Strategies, Challenges, and Answers

A Tale of Two Lawsuits.

A Tale of Two LawsuitsIt was the best of times for Nevada Direct Insurance Company. It was the worst of times for injured parties Michael and Sharon Smith.

You see, the Smiths were hurt in an auto accident with a Nevada Direct policyholder Kuperman. Nevada Direct tried unsuccessfully to enlist Kuperman’s cooperation in dealing with the Smiths’ claim. When Kuperman failed to cooperate, Nevada Direct filed a declaratory relief action against Kuperman, the Smiths and another injured party, Ms. Fields claiming the insurance company had no duty to defend or indemnify Kuperman.  Nevada Direct served Kuperman with the complaint for declaratory relief and promptly took a default against him when he didn’t answer.

Thereafter, the Smiths filed a personal injury action against Kuperman. With default in hand in the declaratory relief action, Nevada Direct chose not to defend Kuperman in the Smiths’ personal injury action. As anticipated, the Smiths obtained a default judgment against Kuperman that was far in excess of his insurance policy. However, the trial judge in the bodily injury action refused to give the Smiths an involuntary assignment of Kuperman’s bad faith rights against Nevada Direct. 

So the Smiths turned to the judge in the declaratory relief action seeking an assignment of rights.  But there was an impediment.  Kuperman was still in default.  However, when the Smiths asked, the trial judge sua sponte set aside the default against Kuperman.  Then, the Smiths asked for and the court gave them an involuntary assignment of Kuperman’s rights against Nevada Direct as allowed for in Gallegos v. Malco Enterprises of Nevada dba Budget Rent A Car, 127 Nev. Adv. Op. 51, 255 P.3d 1287 (2011). The Smiths were on their way to collecting the excess verdict. . . or so they thought.

In Nev. Direct Ins. Co. v. Fields, No. 66561, 2016 Nev. LEXIS 100 (Feb. 26, 2016), the Nevada Supreme Court found several problems with the Smiths’ plan. First, the Smiths had not demonstrated that the default in favor of Nevada Direct and Kuperman should be set aside.  In deciding whether it was proper to set aside the default, the Supreme Court said the trial court should have applied the three factor test developed by the federal court.  The factors are (1) “whether [the defaulting party] engaged in culpable conduct that led to the default; (2) whether [the defaulting party] had a meritorious defense; or (3) whether reopening the default judgment would prejudice [the moving party].” Franchise Holding II, LLC v. Huntington Rests.Grp., Inc., 375 F.3d 922, 926 (9th Cir. 2004).  The Supreme Court found that Nevada Direct would prevail on all three factors.  So the default was reinstated.  One hard fact on which the Supreme Court relied was that the default against Kuperman had remained in place for three years and Nevada Direct had relied on that default when it made its decision not to defend Kuperman in Smiths’ personal injury action.  The court presumed that that amounted to prejudice.  .

The Nevada Supreme Court also pointed out that the Smiths went looking for the involuntary assignment of Kuperman’s rights against Nevada Direct in the wrong lawsuit. According to the Court, the Smiths should have appealed the trial court’s decision in the personal injury action to deny them an assignment of Kuperman’s bad faith rights against Nevada Direct. Instead the Smiths had obtained an assignment of Kuperman’s bad faith rights in the dec relief action where Kuperman was in still in default.

So really, all that the Smiths got as part of that assignment was the right of indemnity up to the amount of the minimum limits of coverage as per the Torres v. Nevada Direct Ins. Co., 131 Nev. Adv. Op. 54, 353 P.3d 1203 (July 30, 2015).  Neither the Smiths nor Kuperman had filed a claim for bad faith or unfair claims settlement practices as part of the declaratory relief action. So the Smiths did not have a basis on which to force Nevada Direct to pay any portion of the excess verdict.

In the end, this decision was in favor of the insurance company. But how would this have played out if the Smith’s counsel had done things a little differently? What would have happened if the Smiths had pursued a counterclaim in the dec relief suit?  How would things have changed if they had obtained their assignment of rights in the bodily injury action instead of the dec relief action?  Would things have been different if the dec relief default had been just days before the bodily injury default instead of years before? So many questions. So few answers.

The most important take away from this case is this:

It is a far, far better thing to know that an excess verdict standing alone does not amount to an automatic finding of bad faith and does not automatically require the insurance company to pay an excess judgment when that insurance company strategically decided not to defend its insured in the related bodily injury action.

Instead, the lesson learned for the Plaintiff’s attorney is that they must take the prescribed steps to properly gain the policyholder’s rights to pursue a bad faith action against his or her own insurance company and then prove that that the insurance company committed bad faith.  And they must do it expeditiously.

If you have questions about this or other coverage or bad faith cases in Nevada, please give Mike Mills a call at 702-240-6060or email him at mmills@blwmlawfirm.com.

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Michael Mills About Michael Mills

Mr. Mills practices in the area of civil litigation and appeals, with particular experience in matters involving trucking liability, insurance defense, insurance coverage, premises liability, products liability and defense of personal injury. Mr. Mills is a member of the Trucking Insurance Defense Association, the Defense Research Institute Trucking Committee and the Nevada Motor Transport Association. Mr. Mills is licensed to practice before the Nevada Supreme Court and the Utah Supreme Court. He is also licensed to appear before the United States Supreme Court, the U.S. District Courts for the Districts of Nevada and Utah, as well as the U.S. Court of Appeals for the Ninth Circuit. Mr. Mills has created 3 Blogs for the benefit of the insurance industry. He serves as editor and publisher of the Nevada Insurance Law Blog, the Nevada Coverage and Bad Faith Blog and the Nevada Trucking Law Blog.

 
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