The United States District Court for the District of Nevada certified the following question to the Nevada Supreme Court:
‘[w]hether, 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.’”
The Nevada Supreme Court responded:
“We conclude that an insurer’s liability where it breaches its contractual duty to defend is not capped at the policy limits plus the insured’s defense costs, and instead, an insurer may be liable for any consequential damages caused by its breach.
We further conclude that good-faith determinations are irrelevant for determining damages upon a breach of this duty.”
At the time of a vehicular accident, the driver was insured under a personal auto policy and his business was insured under a commercial liability policy issued by Century Surety. The accident victim sued driver and his business, the Century named insured, alleging that driver was acting within the course and scope of his employment. Century investigated, concluded that the driver was not driving in the course and scope of his employment at the time of the accident and refused to either defend or settle the claim within its policy limits. The personal auto insurer defended and paid its policy limit as part of a settlement agreement that included a default judgment, after hearing, for $18,050,183.
The default judgment’s factual findings acknowledged that “[driver] was working in the course and scope of his employment…” The accident victim, as the business’ assignee, sued Century for breach of contract and bad faith. The Federal District Court found that Century did not act in bad faith but did breach the contractual duty to defend. It then certified the above question to the Nevada Supreme Court.
There is a lot to unpack in this opinion. It is significant to our clients in 3 distinct areas:
First, it departs from the majority view that requires an insurer to commit the tort of bad faith to be exposed to extra-contractual damages. Now, in Nevada, an insurer may be liable for amounts above contract payments (specifically, in this case, a default judgment that exceeded its policy limits) as consequential damages for breaching its contractual duty to defend its insured. Noteworthy, the extent of an insurer’s liability for “consequential damages” (in this case, the excess judgment) must be determined on the facts of each case. An insurer is not automatically liable for the entire amount of the judgment, but is liable for the amount of the judgment caused by its breach of the duty to defend.
Second, it clarifies the duty to defend. “We take this opportunity to clarify that where there is a potential for coverage based on ‘comparing the allegations of the complaint with the terms of the policy,’ an insurer does have a duty to defend…In this instance, as a general rule, facts outside the complaint cannot justify an insurer’s refusal to defend its insured.”
Finally, if you are keeping score, it follows and cites to the new Restatement of the Law of Liability Insurance on both of the above propositions.
