ORDER DENYING MOTIONS FOR SUMMARY JUDGMENT AND TO STRIKE
This is an insurance dispute arising out of a car accident and subsequent personal injury lawsuit. I have already ruled that defendant Century Surety Company breached its duty to defend its insured, Blue Streak Auto Detailing, as a matter of law. The parties now dispute what damages, if any, were caused by the breach. It is undisputed that Blue Streak incurred no costs of defense because it defaulted in the underlying tort action. The only questions are whether the default judgment against Blue Streak constitutes damages for which Century is liable and, if so, to what extent.
I reconsider and modify my prior ruling that Century’s liability in this case is capped at the policy limit of $1 million. Instead, I hold that the default judgment was a reasonably foreseeable consequential damage caused by Century’s breach of its duty to defend its insured. I also reconsider my prior ruling that Century is not bound by the default judgment. I now hold that Century is bound by the default judgment, absent unreasonableness, fraud, or collusion. Century has shown the $5 million attorney fee award in the default judgment was unreasonable, so Century is not bound by that portion of the judgment. However, genuine issues of fact remain regarding whether the settlement agree
I. BACKGROUND
Plaintiff Ryan Pretner suffered catastrophic brain injuries after he was struck from behind by the side-view mirror of a truck while he was riding his bicycle on the shoulder of a road.
Pretner sued Vasquez and Blue Streak in state court. The complaint alleged that Vasquez was driving in the course and scope of employment for Blue Streak at the time of the accident. Pretner’s attorney forwarded the lawsuit to Century, but Century again declined to defend Blue Streak. Vasquez and Blue Streak then defaulted in the state court action. Pret-ner’s attorney forwarded the entry of default to Century. Century responded that the claim was not covered.
Pretner, Vasquez, and Blue Streak then entered into a settlement agreement. Vasquez and Blue Streak agreed to allow Pretner to pursue a default judgment against them, and Blue Streak assigned to Pretner all of its claims against Century. In exchange, Pretner agreed to a covenant not to execute against Vasquez and Blue Streak. Additionally, Progressive agreed to tender the $100,000 limits of its policy covering Vasquez.
Pretner moved for a default judgment in the state court action. After a hearing, the state court entered a default judgment against Vasquez and Blue Streak. The default judgment set forth factual findings that were deemed admitted by the default. Those findings include that Vasquez negligently injured Pretner, that Vasquez was working in the course and scope of his employment with Blue Streak at the time, and that consequently Blue Streak was also liable. The default judgment entered against both Vasquez and Blue Streak was for over $18 million.
Pretner, as assignee of Blue Streak, then filed this lawsuit against Century for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair claims practices. I previously ruled that Century breached its contractual duty to defend Blue Streak as a matter of law because the underlying complaint alleged facts that potentially fell within the policy’s coverage, thereby triggering the duty to defend. (Dkt. # 168 at 8-9.) As to the parties’ dispute about whether Century was bound by the default judgment against its insured, I reviewed a line of decisions issued by the Supreme Court of Nevada that hold an insurer is bound by a judgment if it has notice of a lawsuit that implicates coverage but does not intervene. I predicted the Supreme Court of Nevada would not extend this line of cases beyond the uninsured motorist context. (Id. at 9-13.) I therefore concluded Century was not bound by the default judgment. (Id.)
The parties agreed that the issue of damages could be resolved without a jury trial. Accordingly, they filed motions for summary judgment on the issue of damages arising from Century’s breach of its duty to defend.
An insured is entitled to recover its costs of defense when an insurer breaches its duty to defend, but it is undisputed that Blue Streak did not incur any defense costs because it defaulted in the underlying personal injury lawsuit. The only other evidence of damages is the default judgment entered against Blue Streak after Century refused to defend it. The parties dispute whether this judgment constitutes recoverable damages caused by Century’s breach of the duty to defend. They also dispute what preclusive effect the underlying default judgment should have.
