Two Nevada federal decisions are at loggerheads over whether an insurer must pay extra-contractual damages when it wrongly denies a defense.
So the 9th Circuit has asked the Nevada Supreme Court:
Under Nevada law—even if refusal to defend is not in bad faith—is the insurer's liability limited to “policy limit[s] 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?” Nalder v. United Automobile Ins. Co., 824 F.3d 854, 856 (2016).
The answer could mean millions, and how Nevada liability insurers assess defense obligations.
Nalder v. UAIC
Nalder v. United Automobile Ins. Co., 2010 WL 5559974 (D. Nev., dec'd 12/20/10), and Andrew v. Century Surety Co., 2014 WL 1764740134 (D. Nev. dec'd 4/29/14), were both cases where auto liability insurers refused to defend their insureds based on policy defenses. Each case resulted in a multi-million dollar default judgment. Separate lawsuits to enforce the judgments against the insurers were decided in Nevada's U.S. District Court. In neither case was the insurer found to have acted in bad faith.
In Nalder summary judgment for UAIC based on the policy defense was reversed on appeal. Nalder v. United Automobile Ins. Co., 500 Fed. Appx. 701 (9th Cir. 2012). On remand, the district court found that since the insured hadn't defended—and had no recoverable defense fees or costs—the insured's only damage was UAIC's failure to pay its $15,000 liability limit toward the $3.5 million judgment. Nalder v. United Automobile Ins. Co., 2013
WL 5882472, at *7 (D. Nev., dec'd 10/30/13).
Andrew v. Century Surety Co.
In Andrew, a personal auto carrier paid its limits where its insured hit a bicyclist with a truck owned and used in the insured's business. Although the complaint alleged the accident was business-related, the business' commercial auto carrier, Century Surety, refused to defend because the insured
was on a personal errand during the accident.
The insured cut a deal with the plaintiff: He'd assign any rights against Century; allow a default to be taken; and in exchange take the plaintiff's promise not to execute on a later judgment. The default judgment—less $5 million in unrecoverable attorney's fees—was over $12 million. Enforcement proceedings against Century were taken.
The U.S. District Court found Century breached its duty to defend but followed California authority capping damages at Century's $1 million policy limits. Andrew v. Century Surety Co., supra at *9.
That decision was revisited in “Andrew II,” where the court held a default judgment was a foreseeable “consequential” damage of the failure to defend, and Century Security's exposure at trial jumped to $12 million. Andrew v. Century Surety Co., 134 F.Supp.3d 1249 at 1259 (D. Nev. 2015).
So are there extra-contractual damages in Nevada for failure to defend?
Nalder and Andrew are polar opposites. If Nalder is the rule, a liability carrier can refuse to defend, and face no consequences beyond what it promised in the first place—to pay for the defense, and indemnify an insured up to its policy limits. This rule emphasizes an insurer's “right to be wrong” when deciding questionable coverage and defense obligations. But it also encourages insurers to give themselves—not their insureds—the benefit of the doubt when making those same decisions (which in itself can raise bad faith implications).
If Andrew holds sway, the insurer can be penalized with extra-contractual damages if its faulty, but “good faith” determination not to defend is later second-guessed in court. This is especially true since Andrew II expressly holds the non-defending insurer, who chooses not to participate in the underlying tort action or protect its interests, is bound by the resulting adverse judgment. Andrew, 134 F.Supp.3d at 1262-3.
Is there a happy medium? And if not, what can insurers do to avoid an Andrew result? The Andrew court suggests the answer is already in the insurer's
arsenal: Defend under a well-drafted reservation of rights (side-stepping a default's dispositive factual and legal effects), and where feasible seek declaratory relief. Id, at 1264. Said differently, get proactive.
Briefing is now in full swing before the Nevada Supreme Court in Nalder v. United Automobile Ins. Co., Nev. S. Ct. Case #70504.
The foregoing is not to be confused with legal advice, but merely, as T.S. Eliot once wrote, “Thoughts of a dry brain in a dry season.”
© Barron & Pruitt, 2017