Andrew v. Century Sur. Co.

• Decision Date: 28 September 2015
• Docket Number: Case No. 2:12–cv–00978–APG–PAL.
• Citation: 134 F.Supp.3d 1249
• Parties: Dana ANDREW, as legal guardian on behalf of Ryan T. Pretner, and Ryan T. Pretner, Plaintiffs v. CENTURY SURETY COMPANY, Defendant.
• Court: U.S. District Court — District of Nevada

134 F.Supp.3d 1249

Dana ANDREW, as legal guardian on behalf of Ryan T. Pretner, and Ryan T. Pretner, Plaintiffs

v.CENTURY SURETY COMPANY, Defendant.

Case No. 2:12–cv–00978–APG–PAL.

United States District Court, D. Nevada.

Signed Sept. 28, 2015.

Dennis M. Prince, Prince Keating, Eric N. Tran, Office of the Attorney General, Robert T. Eglet, Eglet Law Group, Las Vegas, NV, for Plaintiffs.

Alan J. Lefebvre, William D. Schuller, Kolesar & Leatham, Las Vegas, NV, Maria Louise Cousineau, Cozen O'Connor, Los Angeles, CA, for Defendant.

ORDER DENYING MOTIONS FOR SUMMARY JUDGMENT AND TO STRIKE

ANDREW P. GORDON, District Judge.

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 agreement and subsequent default judgment were obtained through fraud or collusion. That issue, and the amount of recoverable damages, must be tried to a jury.

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.¹ The truck was driven by Michael Vasquez. Vasquez worked for Blue Streak, a mobile auto detailing business. Vasquez was personally insured by non-party Progressive Insurance. Blue Streak was insured by Century. Prior to any lawsuit being filed, Century declined to defend Blue Streak on the ground that Vasquez was not working in the course and scope of his employment for Blue Streak at the time of the accident. Century based its decision on Vasquez's statements to the police and to Century's employee that he was not working at the time of the accident.

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. Pretner'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. )

Finally, I set forth the measure of damages for breaching the duty to defend as the reasonable costs of defense in the underlying action plus "the damages reasonably foreseeable at the time of the contract, capped at $1 million." (Id. at 15–16.) I concluded the recoverable damages were capped at the policy limit of $1 million because no genuine issue of fact remained that Century did not act in bad faith. (Id. at 17.)

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., 123 Nev. 382, 168 P.3d 87, 96 (2007). As stated in my prior order, the Supreme Court of Nevada has not specifically set forth the measure of damages for an insurer's contractual breach of the duty to defend. (Dkt. # 168 at 14.) However, in the related context of an indemnitor's breach of the duty to defend, the Court stated that the breach "may give rise to damages in the form of reimbursement of the defense costs the indemnitee was thereby forced to incur in defending against claims encompassed by the indemnity provision." Reyburn Lawn & Landscape Designers, Inc. v. Plaster Dev. Co., Inc., 255 P.3d 268, 278 (2011) (quotation omitted).

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, 107 Nev. 80, 807 P.2d 208, 211 (1991). This includes expectancy damages, which are determined by the method set forth in the Restatement (Second) of Contracts § 347 (1981). Road & Highway Builders v. N. Nev. Rebar, 284 P.3d 377, 382 (Nev.2012). Under § 347:

[s]ubject 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 Blue Streak is found liable on a covered claim, the payment of $1 million. Thus, under § 347(a), Blue Streak's expectancy damages are the costs of defense plus the policy limit of $1 million (applied to any award entered against Blue Streak in the underlying lawsuit).

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, 105 Nev. 188, 772 P.2d 1284, 1286 (1989) (quotation omitted); see also Restatement (Second) of Contracts § 351(1) (1981) ("Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made."). A loss "may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know." Restatement (Second) of Contracts § 351(2).

The insurer's duty to defend "is of vital importance to the insured." Amato v. Mercury Cas. Co., 53 Cal.App.4th 825, 832, 61 Cal.Rptr.2d 909 (Cal.Ct.App.1997) ; see also Dewitt Constr. Inc. v. Charter Oak Fire Ins. Co., 307 F.3d 1127, 1137 (9th Cir.2002) ("The duty to defend is one of the main benefits of the insurance contract.") (quotation omitted). "The insured's desire to secure the right to call on the insurer's superior resources for the defense of third party claims is, in all likelihood, typically as significant a...