judgment was a reasonably foreseeable consequential damage caused by Century's breach of its duty to defend its insured, and that Century was bound by the default judgment, absent unreasonableness, fraud or collusion. The Court eventually stayed its decision and certified the following question to the NSC:
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 is the insurer liable for all losses consequential to the insurer's breach?
The NSC concluded that the insurer may be liable for any consequential damages caused by its breach of the duty of defend and that the good faith determination is irrelevant in determining those damages. Thus, even in the absence of bad faith, an insurer may be liable for a judgment that exceeds the policy limits if the judgment is consequential to the insurer's breach.
While the NSC acknowledged that the majority view limited damages to the policy limits, plus attorney fees, expenses and other damages as long as the insurer did not act in bad faith, it found the minority view the better approach. The NSC opined that the majority view places an artificial limit to the insurer's liability within the policy limits for a breach of the contract which is based on the insurer's duty to indemnify. The NSC noted that "[a] duty to defend limited to and coextensive with the duty to indemnify would be essentially meaningless; insureds pay a premium for what is partly litigation insurance designed to protect...the insured from the expense of defending suits brought against him." It also noted the policy limits "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."
Finally, the NSC found the obligation of the insurer to defend its insured is purely contractual and a refusal to defend is considered a breach of contract. Thus, consistent with general contract principles the insured may be entitled to consequential damages resulting from the insurer's breach of its contractual duty to defend.
As some solace to insurers, the NSC specifically noted that an entire judgment is not automatically a consequence of an insurer's breach of its duty to defend, but rather "the insured is tasked with showing that the breach caused the excess judgment" and is "obligated to take all reasonable means to protect himself and mitigate his damages." While this limits the breadth of the rule, it is clear that, as the NSC noted, an "insurer refuses to defend at its own peril."
It is of note that Nevada has previously relied on California law as especially persuasive on insurance issues. The NSC's decision presents the first significant divergence from California insurance law. In this case, California follows the majority rule and would limit recovery. Instead, the NSC chose to follow the minority rule and expand recovery.
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