Posted In: Insurance Recovery
Insurance Blog: Nevada Supreme Court Finds that Insurance Company's Liability can Exceed the Policy Limit
By Christopher T. Teodosio on March 05, 2019
In Century Sur. Co. v. Dana Andrew, 134 Nev. Adv. Op. 100, 2018 WL 6609591 (2018), the Nevada Supreme Court considered the issue 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 defense, or whether the insurer is liable for all losses consequential to the insurer’s breach.” Century Sur. Co., 2018 WL 6609591 at 1. The Court found that where an insurance company “breaches its contractual duty to defend… [it] may be liable for any consequential damages caused by its breach.” Id.
The plaintiff (the “Injured Party”) was struck by a truck and suffered serious brain injuries. The owner and driver of the truck (the “Insured”) used the truck personally and in connection with an auto detailing business that he owned. The Insured’s business had a commercial general liability policy with a $1,000,000 limit that was issued by Century Surety Company (“Century”).
After the Injured Party submitted a claim, Century conducted an investigation and concluded that the Insured was not driving his truck in the course and scope of his employment when he struck the Injured Party. Accordingly, Century determined that the accident was not covered under the business’s CGL policy and refused to settle the Injured Party’s claim within the policy limit.
The Injured Party brought suit against the Insured and his business. In the complaint, the Injured Party alleged that the Insured was driving in the course and scope of his employment with the Insured’s company. The Injured Party notified Century of the suit, but Century did not defend the Insured or his company. Consequently, the Insured and his company defaulted. Then, the Injured Party entered into a settlement agreement with the Insured and his company under which the Insured’s company assigned its rights under the Century policy to the Injured Party. Thereafter, the Injured Party was granted default judgment against the Insured and his company in the amount of $18,050,183 and, as part of the factual findings in the default judgment entry, the Court found that the Insured negligently injured the Injured Party and the Insured “was working in the course and scope of his employment with [the Insured’s company] at the time, and that consequently [the Insured’s company] was also liable.”
The Dispute Between the Injured Party and Century
The Injured Party, as assignee of the Century policy, filed suit for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair claims practice against Century. The Nevada District Court found that Century did not act in bad faith but breached its duty to defend. Upon a motion for reconsideration, the court found that the Insured’s company was entitled to consequential damages exceeding the policy limits due to Century’s failure to defend and that the default judgment constituted consequential damages. The District Court stayed the case and certified the question to the Nevada Supreme Court.
The Nevada Supreme Court’s Analysis
The Nevada Supreme Court analyzed the insurance policy like any other contract. It found that “the general rule in a breach of contract case is that the injured party may be awarded expectancy damages…” Id. at 2. And, the Court found that expectancy damages could be measured by, among other things, “any other loss, including incidental or consequential loss, caused by the breach.” Id. citing Restatement (Second) of Contracts § 347.
In its analysis, the Court recognized that there were two views as to an insurance company’s liability in breaching its duty to defend when the judgment against the insured exceeded the policy limit. The majority view recognizes that “the liability of the insurer is ordinarily limited to the amount of the policy plus attorneys’ fees and costs.” Id. at 3. The minority view, in contrast, “is that damages for a breach of the duty to defend are not automatically limited to the amount of the policy; instead the damages awarded depend on the facts of each case” and that the party injured “by an insurer’s breach of its duty to defend is entitled to recover all damages naturally flowing from the breach.” Id. Moreover, with respect to the minority view, “[d]amages that may naturally flow from an insurer’s breach include: (1) the amount of the judgment or settlement against the insured plus interest [even in excess of the policy limits]; (2) costs and attorneys’ fees incurred by the insured in defending the suit; and (3) any additional costs that the insured can show naturally resulted from the breach.” Id.
The Nevada Supreme Court found that the minority view was “the better approach” because “the majority view places an artificial limit to the insurer’s liability.” Id. at 4. As such, the Court found that the Injured Party was entitled to consequential damages. Furthermore, the Court held that the “right to recover consequential damages sustained as a result of an insurer’s breach of the duty to defend does not require proof of bad faith.” Id. at 5. Indeed, the Court found that where an insurer breaches its duty to defend it does so “at its own peril” and “takes the risk not only that it may eventually be forced to pay the insured’s legal expenses but also that it may end up having to pay for a loss it did not insure against.” Id. The Nevada Supreme Court, however, did not go so far as to conclude that an entire judgment was automatically consequential damages arising from an insurance company’s breach of its duty to defend. Rather, the insured “is tasked with showing that breach caused the excess judgment and is obligated to take all reasonable means to protect himself and mitigate his damages.” Id.
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