II. ANALYSIS
A. Consequential Damages and the Policy Limits
Pretner bears the burden of showing the default judgment constitutes damages to Blue Streak caused by Century’s breach. See Clark Cnty. Sch. Dist. v. Richardson Constr., Inc.,
Nevada law provides that in a breach of contract case, a plaintiff may seek compensatory damages, which “are awarded to make the aggrieved party whole and ... should place the plaintiff in the position he would have been in had the contract not been breached.” Hornwood v. Smith’s Food King No. 1,
[sjubject to the limitations stated in §§ 350-53, the injured party has a right to damages based on his expectation interest as measured by
(a) the loss in value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
Under the contract, Blue Streak expected Century to provide a defense and, if
Under § 347(b), Blue Streak also is entitled to consequential damages for Century’s breach of the duty to defend. Consequential losses are those damages that “aris[e] naturally, or were reasonably contemplated by both parties at the time they made the contract.” Hornwood v. Smith’s Food King No. 1,
The insurer’s duty to defend “is of vital importance to the insured.” Amato v. Mercury Cas. Co.,
Courts disagree, however, on whether, in the absence of bad faith, an insured can
One explanation of the reasoning behind this rule is that “the measure of damages for the breach of a contract for the payment of money is the amount agreed to be paid with interest,” and a breach of the duty to defend “cannot be held to enlarge the limitation as to the amount fixed as reimbursement for injuries to persons.” Mannheimer Bros. v. Kansas Cas. & Sur. Co.,
Courts that have limited damages to the policy limits have suggested that there may be circumstances where the breach of the duty to defend may require the insurer to pay in excess of the policy limits. See Rogan v. Auto-Owners Ins. Co.,
Thus, in the context of a breach of the duty to defend, bad faith is not required to impose liability on the insurer in excess of the policy limits. This does not negate the distinction between a breach of the contractual duty to defend and a bad faith breach of the contract. There are still consequences for an insurer acting in bad faith, including that it may require the insurer to pay even unforeseeable consequential damages as well as punitive damages. See Bainbridge, Inc. v. Travelers Cas. Co. of Conn.,
In Nevada, the amount expected to be paid under a contract is not the only measure of damages for a breach. Nevada also allows recovery of consequential losses. Thus, if the default judgment was a reasonably foreseeable consequence of Century’s breach, then Century is liable for the
Century argues that if it is liable for the entire default judgment amount, then the insured is receiving policy benefits he did not contract for and the insurer is paying for a risk it did not contractually agree to cover. But Century is confusing its indemnification obligations with its duty to defend. Century agreed to defend its insured, and under Nevada law it is liable for consequential damages arising from a breach of that duty, even if its separate duty to indemnify would limit recovery to $1 million for a breach of that contractual provision.
Century next argues that if it is liable for the entire default judgment without capping it at the policy limit, the insured is placed in a better position than it would have been in had Century performed its contractual obligations. According to Century, if it had performed, the most Blue Streak could have hoped for is $1 million plus costs of defense. This again confuses the duty to indemnify with the duty to defend. If Century had performed, by Century’s own arguments Blue Streak would have had a complete defense to any liability (that is, Blue Streak would not be liable because Vasquez was not driving in the course and scope of his employment). Blue Streak therefore would have been entitled to a judgment in its favor against Pretner. Instead, Blue Streak defaulted and now has an $18 million judgment against it. See Delatorre,
As to foreseeability, Century argues that it was not reasonably foreseeable at the time of contracting that it would have to pay for a non-covered claim. But holding Century liable for the default judgment would not be based on Century indemnifying Blue Streak for a non-covered claim. It is based on Century having to pay for all consequential damages arising out of a breach of its duty to defend its insured. Century has not argued it was unforeseeable that its insured, a mobile auto detailing business, could cause a car accident resulting in catastrophic injuries. It also was foreseeable that a plaintiffs attorney would allege that the business’s vehicle was being used in the course and scope of employment at the time of the accident. It therefore was foreseeable at the time of contracting that if Century refused to provide a defense in the face of such allegations, a substantial default judgment against its insured could result.
As for proximate cause, Century has consistently asserted that Vasquez was not in the course and scope of employment at the time of the accident. Thus, by Century’s own position, had it defended Blue Streak, Blue Streak would have obtained a judgment in its favor instead of an $18 million judgment against it. Consequently, Century’s breach of its duty to defend proximately caused the default judgment. See Thomas,
In sum, Nevada law allows for recovery of all reasonably foreseeable consequential damages for a breach of contract, regardless of the good or bad faith of the breaching party. There is no special rule for insurers that caps their liability at the policy limits for a breach of the duty to defend. I therefore reconsider my prior ruling that because Century did not act in bad faith, its liability is capped at the $1 million policy limits. A district court “possesses the inherent procedural power to reconsider, rescind, or modify an interlocutory order for cause seen by it to be sufficient,” so long as it has jurisdiction. City of L.A., Harbor Div. v. Santa Monica Baykeeper,
B. Reconsideration of the Binding Effect of the Underlying Judgment
Century contends that it should not be bound by the default judgment, including the amount of the judgment. In a prior order, I agreed with Century’s position. I noted that the “Nevada Supreme Court has held that where an insurer has notice of an adversarial proceeding that implicates uninsured motorist coverage under its policy but refuses to intervene, the insurer will be bound by the judgment thereafter obtained.” (Dkt. # 168 at 9-10 (citing Allstate Ins. Co. v. Pietrosh,
I considered two other cases in the uninsured motorist context, State Farm Mutual Automobile Insurance Company v. Christensen,
After reevaluating relevant authority, including Pietrosh’s reasoning and other jurisdictions’ decisions, I now reconsider my earlier decision. Many jurisdictions hold that when an insurer has notice of the lawsuit against its insured and breaches its duty to defend, it is bound by the resulting judgment, default judgment, or settlement, in the absence of fraud or collusion, with respect to all material findings of fact necessary to the judgment or settlement.
