Insurer Duty to Defend/Bad Faith

On December 13, 2018, the Nevada Supreme Court issued a new opinion in the case of Century Sur. Co. v. Andrew, 432 P.3d 180 (Nev. 2018), which clarifies an insurer’s duty to defend an insured and the potential consequences of an insurer not honoring its duty.

The underlying case itself was simple to explain. Andrew sued a third party named Vasquez for causing an automobile accident which resulted in serious brain injuries to Andrew’s ward. At the time, Vasquez was driving a truck he used for personal and business use. His business auto insurance had a much higher policy limit, so it was advantageous for Andrew to allege that Vasquez was working at the time of the accident. However, his business auto insurer, Century Surety Co., investigated and determined that Vasquez was not working or on the way to a job at the time of the accident. Century denied the claim for lack of coverage on that basis. Andrew then sued and, while it seemed to possibly be untrue, he alleged in
the complaint that Vasquez was in the course and scope of his employment at the time of the accident. Century refused not only to indemnify the claim but, based on its investigation, refused to even defend the case. A default judgment for $18,000,000 was then taken.

The underlying problem here, however, is that an insurer must defend based on the allegations of the complaint. Even if the allegations are disputed or unlikely to be true, the duty to defend is triggered by them. By self-adjudicating the facts in its own favor, Century hung its insureds out to dry and the result was a large judgment. The law rarely, if ever, allows a party to self-adjudicate its own dispute. The Nevada Supreme Court held that in cases such as the one before it, an insurance company may have liability beyond its policy limits for denying the duty to defend, even if it acted in good faith in denying the claim. The liability over the policy limits can exist if the judgment is “consequential” to the breach of the duty to defend.

Does that mean a default judgment after an insurer fails to defend is always payable by the insurer now? In other words, does Century owe the whole $18,000,000 now? Probably not. The Nevada Supreme Court concluded its opinion by stating “However, we are not saying that an entire judgment is automatically a consequence of an insurer’s breach of its duty to defend; rather, the insured is tasked with showing that the breach caused the excess judgment and is obligated to take all reasonable means to protect
himself and mitigate his damages.” It seems that the underlying case (a brain injury) was a very serious one regardless of whether the insurer defended the case or not. Therefore, this particular case would not seem to be great facts to force the insurer to pay the entire default judgment. We will have to see how this law develops over the next few years to truly judge it.