In 2018, the Nevada Supreme Court issued an opinion in Century Surety Company v. Andrew with important potential implications regarding an insurance carrier’s liability and duty to defend. Generally, an insurance policy contains the detailed scope of the insurer’s contractual duty to defend the insured, outlining both when the duty and certain exclusions apply. At issue in the Century Surety case is whether the liability of an insurer that has breached its duty to defend, without acting in bad faith, is capped at policy limits plus costs incurred, or whether the insurer is liable for all losses consequential to the breach of the duty to defend.
Factual and Procedural Background
The Century Surety case involved a motor vehicle accident that resulted in injury to a minor, Ryan Pretner. A truck owned and operated by Michael Vasquez struck Pretner, causing severe brain injuries. Defendant Vasquez used the truck for both personal use and his mobile auto detailing business, Blue Streak Auto Detailing, LLC. Blue Streak maintained a commercial liability policy with Century Surety Company, and Vasquez maintained a personal auto liability policy through Progressive Casualty Insurance Company. Century Surety obtained a copy of the police report and after investigation determined Vasquez was not in the course and scope of employment at the time of the crash, and therefore the claim was not covered under Blue Streak’s commercial liability policy. Century Surety also refused to settle the lawsuit within the policy limits prior to the start of litigation. Plaintiff filed the complaint, and both Vasquez and Blue Streak defaulted, a copy of which was forwarded to Century Surety, but Century Surety maintained the claim was not covered under its insurance policy and did not get involved.
After the default, defendants settled with plaintiffs and assigned their rights against Century Surety to the plaintiffs; plaintiffs agreed not to execute any judgment. Progressive also tendered the full policy of $100,000 to plaintiffs as a part of the settlement. Plaintiffs then obtained a default judgment against Vasquez and Blue Streak in the amount of $18,050,183.00. Subsequently, plaintiffs filed suit against Century Surety as assignees asserting breach of contract, breach of implied covenant of good faith and fair dealing, and unfair claims practices. Century Surety removed the matter to the Nevada Federal District Court.
The Federal District Court held that Century Surety did not act in bad faith but did find that it breached its duty to defend. The court further held the damages for breaching the duty to defend were capped at the policy limit, plus any cost incurred by Blue Streak in mounting a defense. However, after plaintiffs filed a motion for reconsideration, the court held Blue Streak was entitled to recover consequential damages that exceeded the policy limits for the breach. The court further held the default judgment entered against Blue Streak was “a reasonably foreseeable result of the breach of the duty to defend.” The court then certified the question to the Nevada Supreme Court.
The Nevada Supreme Court’s Holding and Discussion
In its decision, the Nevada Supreme Court discussed the duty to defend and indemnify generally, noting the duty to defend is “‘separate from’ and ‘broader than the duty to indemnify.’” (Pension Tr. Fund for Operating Eng’rs v. Fed. Ins. Co., 307 F.3d 944, 949 (9th Cir. 2002)). Further, in Nevada, the duty to defend arises if facts are “alleged which if proved true would give rise to the duty to indemnify.” (Rockwood Ins. Co. v. Federated Capital Corp., 694 F.Supp. 772, 776 (D. Nev. 1988)). The Court then noted all states recognize that where the duty to defend does arise, and the insurer breaches that duty, the insurer is then at least liable for the insured’s “reasonable costs in mounting a defense in the underlying action.” (See Reyburn Lawn & Landscape Designers, Inc. v. Plaster Dev. Co., Inc., 127 Nev. 331, 345 (2011)). However, beyond that, the Court noted states have two different views regarding whether an insurer is liable for the entire judgment that exceeds the policy limits.
The majority view holds liability of the insurer is limited to the amount of the policy plus attorneys’ fees and costs. The minority view holds a breach of the duty to defend is not automatically limited to the amount of the policy, but rather, the damages awarded depend on the facts of the case. (See Burgraff v. Menard, Inc., 875 N.W.2d 596, 608 (Wis. 2016)). Citing the Burgraff case, the Court noted the purpose is to have the insurer pay damages such that the insured is in the same position he would have been. (Id.). As such, the insurer is responsible for “all damages naturally flowing from the breach” of the duty to defend, including:
(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.
(Newhouse v. Citizens Sec. Mut. Ins. Co., 501 N.W.2d 1,6 (Wis. 1993)). The Court favored this approach and criticized the majority approach for placing an “artificial limit” on the insurer’s liability. The minority position, on the other hand, provides the insured the opportunity to recover all damages “naturally flowing” from the breach of the duty to defend and, in the Court’s view, is more consistent with contract principles and established case law regarding damages recoverable due to a breach of contract. The Court further noted these established contract law principles and recoverable damages do not require the insured prove bad faith.
The Court does not discuss the factual background or Century Surety’s actions in light of the decision it made; however, Century Surety could perhaps have taken a few key steps to avoid such a huge loss. Initially, the Court’s discussion regarding the duty to defend in Nevada confirms that based on Nevada case law, the duty to defend is very broad, merely requiring that the allegations made, if proven true, would require the insurer to indemnify. As such, even if the allegations turn out to be false, the duty to defend is still triggered by allegations that would require indemnification.
Based on this very broad duty to defend, insurers should review any complaint against its insured to determine whether the allegations, if proven true, would give rise to the duty to indemnify. This is true even when the insurer has conducted a pre-litigation investigation and determined the allegations are not, in fact, true. Rather, after conducting that investigation, the insurer should retain counsel and defend the claims, asserting and providing evidence that the allegations giving rise to the duty to indemnify are not true. Once appropriate discovery has been conducted and/or provided to prove the allegations are untrue, a Motion for Summary Judgment, if successful, can provide an official record for the insurer to use in a subsequent action for Declaratory Relief. If unsuccessful, the insurer will likely still have to bear the cost of defense moving forward. At that point, a discussion with counsel regarding cost of defense versus settlement would likely be appropriate.