Ninth Circuit Asks Nevada Supreme Court to Address Scope of Damages for Insurer’s Breach of Duty to Defend
06.23.16
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(Article from Insurance Law Alert, June 2016)
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The Ninth Circuit asked the Nevada Supreme Court to decide whether an insurer that breached its duty to defend, but did not act in bad faith, is liable for all consequential losses arising from that breach, including sums in excess of policy limits, or whether such liability is capped at policy limits plus defense costs. Nalder v. United Auto. Ins. Co., 2016 WL 3082417 (9th Cir. June 1, 2016).
The coverage dispute arose from an automobile accident in which Lewis ran over a minor. The minor’s father contacted United Auto, Lewis’s insurer, and offered to settle for the $15,000 policy limit. United Auto refused, based on its position that Lewis was not covered at the time of the accident because he had failed to timely renew his policy. United Auto did not inform Lewis of the offer. Thereafter, the victim sued Lewis. Lewis did not defend the suit and a $3.5 million default judgment was entered against him. The victim and Lewis then sued United Auto for breach of contract and bad faith, among other claims. A Nevada district court judge initially ruled in United Auto’s favor, but on remand from the Ninth Circuit held that the renewal provision was ambiguous and that Lewis was covered under the policy at the time of the accident. The court ordered United Auto to pay the $15,000 policy limit but held that it was not liable for consequential damages because Lewis chose not to defend himself in the underlying suit and did not incur any defense costs.
On appeal, the parties disputed whether United Auto was liable for the $3.5 million default judgment as consequential damages stemming from its failure to defend. Noting the absence of binding Nevada precedent in this context, and conflicting lower court decisions, the Ninth Circuit certified the following question to the Nevada Supreme Court:
Whether, 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 is the insurer liable for all losses consequential to the insurer’s breach?
We will keep you apprised of further developments in this matter.