Where An Insurance Company Breaches Its Duty To Defend, It Can Be Liable For An Excess Verdict Even If The Company Did Not Act In Bad Faith

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Ryan Pretner suffered critical injuries when he was hit by a truck driven by Michael Vasquez.  Mr. Vasquez’s truck was covered by two auto policies, his personal policy, and his business auto policy.  His personal insurance with Progressive had a limit of $100,000 per person.  His commercial auto policy with Century Surety Company had a $1,000,000 limit.

Century Surety conducted an investigation and determined that Mr. Vasquez was not in the course and scope of his business as an auto detailer with Blue Streak Auto Detailing.

Mr. Pretner served Mr. Vasquez and Blue Streak with a demand to settle for the policy limit.  Century Surety refused the demand.  Mr. Pretner (via his legal guardian Dana Andrew) filed suit against Mr. Vasquez and Blue Streak alleging that Mr. Vasquez was in the course and scope of his business when the accident happened.  Mr. Pretner’s counsel notified Century Surety of the lawsuit.  Despite the allegations in the complaint, Century Surety insisted that the claim was not covered under its policy of insurance and did not take up the defense.

Progressive paid its $100,000 policy and in return secured a covenant not to execute, in favor of Vasquez and Blue Streak.  As part of that arrangement, Vasquez and Blue Streak assigned their rights against Century Surety to Pretner and his guardian Adams.

Pretner then took a default judgment against Vasquez and Blue Streak for $18,050,183.  Pretner filed suit against Century for breach of contract, breach of the implied covenant of good faith and violations of Nevada’s Unfair Claims Settlement Practices Act.  Century Surety removed the matter from state court to federal court.

The federal court found that Century Surety had not acted in bad faith.  Then the court had to decide whether Pretner’s recovery from Century Surety would be limited to the policy limit or whether it could be in excess of the policy. Initially, the court leaned toward limiting Century Surety’s damages to the $1,000,000 commercial auto policy.  But after reconsideration, the federal court certified the following question to the Nevada Supreme Court.

[w]hether, 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 a defense, or [whether] the insurer [is] liable for all losses consequential to the insurer’s breach.”

In answer to that question, the Nevada Supreme Court issues its opinion in Century Sur. Co. v. Andrew, 432 P.3d 180 (Nev. 2018).  In that opinion, the Court said that where an insurance company violates the duty to defend, all court agree that the insured would be entitled to recover the costs incurred by the insured in mounting his or her own defense.

The Court went on to say however that the courts are split on the question of whether damages should be limited to the amount of the policy.

The Court said that the majority view limits recovery from the breaching insurance company the amount of the policy limit.  See Hamlin Inc. v. Hartford Accident &Indemnity Co., 86 F.3d 93,95 (7th Cir. 1996).  There the court said that since the insured defended itself, it could not have done better with an insurance company assigned attorney.  Therefore the damages should be limited to what they would be had the insurance company not violated the duty to defend.

The court rejected the “majority” view and instead adopted the “minority” view as described in Burgraff v.Menard, Inc., 875 N.W.2d 596, 608 (Wis. 2016).  There court explained that its goal was to put the insured in the same position he would have been in had the insurance company fulfilled the insurance contract.  Thus, damages are not automatically limited to the policy limit.  Instead, the insured can recover any damages that naturally flow from the insurer’s breach which might include:

(1) the amount of the judgment or settlement against the insured plus interest [even in excess of the policy limits];

(2) costs and attorney 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).

As an example, the Court cited to Delatorre v. Safeway Insurance Co., 989 N.E.2d 268, 274 (Ill. App. Ct. 2013), where the court found that the entry of default judgment against the defendant directly flowed from the insurer’s breach.  The Delatorre court found that the insurer was liable for the entire amount of the default judgment, even though that amount was above the policy limit.

The Court did not reach a decision that the insurance companies that breached the duty to defend must automatically pay all damages over and above the policy limit.  The insured must still take reasonable efforts to avoid losses where possible.

However, the court did say that the insurance company may be on the hook for consequential damages, including (including those over and above the policy limit) even if the insurance company committed no bad faith by choosing not to defend its insured.

The clear message sent by the Court is that where an insurance company is deciding whether it will defend its insured, and it chooses not to, the company is doing so at its own peril.

If you have further questions about the duty to defend in Nevada, please contact Mike Mills at Bauman Loewe Witt & Maxwell.  He can be reached at 702.240.6060×114.  You can also send him an email at mmills@blwmlawfirm.com.