The U.S. Court of Appeals for the Ninth Circuit has 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?
The Case
On July 8, 2007, Gary Lewis injured Cheyanne Nalder with his car. Mr. Lewis had taken out an auto insurance policy with United Automobile Insurance Company (“UAIC”) that was renewable on a monthly basis. Before the accident, Mr. Lewis had received a statement instructing him that his renewal payment was due by June 30, 2007. The statement also specified that “[t]o avoid lapse in coverage, payment must be received prior to expiration of your policy.” The statement listed June 30, 2007, as the policy's effective date and July 31, 2007, as its expiration date. Mr. Lewis didn't pay to renew his policy until July 10, 2007, two days after the accident.
James Nalder, Cheyanne Nalder's father, made an offer to UAIC to settle her claim for $15,000, the policy limit. UAIC rejected the offer, arguing that Mr. Lewis was not covered at the time of the accident because he had not renewed his policy by June 30. UAIC never informed Mr. Lewis that Mr. Nalder was willing to settle.
Mr. Nalder sued Mr. Lewis in a Nevada state court and obtained a $3.5 million default judgment.
Mr. Nalder and Mr. Lewis then filed an action against UAIC, alleging breach of contract, breach of the implied covenant of good faith and fair dealing, bad faith, fraud and breach of Section 686A.310 of the Nevada Revised Statutes.
UAIC moved for summary judgment on the basis that Mr. Lewis had no insurance coverage on the date of the accident.
In response, Mr. Nalder and Mr. Lewis argued that Mr. Lewis was covered on the date of the accident because the renewal notice was ambiguous as to when payment had to be received to avoid a lapse in coverage, and that this ambiguity had to be construed in favor of Mr. Lewis.
The district court found that the policy could not be reasonably interpreted in favor of the argument by Mr. Nalder and Mr. Lewis, and granted summary judgment in favor of UAIC.
The Ninth Circuit held that summary judgment “with respect to whether there was coverage” was improper because Mr. Nalder and Mr. Lewis had come forward “with facts supporting their tenable legal position.” The circuit court also affirmed “[t]he portion of the order granting summary judgment with respect to the [Nevada] statutory arguments.”
On remand, the district court granted partial summary judgment to each party. First, the district court found the renewal statement ambiguous, so it construed this ambiguity against UAIC by finding that Mr. Lewis was covered on the date of the accident. Second, the district court found that UAIC had not acted in bad faith because it had a reasonable basis to dispute coverage. Third, the district court found that UAIC had breached its duty to defend Mr. Lewis, but it awarded no damages because Mr. Lewis had not incurred any fees or costs in defending the underlying action as he took a default judgment, reasoning that “[i]f an insurer breaches the duty to defend, damages are limited to attorneys' fees and costs incurred by the insured to defend the action.”
The district court ordered UAIC “to pay Cheyanne Nalder the policy limits on Gary Lewis's implied insurance policy at the time of the accident.”
Mr. Nalder and Mr. Lewis appealed, asserting that they should have been awarded consequential and compensatory damages resulting from the Nevada state court judgment – $3.5 million – because UAIC had breached its duty to defend – even though the district court had determined that UAIC had not acted in bad faith.
The Ninth Circuit's Decision
The circuit court, finding no controlling precedent of the Nevada Supreme Court or the court of appeals, 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?
FC&S Legal Comment
We will continue to monitor this case and will report on developments as warranted.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].