These policy concerns are similar to those identified by the Supreme Court of Nevada in Pietrosh. There, the Court noted that insurance policies are not “ordinary” contracts because they are “complex instruments], unilaterally prepared and seldom understood by the insured.”
These policy considerations, along with the related concern of preventing inconsistent judgments, are not unique to the uninsured/underinsured motorist context. Rather, they are magnified when an insurer breaches its duty to defend its insured because the insurer not only had the opportunity to participate, it had a contractual obligation to do so. Further, binding an insurer to the underlying judgment when it breaches its duty to defend incentivizes it to resolve all doubts about the duty to defend in the insured’s favor by raising the risk level for an insurer who opts not to defend. See United Nat’l Ins. Co. v. Frontier Ins. Co., Inc.,
This is consistent with the Restatement (Second) of Judgments § 58:
(1) When an indemnitor has an obligation to indemnify an indemnitee (such as an insured) against liability to third persons and also to provide the indemni-tee with a defense of actions involvingclaims that might be within the scope of the indemnity obligation, and an action is brought against the indemnitee involving such a claim and the indemnitor is given reasonable notice of the action and an opportunity to assume its defense, a judgment for the injured person has the following effects on the indemnitor in a subsequent action by the indemnitee for indemnification:
(a) The indemnitor is estopped from disputing the existence and extent of the indemnitee’s liability to the injured person; and
(b) The indemnitor is precluded from relitigating those issues determined in the action against the indemnitee as to which there was no conflict of interest between the indemnitor and the in-demnitee.
See also id. cmt. a, illus. 1; Restatement (First) of Judgments § 107 cmts. c, f (1942) (stating that if an indemnitor owes a duty to defend and “fails to give this assistance at the time when it is of greatest importance, it is fair that he should abide by the result of the trial” even in the case of a default judgment, so long as there is no fraud or collusion). The Supreme Court of Nevada looks to the Restatement of Judgments for guidance. See, e.g., Alcantara ex rel. Alcantara v. Wal-Mart Stores, Inc.,
This includes precluding the insurer from re-litigating a coverage defense that contradicts the facts necessary to the underlying judgment. Some courts allow an insurer who breaches its duty to defend to contest whether the underlying judgment or settlement actually falls within the policy’s coverage.
But other courts allow the breaching insurer to contest coverage only so long as it does not contradict any findings in the underlying judgment against its insured. These courts reason that the insurer had not only the opportunity but the obligation to participate in the litigation, and the insurer therefore cannot re-litigate any issue decided in the judgment, default judgment, or settlement against its insured. Additionally, requiring the insurer to participate or be bound prevents multiple lawsuits on the same questions and avoids potential inconsistent results. See n. 2 supra.
Because the Supreme Court of Nevada has already expressed its policy preferences in favor of putting the burden on the insurer to intervene and avoiding multiple lawsuits, and because that Court tends to follow the Restatement, I predict it would hold that an insurer cannot re-litigate any issue of coverage that would contradict the facts necessary to the insured’s liability in the underlying action. However, the insurer is bound only to those matters necessary to resolve the insured’s liability. Thus, if an insurer has other coverage defenses that do not deny the factual findings in the underlying judgment or settlement, the insurer still may raise those defenses. See, e.g., Hogan v. Midland Nat’l Ins. Co.,
At the September 17, 2015 hearing, Century argued that it should not be bound by the underlying judgment because an insurer who denies coverage has a conflict of interest with its insured. Some courts acknowledge an exception from the usual rule that an insurer is bound by the underlying judgment where the insurer and insured have a conflict of interest. See Farm Bureau Mut. Auto. Ins. Co. v. Hammer,
I need not decide whether the Supreme Court of Nevada would recognize an exception for a conflict of interest and what an insurer must do to validly invoke this exception
There is no such conflict here because Century’s reason for denying coverage would have given Blue Streak a complete defense to the claims against it. If Century was correct that Vasquez was not working in the course and scope of employment with Blue Streak, then the very reason Century denied it owed Blue Streak a defense would have entitled Blue Streak to a judgment in Blue Streak’s favor against Pretner. Century’s and its insured’s interests were therefore aligned in showing that Vasquez was not driving in the course and scope of employment at the time of the accident. See also Spring Vegetable Co. v. Hartford Cas. Ins. Co.,
Because Blue Streak could be liable only if Vasquez was working in the course and scope of his employment at the time of the accident, that fact necessarily was decided by the default judgment against Blue Streak. The default judgment recited this specific finding. The default judgment also determined the judgment amount, which in this case reflects the measure of damages suffered by Blue Streak as a result of the breach of the duty to defend. Century therefore cannot relitigate those issues. It is bound by the default judgment unless, as discussed below, the settlement agreement and subsequent default judgment were unreasonable, fraudulent, or collusive.
