In Century Sur. Co. v. Andrew, 134 Nev.Adv.Op 100, No. 73756 (December 12, 2018), the Nevada Supreme Court, answering a certified question submitted by the United States District Court for the District of Nevada, held an insurer who breaches the duty to defend can be held liable for the entirety of a judgment in excess of policy limits, even if the insurer acted in good faith when it denied the defense. It also concluded, following the new Restatement of Liability Insurance, that an insurer may not rely upon extrinsic evidence to refuse to defend an insured, but if an insurer agrees to defend under reservation, it may rely on extrinsic evidence in coverage litigation to terminate its defense obligation.
The case involved an incident in which a truck owned and driven by Michael Vasquez struck Ryan T. Pretner. Mr. Vasquez drove the truck for his personal use as well as for his mobile auto detailing business. Mr. Vasquez was covered under a personal auto liability policy, which had a $100,000 policy limit, and by a commercial liability policy issued by Century Surety Company, which had a $1 million policy limit. Century investigated, concluded Mr. Vasquez had not been driving in the course and scope of his employment when the accident occurred, and refused to defend or settle the claim. Thereafter, Mr. Vasquez’s personal auto insurer tendered its $100,000 policy limit, and Mr. Pretner obtained a default judgment against Mr. Vasquez and his business for $18,050,183. Following a post-judgment assignment, Mr. Pretner filed suit against the Century. The United States District Court for the District of Nevada found Century had not breached the implied covenant of good faith and fair dealing, but it owed a duty to defend. It then certified to the Nevada Supreme Court the question of whether the insurer’s liability for failing to defend was capped at the policy limits.
The Nevada Supreme Court concluded the insurer’s liability was not capped so that it could be liable for the full amount of the stipulated judgment as consequential damages stemming from the breach of the duty to defend. The court adopted what it acknowledged was the minority viewpoint, relying on the expectancy theory of contractual damages embodied in Section 347 of the Restatement (2d) of Contracts under which recoverable damages for breach of contract extend not only to the value of the contractual performance not received, but also “any other loss, including incidental or consequential loss, caused by the breach.” As such, the court found an insurer may be liable for any consequential damages caused by its breach, even if it did not act in bad faith. The court qualified its opinion, however, stating it was “not saying that an entire judgment is automatically a consequence of an insurer’s breach of its duty to defend.” Rather, the insured (or claimant in the insured’s shoes) must prove the breach caused the entry of the excess judgment. Moreover, the court found the insured continued to have a duty to protect itself and mitigate its damages.
Although not the main focus of its opinion, the court also took the opportunity to “clarify” the standard for determining when a duty to defend exist, again citing the Restatement. Specifically, the court found insurers may not use facts outside those in the complaint as a basis for refusing to defend, but if the insurer agrees to defend under a reservation of rights, “facts outside the complaint may be used in an action brought by the insurer seeking to terminate its duty to defend its insured in an action whereby the insurer is defending under a reservation of rights.”