In a recent opinion, the Nevada Supreme Court examined an insurer’s duty to defend, as well as what damages are available when an insurer breaches that duty.1The opinion came in response to a certified question from the United States District Court for the District of Nevada which asked the Court to clarify Nevada law on this issue. The Nevada Supreme Court concluded, “that an insurer’s liability where it breaches its contractual duty to defend is not capped at the policy limits plus the insured’s defense costs, and instead, an insurer may be liable for any consequential damages caused by its breach.”2
1. The Duty to Defend
An insurer’s duty to defend arises out of the applicable insurance policy, which serves as a contract between an insurer and its insured. “An insurance policy creates two contractual duties between the insurer and the insured: the duty to indemnify and the duty to defend.”3 While the duty to indemnify arises only when an insured becomes legally obligated to pay damages for a covered underlying claim, the duty to defend arises, “whenever [the insurer] ascertains facts which give rise to the potential of liability under the policy.”4 As such, the duty to defend is broader than the duty to indemnify.5
In Nevada, the duty to defend arises, “’if facts [in a lawsuit] are alleged which if proved would give rise to the duty to indemnify,’ which then ‘the insurer must defend.’”6 The Court in Century Surety acknowledged that the duty to defend is not absolute.7 However, the Court explained that, “where there is potential for coverage based on ‘comparing the allegations of the complaint with the terms of the policy,’ an insurer does have a duty to defend.”8 Thus, so long as the facts alleged in the complaint, if proven true, would give rise to the duty to indemnify, the insurer must defend its insured in the action. The insurer may defend under a reservation of rights, but it may not simply refuse to proffer a defense. To do so would constitute a breach of its duty to defend.
2. Damages for Breach of the Duty to Defend
“In a case where the duty to defend does in fact arise, and the insurer breaches that duty, the insurer is at least liable for the insured’s reasonable costs in mounting a defense in the underlying action.”9 Additionally, the Court adopted the minority viewpoint and held that an insurer’s liability is not capped at the policy limits, but rather, the insurer must, “pay damages necessary to put the insured in the same position he would have been in had the insurance company fulfilled the insurance contract.”10 Thus, an insurer may be liable for: (1) the amount of the judgement/settlement plus interest; (2) attorneys’ fees and costs incurred by the insured; and (3) any additional costs the insured can show resulted from the breach.11 In the Court’s view, allowing damages in excess of the policy limits is consistent with general contract principles that apply to insurance policies in other contexts.12
Additionally, the Court held that an insured’s right to recover consequential damages as a result of an insurer’s breach of the duty to defend does not require proof that the insurer acted in bad faith.13 “Thus, even in the absence of bad faith, the insurer may be liable for a judgment that exceeds the policy limits if the judgment is consequential to the insurer’s breach.”14
In sum, “the insurer refuses to defend at its own peril.”15
1Century Surety Company v. Dana Andrew, as legal guardian on behalf of Ryan T. Pretner; and Ryan T. Pretner, 134 Nev. Adv. Op. 100 (Nev. 2018).
2Id. at *2.
3Id. at *6 (citing Allstate Ins. Co. v. Miller, 125 Nev. 300, 309 (2009)).
4Id. (citing United Nat’l Ins. Co. v. Frontier Ins. Co., Inc., 120 Nev. 678, 684 (2004)).
5Id. (citing Pension Tr. Fund for Operating Eng’nrs v. Fed. Ins. Co., 397 F.3d 944, 949 (9th Cir. 2002)).
6Id. at *7 (citing Rockwood Ins. Co. v. Federated Capital Corp., 694 F. Supp. 772, 776 (D. Nev. 1988); United Nat’l Ins. Co. v. Frontier Ins. Co., Inc., 120 Nev. 678, 687 (2004)).
7Id. at *7 fn. 4.
9Id. at *8 (citing Reyburn Lawn & Landscape Designers, Inc. v. Plaster Dev. Co., Inc., 127 Nev. 331,345 (2011)).
10Id. at *9 (citing Burgraff v. Menard, Inc., 875 N.W.2d 596, 608 (Wis. 2016)).
11Id. at *10 (citing Newhouse v. Citizens Sec. Mut. Ins. Co., 501 N.W.2d 1, 6 (Wis. 1993)).
12Id. at *11.
13Id. at *12.
14Id. at *13.