August 16, 2017

Ninth Circuit asks Nevada High Court Whether Non-Defending Insurer Must Pay Default Judgment Caused by Breach

The Ninth Circuit has certified to the Nevada Supreme Court the question of whether an insurer is liable for consequential damages caused by its breach of the duty to defend, including default judgments exceeding policy limits. See Nalder v. United Auto. Ins. Co., No. 13-17441, 2016 WL 3082417 (9th Cir. June 1, 2016).

In Nalder, the insurer refused to defend its insured against a third-party complaint, resulting in a default judgment that exceeded policy limits. In the ensuing coverage action, the district court concluded that the insurer breached its duty to defend, but awarded no damages because the insured incurred no defense costs. The insured argued on appeal that the insurer should be liable for all consequential damages caused by the insurer’s breach, including the excess judgment. The Ninth Circuit certified to the Nevada Supreme Court the question of whether a non-defending insurer is liable for all losses caused by its breach, or whether the insurer is only liable for defense costs.

Payne & Fears LLP examined this question in “Turning Lemons into Lemonade: How Policyholders Can Use Denials to Expand Coverage.” This article explores various legal theories courts have adopted to expand coverage for an insured when the insurer wrongfully denies coverage. Those jurisdictions have relied upon principles of tortious bad faith, waiver, and estoppel to hold that a breaching insurer may be forced to pay an otherwise non-covered judgment.