Answering a certified question, the Nevada Supreme Court determined that an insurer breaching its duty to defend may be liable for consequential damages caused to the insured. Century Sur. Co. c. Andrew, 2018 Nev. LEXIS 112 (Nev. Dec. 13, 2018).
Michael Vasquez struck a minor, causing significant brain injury. Vasquez used the truck for personal use as well as for his mobile auto detailing business, Blue Streak. Vasquez was covered by a personal auto policy issued by Progressive. The policy had a limit of $100,000. Blue Streak had a CGL policy with Century Surety Company with a policy limit of $1 million.
Century Surety conducted an investigation and determined that Vasquez was not driving in the course and scope of his employment at the time of the accident. Therefore, the accident was not covered under the CGL policy. Century Surety rejected Blue Streak's demand to settle the claim within the policy limits.
The minor's parents sued Vasquez and Blue Streak, alleging that Vasquez was driving in the course and scope of his employment at the time of the accident. Century Surety refused to defend. Vasquez, Blue Streak and the minor's parents settled, agreeing that the minor's parents would not execute on any judgment against Vasquez and Blue Streak and Blue Streak would assign its rights against Century Surety. In addition, Progressive agreed to tender Vasquez's $100,000 policy limit. The minor's parents then secured a default judgment for $18,050,183 against Blue Streak and Vasquez. The factual findings stated that Vasquez negligently injued the minor and that he was working in the course and scope of his employment with Blue Streak at the time, making Blue Streak also liable.
The minor's parents then sued Century Surety in federal district court. The court found that Century Surety did not act in bad faith, but it did breach its duty to defend Blue Streak. The court determined that Blue Streak was entitled to recover consequential damages that exceeded the policy limit for Century Surety's breach of its duty to defend. Bad faith was not required to impose liability on the insurer in excess of the policy limit.
The federal district court then certified a question to the Nevada Supreme Court, asking whether the liability of an insurer that breaches its duty to defend, but has not acted in bad faith, is capped at the policy limit or whether the insurer is liable for all losses consequential to the insurer's breach.
The Nevada Supreme Court noted that the majority view was that where there was no opportunity to compromise the claim and the only wrongful act of the insurer was the refusal to defend, the liability of the insurer was limited to the amount of the policy plus attorneys fees and costs.
In contrast, the minority held that damages for a breach of the duty to defend were not automatically limited to the amount of the policy; instead, the damages awarded depended on the facts of each case. The objective was to have the insurer pay damages necessary to put the insured in the same position he would have been in had the insurer fulfilled the policy. Damages that may naturally flow from an insurer's breach included: (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 could show naturally resulted from the breach.
The court concluded that the minority view was the better approach. An insured could recover any damages consequential to the insurer's breach of its duty to defend. An insurer's liability for the breach of the duty to defend was not capped at the policy limits, even in the absence of bad faith.