Nevada’s “Legal Entitlement” To Benefits
While Nevada offers some unique challenges for insurance companies and defendants in personal injury claims, first party breach of contract and/or extra-contractual claims arising from Uninsured and/or Underinsured (UM/UIM) Motorist Benefits in automobile insurance policies are particularly troublesome. Nevada law does not require the insured to obtain a judgment against (or consummate a settlement with) the uninsured/underinsured tortfeasor who caused the insured’s damages. Nor must they exhaust the uninsured/underinsured tortfeasor’s applicable insurance limits. Instead, Nevada law permits the insured to file a bad faith action against their insurer once the insured establishes “legal entitlement” and unreasonable conduct by the insurer regarding its obligations to its insured. See Pemberton v Farmers Ins. Exchange (1993) 109 Nev. 789, 858 P.2d 380.
In Nevada, a first party insured claimant can file a lawsuit for breach of contract against their insurer as long as the insured alleges their damages exceed the applicable tortfeasors’ limits and they allege the insurer has breached its contractual obligations under the insurance policy to afford and/or pay benefits for the claim. Unlike California, there is no statutory requirement to first submit UM/UIM breach of contract and bad faith claims to arbitration. Furthermore, Nevada permits the insured/claimant to assert their first party claims in the same lawsuit wherein they assert their third party bodily injury claims against the uninsured/ underinsured tortfeasor. In Nevada, plaintiffs’ counsel often combine the claims in the same lawsuit because their client and the uninsured/underinsured tortfeasor are both Nevada residents. This prevents the insurer from removing the case to federal court (a less hostile forum for insurers) based on diversity jurisdiction.
When the insured files their complaint alleging first party claims for failure to pay UM/UIM benefits, they will always assert breach of contract theories under the applicable insurance policy. Typically, they also will assert extra-contractual theories based on allegations the insurer engaged in unreasonable conduct in relation to the UM/UIM claim and/or they allege the insurer violated Nevada Revised Statute Section 686A.310, also known as Nevada’s Unfair Claims Practices Act. The extra-contractual theories usually state causes of action for breach of the implied covenant of good faith and fair dealing, violations of common law bad faith and violations of Nevada’s Unfair Claims Practices Action (Statutory Bad Faith).
The Nevada Federal District Court has explained in this regard,
The duty of good faith and fair dealing in Nevada thus does not come into existence upon the “establishment” of a claim by the insured. Rather …, the duty inheres to the contract of insurance itself, and exists long before the actual legal entitlement to recovery is established. Thus, in the present case, it is clear that the plaintiff need not wait until “legal entitlement” in order to establish a claim for bad faith. Rather, all he need show is that the insurer has breached his duty of reasonable negotiation and settlement of the claim. Lee v Allstate Ins. Co. (1996) 648 F. Supp. 1295, 1299.
When evaluating a claim for uninsured/underinsured, the insurer is required to conduct a reasonable prompt investigation and arrive at a reasonable valuation of the insured’s damage claim. The insurer is entitled to an offset for the uninsured/ underinsured tortfeasor’s applicable policy limits, regardless if the tortfeasor settled with the insured for less than the applicable limits. The insured also is entitled to an offset for Med Pay benefits it pays under its policy to the insured.
Finally, the insurer is also permitted to assert contributory negligence and other defenses the uninsured/underinsured tortfeasor possesses in relation to the insured’s third party claim, as long as there has not been a liability determination regarding the same. If liability issues have already been adjudicated in the third party claim, the insurer is bound by this determination. This is true even when liability is not adjudicated on the merits, as long as the insurance company receives notice of the third party lawsuit.
In Estate of Lomastro v American Family (2008) 124 Nev. 1060, the Nevada Supreme Court held an entry of default “binds an insurance company intervenor as to the liability of an uninsured motorist defendant if the insurance company had notice of the litigation and the plaintiff’s intent to seek entry of default, but failed to intervene before a default was entered.” Id at 1064. Therefore, insurance carriers handling first party UM/UIM claims in Nevada must be mindful of receiving from the insured’s counsel, a Three Day Notices of Intent to Enter Default relating to the insured’s third party claim against the uninsured/underinsured tortfeasor. If the insurer believes there are facts to support a liability defense, they must assign counsel to intervene in the case before Plaintiff enters default against the tortfeasor or the insurer will lose the right to assert the liability defense in the first party claim.
The Nevada Unfair Claims Practices Act includes 15 specific subsections expressly describing conduct which constitutes an “unfair practice.” The sections insurers typically violate include the following:
1. Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.
2. Failing to effectuate prompt, fair and equitable settlements of claims in which liability of the insurer has become reasonably clear.
3. Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered.
4. Failing to provide promptly to an insured a reasonable explanation of the basis in the insurance policy, with respect to the facts of the insured’s claim and the applicable law, for the denial of the claim or for an offer to settle or compromise the claim.
Typically, an insurer commits bad faith because it fails to respond, in writing and within a reasonable time, to their insured’s demand for UM/UIM benefits. This does not mean the insurers always must respond to an unreasonable time limit demand, but good practice requires the insurer’s representative handling the claim, to respond in writing, within a reasonable time and if more time is required to evaluate the claim, the response should articulate why it is reasonable to request more time and how much time is needed.
When the first party UM/UIM claim enters litigation, the insurer has a continuing duty to evaluate any new information regarding the claim. Therefore, any new information regarding the claim obtained by the insurers counsel in the litigation must be provided to the insurance company representative for their independent evaluation regarding the insurer’s reasonable valuation of the claim. If this is not done, the insurer’s attorney will become the only claim evaluator and the attorney’s file will become discoverable.
When first party UM/UIM claims are resolved, the insurer should never condition payment of the contractual benefits to the insured or require its insured to sign a release of potential extra-contractual claims or dismiss any related lawsuit regarding the same. The insurance carrier is contractually obligated to pay and the insured is entitled to receive the reasonable value of UM/UIM benefits afforded under the policy and an attempt to require the insured to sign a release in exchange for payment of the benefits, likely will be construed as an act of bad faith. Requiring the insured to sign only a written acknowledgment of receipt of payment of the benefits avoids creating additional exposure to bad faith claims.
For example, in a case where the insured’s pre-litigation treatment was limited to conservative care and then after litigation commences, the insured undergoes more extensive medical treatment which is attributable to the claim, the insurer often will re-assess and possibly increase its valuation of the claim. When this occurs, the insurer may decide to tender the limits of the contractual benefits afforded under the policy while the ongoing bad faith lawsuit continues. In this scenario, the insurer cannot condition payment of the benefits on dismissal of the extra contractual claims.
A first party claimant in Nevada does not need to wait to file a lawsuit against their insurer until after they exhaust a tortfeasor’s policy, through settlement or judgment and/or wait for their their third party claims to be adjudicated. Instead, they merely have to allege their damages exceed the tortfeasor’s applicable limits, to file a lawsuit against their UM/UIM carrier for breach of contract. And if they allege unreasonable conduct by the insurer in evaluating the claim, the lawsuit will include bad faith and related extra-contractual theories.
ABOUT THE AUTHOR: Tom McGrath is the managing partner of Tyson & Mendes’ Las Vegas, NV office. Mr. McGrath specializes in insurance defense, personal injury, professional liability, and general civil litigation. Contact him at (702)724-2648 or firstname.lastname@example.org.