C. Unreasonable, Fraudulent, or Collusive Settlement
When an insurer refuses to defend its insured, the insured “may, without forfeiture of his right to indemnity, settle with the [injured party] upon the best terms possible, taking a covenant not to execute.” Samson v. Transamerica Ins. Co.,
Here, Century is bound by the default judgment’s damage amount as a measure of Blue Streak’s consequential damages, unless it can show that the default judgment amount was unreasonable or that it was procured through fraud or collusion. As discussed below, the default judgment amount is unreasonable because it awards $5 million in attorney’s fees without a legal basis. Additionally, genuine issues of fact remain as to whether the default judgment was procured through fraud or collusion.
1. Unreasonable Judgment Amount
The state court entered a judgment in the amount of $12,888,492.66 in damages plus $6,295.99 in costs. (Dkt. # 14-27 at 6.) The state court added another $5,155,396.80 in attorney’s fees. (Id.)
Century argued at summary judgment that the default judgment was unreasonable in amount because it included the attorney’s fee award even though Pretner did not seek attorney’s fees in the application for default judgment and even though there was no legal basis to award the fees. (Dkt. # 22 at 24.) Pretner responded that a district court has discretion to award attorney’s fees following a default judgment. (Dkt. # 49 at 26 (citing Foster v. Dingwall,
In Nevada, a district court generally may not award attorney’s fees “unless authorized to do so by a statute, rule or contract.” Davis v. Beling,
Here, Pretner recovered more than $20,000, so the attorney fee award could not have been based on § 18.010(2)(a). Because Vasquez and Blue Streak defaulted, they did not maintain any defense. As a result, there was not (and could not have
Additionally, the award of over $5 million in attorney’s fees for prosecuting a default judgment was unsupported. Pret-ner' did not request attorney’s fees in the application for default judgment and presented no documentary evidence to support the award. (Dkt. # 14-26 at 12-13.)
Pretner’s reliance on Foster is misplaced. There, the district court awarded attorney’s fees for discovery violations and for frivolous claims and defenses, as allowed under § 18.010(2)(b).
The attorney’s fee award was unreasonable because it had no legal or factual basis. However, Century has never challenged the settlement (as opposed to the judgment) as being unreasonable. Nor has Century argued that the remaining $12 million judgment was unreasonable. Accordingly, the maximum amount of the default judgment that Century may be Hable for is $12,494,788.65 ($12,488,492.66 in damages and $6,295.99 in costs).
2. Fraudulent or Collusive Settlement and Resulting Judgment
It is not fraudulent or collusive for the insured to assign its rights against its insurer and to receive a covenant not to execute in return. Samson,
But an insurer is not bound by “those trial proceedings which are clearly a patent sham collusively designed to create a judgment for which liability insurance coverage would then exist.” Id. at 517 n. 16,
The Supreme Court of Nevada has not addressed what constitutes fraud or collusion in this context. But other courts have indicated that fraud and collusion occur “when the purpose is to injure the interests of an absent or nonparticipating party, such as an insurer or nonsettling defendant.” ’ Cent. Mut. Ins. Co. v. Tracy’s Treasures, Inc.,
But generally what may constitute fraud or collusion is a fact-intensive inquiry determined on a case-by-case basis. Andrade,
Whether a settlement agreement was fraudulent or collusive is an issue of fact. Cent. Mut. Ins. Co.,
Genuine issues of material fact remain regarding whether the settlement agreement was the product of fraud or collusion. Viewing the facts in the light most favorable to Century, a reasonable jury could find the settlement agreement was fraudulent or collusive. The underlying complaint alleged that Vasquez was in the course and scope of his employment despite Vasquez’s steadfast position from the day of the accident that he was on a personal errand and was not working at the time of the accident. Vasquez told Century and Progressive that he was not working at the time of the accident. (Dkt. # 192-3 at 3-5.)
