On September 20th, the Supreme Court of Nevada issued an order answering certified questions posed by the United States Court of Appeals for the Ninth Circuit directed at the vitality and application of its recent ruling in Century Surety Co. v. Andrew, 134 Nev., Adv. Op. 100, 432 P.3d 180 (2018). In Century Surety, the Court departed from the prevailing view among jurisdictions in announcing “an insurer’s liability for the breach of the duty to defend is not capped at the policy limits, even in the absence of bad faith.” The two questions certified to the Court in Nalder on behalf of Nalder v. United Auto Ins. Co., No. 70504, 2019 WL 5260073, were as follows:
- 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?
- In an action against an insurer for breach of the duty to defend its insured, can the plaintiff continue to seek consequential damages in the amount of a default judgment obtained against the insured when the judgment against the insured was not renewed and the time for doing so expired while the action against the insurer was pending?
In response to the first, the Court reiterated that the reasonableness of an insurer’s refusal to defend is “irrelevant for determining damages upon a breach of the duty to defend.” Id. at *2. Moreover, it declined to recognize a deviation from the standard announced in Century Surety for circumstances in which the “complaint did not allege a loss within the policy period and an insurer’s breach of a duty to defend is based on a reasonable, good faith determination that the insurance policy at issue was not in effect at the time of the loss.” Id.
With respect to the second certified question, the Court analyzed the circumstances in which the question arose: Nalder sued Lewis and obtained a $3.5 million dollar default judgment in state court. Nalder took an assignment of Lewis’ rights against his insurer, United Auto Insurance Company. Nalder and Lewis initiated a federal court action against United Auto to collect the judgment premised upon the insurer’s failure to defend Lewis in the state court action. They did so, however, having failed to renew the judgment before it expired (six years following entry).
Presented with this procedural history, the Court found that the federal action was not an “action on the judgment” under NRS 11.190(1)(a) that would otherwise toll its expiration and the expired judgment central to the federal court action was not an element of consequential damages, “If Lewis is not liable to Nalder for the $3.5 million judgment, it follows that UAIC is not liable for that judgment as a result of breaching its duty to defend Lewis in the action that led to it; Lewis no longer needs UAIC to pay him $3.5 million to give him the benefit of his insurance contract…(‘[T]he law does not allow awards for phantom injuries.’ Citation omitted.)”
The Court thus answered the second question in the negative, declining to recognize the expired $3.5 million dollar judgment—which Lewis did not and could not suffer—as consequential damages for the breach of the duty to defend. To hold otherwise would give Lewis (and his assignee) a windfall in excess of any benefit he would have obtained for United Auto’s performance under the contract. Id. at *3.
Nalder on behalf of Nalder v. United Auto. Ins. Co., No. 70504, 2019 WL 5260073, (Nev. Sept. 20, 2019).
