In Century Surety Co. v. Andrew, 432 P.3d 180 (Nev. 2018) the Nevada Supreme Court adopted the minority view holding that the insurer’s failure to defend its insured made the insurer liable for the excess judgment that was entered, even though there was no finding of bad faith misconduct. According to the court, the excess judgment was foreseeable, and therefore the insurer’s liability was not limited to defense costs and indemnity within limits.
This case involved an automobile accident. Under the facts of the case, Mr. Michael Vasquez was using his company truck for personal transportation when the accident occurred. Mr. Vasquez had a $100,000 personal auto policy with Progressive and a $1,000,000 commercial policy with Century Surety at the time of the accident. Century Surety rejected a policy limits demand because it believed that Vasquez was not working at the time of the accident and therefore its policy was not applicable. When suit was filed, Century denied Vasquez a defense, notwithstanding the allegations in the suit that Vasquez was acting in the course and scope of his employment. Thereafter a default judgment was entered against Vasquez and his company in excess of $18 million. The claimant/assignee then sued Century after receiving an assignment of rights from Vasquez. Century removed the case to federal court and argued that its liability could not exceed its $1 million policy limit plus the insured’s defense costs because there was no bad faith.
The legal issues were presented to the Nevada Supreme Court on a certified question from the U.S. District Court.
The Nevada Supreme Court acknowledged that a split of authority existed on the question of whether Century could be exposed above its policy limits in the absence of bad faith misconduct. Under the majority view, insurance companies did not incur liability exceeding their policy limits merely by breaching a contractual obligation to defend. In that situation, insurers only owed a contractual obligation to pay defense costs and indemnity up to the policy limit in the absence of bad faith. However, the minority view allowed recovery of all damages flowing from the failure to defend. The Nevada Supreme Court adopted the minority view and rejected the majority view. In rejecting the majority view, the high court observed that the majority view placed an artificial limit on the insurance company’s liability for failing to defend. As with any other type of contract, the high court concluded that the breaching party should be held responsible for any foreseeable consequences of its conduct, including the portion of the judgment which exceeded the policy limits.