Although there was a default judgment hearing before an independent judge in state court, there is no evidence the judge was advised that both Century and Vasquez disputed whether Vasquez was driving in the course and scope of employment at the time of the accident and that this fact was important because it would trigger liability for a non-participating insurer. No evidence was presented to the judge showing Vasquez in fact was driving in the course and scope of his employment at the time of the accident. (Dkt. # 192-22.) There also is no evidence the judge was told about the settlement agreement with the covenant not to execute. Although Century had notice of the lawsuit and the entry of default, there is no evidence Century knew Vasquez and Blue Streak had settled in exchange for a covenant not to execute. Nor is there evidence Century was notified of the application for default judgment or the date and time of the default judgment hearing. (Dkt. # 73-2 at 230, 235 (certificates of service showing application for default judgment and date and time of hearing served only on Progressive attorney).) Viewing the totality of these circumstances in the light most favorable to Century, a reasonable jury could find the settlement agreement and resulting default judgment were the product of fraud or collusion designed to manufacture coverage where none existed under the Century policy.
On the other hand, viewing the facts in the light most favorable to Pretner, a reasonable jury could find that the settlement and resulting default judgment were not fraudulent or collusive. The complaint alleged the facts potentially triggering coverage under the Century policy before the parties entered into the settlement agreement. Although Vasquez denied he was acting in the course and scope of employment, he is a layperson who may not understand all of the factors that would inform the inquiry. Pretner advised Century of the lawsuit and of the default, and thus Century had the opportunity and the duty to litigate the issue. Instead, Century abandoned its insured.
Moreover, Vasquez did not agree to testify falsely that he was driving in course and scope of employment, and the parties did not agree to any damages amount, much less an inflated amount. Instead, Vasquez and Blue Streak agreed to default, as they had already done anyway. They also agreed that a state court judge would decide whether a default judgment was warranted and, if so, in what amount. A reasonable jury could conclude Century knew the complaint alleged facts potentially triggering coverage and knew its insured had defaulted and thereby admitted those facts. Century therefore should have monitored the litigation and attended the default judgment hearing if it wanted to contest Blue Streak’s liability and the amount of that liability. Accordingly, a reasonable jury could conclude that “[a]ny resulting damage to [Century] was caused not by [Vasquez’s] supposed misconduct but by [Century’s] own intransigence.” Id.
Material issues of fact remain regarding whether the settlement agreement and the default judgment were the product of fraud or collusion. That issue therefore must be presented to a jury.
III. CONCLUSION
IT IS THEREFORE ORDERED that defendant Century Surety Company’s motion for summary judgment (Dkt. # 192) is DENIED.
IT IS FURTHER ORDERED that plaintiffs’ motion for summary judgment (Dkt. # 194) is DENIED.
IT IS FURTHER ORDERED that plaintiffs’ motion to strike (Dkt. # 197) is DENIED.
IT IS FURTHER ORDERED that the parties shall file a proposed joint pretrial order as required under the Local Rules.
Notes
. I previously set forth the facts of this case in more detail at Dkt. #123.
. For an example of when the breach of the duty to defend would not proximately cause an excess judgment, see Rogan,
. See Pershing Park Villas Homeowners Ass'n v. United Pac. Ins. Co.,
. When a federal court interprets state law, it is bound by the decisions of the state’s highest court. Assurance Co. of Am. v. Wall & Assocs. LLC of Olympia,
. See, e.g., Dewitt Constr. Inc.,
. See Wear v. Farmers Ins. Co. of Wash.,
. At the September 17, 2015 hearing, Pretner argued that Century has never contended the settlement agreement and resulting default judgment were unreasonable or the product of fraud or collusion. But Century has raised these issues from the beginning of the case. (Dkt. # 7 at 19; Dkt. # 22 at 20-25.) Century did not continue to argue the point in subsequent filings because I previously ruled that Century was not bound by the default judgment.
. Pretner moves to strike Vasquez's declaration, arguing that Century cannot rely on after-acquired evidence to support its decision not to defend Blue Streak. Pretner also argues Vasquez cannot submit an affidavit contradicting the facts recited in the default judgment against him. I deny the motion to strike. The question of whether Century
. Century stated at the September 17, 2015 hearing that discovery should be re-opened on the issue of fraud and collusion. However, Century raised this defense from the outset and discovery proceeded for over a year before I ruled Century was not bound by the default judgment. Century therefore had ample opportunity to investigate its fraud or collusion defense.