Last year, the Nevada Supreme Court issued a decision on whether or not under state law an insurer’s failure to defend – but not acting in bad faith – makes it liable for all losses resulting from the breach or just up to the policy limits plus costs. The court found an insurer’s liability is not capped at the policy limits.
After suffering brain injuries as a result of being struck by a truck, the accident victim and his guardian filed a personal injury lawsuit. The defendant, who used the truck for both personal and business purposes, was insured under a Progressive car insurance policy with a $100,000 personal auto liability policy limit. His company was insured under a commercial liability policy with Century Surety that had a $1 million limit.
Century determined the accident was not covered because it did not occur while the defendant was driving in the course and scope of his employment. The victim and guardian sued the defendant and his company claiming the accident was work-related. Century refused to defend the company. Both the owner and the company defaulted in the action. Then, the defendant and his company entered into a settlement agreement with the victim and guardian. Part of the agreement was that they would not enforce a judgment against the defendant and his company if the company assigned its rights against Century to them. The Court entered a default judgment concluding that the accident happened in the course and scope of the defendant’s employment with the company. The victim and guardian then filed suit against Century in state court, which was removed to federal court.
The court found that Century did not act in bad faith by failing and refusing to defend the owner’s company but did breach its duty to do so. Accordingly, the company was entitled to recover damages in excess of the Century policy limit for the breach and that the default was a foreseeable result of the breach. The federal court specifically noted that bad faith was not required to impose liability above the policy limits.
The Nevada Supreme Court answered a certified question by the federal court, agreeing with its decision although noting this is the minority view. The court reasoned that, because the duty to defend is contractual, a breach of this duty gives rise to liability for consequential damages above and beyond the policy limits.
The case is Century Surety Company v. Andrew, Case No. 73756 (Nev. Dec. 13, 2018).