Following a hearing, the Las Vegas U.S. District Court entered a default judgment against Mr. Vasquez and Blue Streak for $18.1 million. Mr. Andrew filed suit in state court against Century on charges including breach of contract. That case was removed to federal court. The district court found that Century did not act in bad faith, but had breached its duty to defend Blue Streak. The court held that Blue Streak was entitled to recover consequential damages that exceeded the policy limit for its breach of duty to defend, and that the default judgment was reasonably foreseeable as a result of the breach. The court then submitted a question to the Nevada Supreme Court, whether Century should be liable for all consequential damages stemming from its refusal to provide a defense. The Supreme Court said Century should be held liable, and said that under the majority view, damages for a breach of duty are automatically limited to the amount of the policy, it places an artificial limit to the insurer's liability within the policy limits for a breach of its duty to defend. The ruling read that even if there is no 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.

An insurer “refuses to defend at its own risk” but the court added that “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.”

Editors Note: An insurance policy creates two contractual duties between the insurer and the insured: the duty to defend and the duty to indemnify. The duty to indemnify arises when an insured becomes legally obligated to pay damages in the underlying action that gives rise to a claim under the policy. The insurer bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy. The majority view mentioned above is that “where there is no opportunity to compromise the claim and the only wrongful act of the insurer is the refusal to defend, the liability of the insurer is ordinarily limited to the amount of the policy plus attorneys' fees and costs.” The minority view, that the court adopted here, is that damages for a breach of the duty to defend are not automatically limited to the amount of the policy instead the damages awarded depend on the facts of each case.