The Supreme Court of Nevada recently issued a decision in which it cited two ALI publications: the Restatement (Second) of Contracts and the Restatement of the Law, Liability Insurance (Proposed Final Draft No. 2, approved May 2018). The court looked to these Restatements to guide its analysis of a question of liability-insurance law under the law of Nevada.
In Century Surety Company v. Andrew ex rel. Pretner, No. 73756 (Nev. Dec. 13, 2018), the Supreme Court of Nevada addressed a certified question submitted by the United States District Court for the District of Nevada, which asked “[w]hether, 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 [whether] the insurer [is] liable for all losses consequential to the insurer’s breach.” (Alterations in original.)
The Supreme Court of Nevada concluded that an insurer’s liability in this situation “is not capped at the policy limits plus the insured’s defense costs”; rather “an insurer may be liable for any consequential damages caused by its breach.” The court further concluded that an insured’s right to recover consequential damages does not require proof that the insurer acted in bad faith in committing the breach.
In reaching these conclusions, the court looked to the Restatement (Second) of Contracts and the Restatement of the Law, Liability Insurance (Proposed Final Draft No. 2) for support on several points of law. The court first recognized that insurance policies are contracts, and that “[t]he general rule in a breach of contract case is that the injured party may be awarded expectancy damages, which are determined by the method set forth in the Restatement (Second) of Contracts § 347.” The court quoted from the Black Letter of § 347, emphasizing that according to the Restatement, an injured party may recover expectation damages that include amounts attributable to “incidental or consequential loss” caused by the breach.
The Supreme Court of Nevada then surveyed case law from other jurisdictions, observing that “courts have taken two different views when considering whether the insurer may be liable for an entire judgment that exceeds the policy limits in the underlying action [against the insured].” According to the court, a majority of decisions have capped an insurer’s liability at the policy limits plus defense costs. Conversely, other courts have held 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.” The Nevada high court concluded that this latter view “is the better approach,” as the insurance policy limits are meant to cap only the amount an insurer might have to pay to third parties injured by the insured, rather than being intended to serve as a cap on damages for which the insurer may be liable to its insured due to the insurer’s breach. To hold otherwise, the court explained, would render meaningless the value of the insurer’s duty to defend, for which insureds pay a premium.
The court then cited § 48 of the Restatement of the Law, Liability Insurance (Proposed Final Draft No. 2), to underscore that allowing the insured to recover consequential damages from the insurer is “[c]onsistent with” the “general contract principles” the court had enunciated earlier in the opinion, in reliance on the Restatement (Second) of Contracts. Section 48 of the Restatement of the Law, Liability Insurance addresses the topic of Damages for Breach of a Liability Insurance Policy, and states that an insured may recover damages for consequential loss caused by the insurer’s breach of the policy. Consistent with the Nevada high court’s analysis, Comment d to § 48 states that this “follows the ordinary contract-law rules regarding consequential damages.” The Supreme Court of Nevada concluded its opinion by making clear that “[t]he right to recover consequential damages sustained as a result of an insurer’s breach of the duty to defend does not require proof of bad faith” on the part of the insurer.
In the course of its discussion, the court also took the “opportunity to clarify” another point of Nevada liability-insurance law, and in doing so cited § 13 of the Restatement of the Law, Liability Insurance. Under Nevada law, the court sought to make clear, “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.” (Quoting prior case law.) The court then quoted from Comment c to § 13 of the Restatement of the Law, Liability Insurance for the point that, “[t]he general rule is that insurers may not use facts outside the complaint as the basis for refusing to defend.” And the Supreme Court of Nevada further quoted from Comment c to § 13 to articulate the limited circumstances where an insurer may resort to facts outside the complaint to argue that it has no duty to defend its insured.
The Supreme Court of Nevada’s recent decision in Century Surety Company v. Andrew ex rel. Pretner demonstrates how two Restatements from different eras of The American Law Institute’s work can operate together to guide a state supreme court in clarifying the law of its jurisdiction.