James Nalder v. United Automobile Insurance Co , 824 F.3d 854 ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JAMES NALDER, Guardian No. 13-17441
Ad Litem on behalf of
Cheyanne Nalder; GARY D.C. No.
LEWIS, individually, 2:09-cv-01348-RCJ-GWF
Plaintiffs-Appellants,
v. ORDER
UNITED AUTOMOBILE
INSURANCE COMPANY,
Defendant-Appellee.
Filed June 1, 2016
Before: Alex Kozinski, John T. Noonan
and Diarmuid F. O’Scannlain, Circuit Judges.
Order
2 NALDER V. UNITED AUTOMOBILE INS. CO.
SUMMARY*
Certification to Nevada Supreme Court
The panel certified the following question of law to the
Nevada Supreme Court:
Whether, 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 is the
insurer liable for all losses consequential to
the insurer’s breach?
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
NALDER V. UNITED AUTOMOBILE INS. CO. 3
ORDER
Pursuant to Rule 5 of the Nevada Rules of Appellate
Procedure, we certify to the Nevada Supreme Court the
question of law set forth in Part II of this order. The answer
to this question may be determinative of the cause pending
before this court, and there is no controlling precedent in the
decisions of the Nevada Supreme Court or the Nevada Court
of Appeals.
Further proceedings in this court are stayed pending
receipt of an answer to the certified question. Submission is
withdrawn pending further order. The parties shall notify the
Clerk of this court within one week after the Nevada Supreme
Court accepts or rejects the certified question, and again
within one week after the Nevada Supreme Court renders its
opinion.
I. The Parties
Plaintiffs-appellants, James Nalder, guardian ad litem for
Cheyanne Nalder, and Gary Lewis will be the appellants
before the Nevada Supreme Court. Defendant-appellee,
United Automobile Insurance Company (UAIC), a Florida
corporation with its principal place of business in Florida,
will be the respondent.
The names and addresses of counsel for the parties are as
follows:
Thomas Christensen, Christensen Law Offices, LLC,
1000 S. Valley View Blvd., Las Vegas, Nevada 89107, for
appellants.
4 NALDER V. UNITED AUTOMOBILE INS. CO.
Thomas E. Winner, Susan M. Sherrod and Matthew J.
Douglas, Atkin Winner & Sherrod, 1117 South Rancho
Drive, Las Vegas, Nevada 89102, for respondent.
II. Question of Law
The question of law to be answered is:
Whether, 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 is the insurer liable for all losses
consequential to the insurer’s breach?
The Nevada Supreme Court may rephrase the question as
it deems necessary.
III. Background
On July 8, 2007, Gary Lewis ran over Cheyanne Nalder.
Lewis had taken out an auto insurance policy with UAIC,
which was renewable on a monthly basis. Before the
accident, Lewis had received a statement instructing him that
his renewal payment was due by June 30, 2007. The
statement also specified that “[t]o avoid lapse in coverage,
payment must be received prior to expiration of your policy.”
The statement listed June 30, 2007, as the policy’s effective
date and July 31, 2007, as its expiration date. Lewis didn’t
pay to renew his policy until July 10, 2007, two days after the
accident.
NALDER V. UNITED AUTOMOBILE INS. CO. 5
James Nalder (Nalder), Cheyanne’s father, made an offer
to UAIC to settle her claim for $15,000, the policy limit.
UAIC rejected the offer, arguing Lewis wasn’t covered at the
time of the accident because he didn’t renew the policy by
June 30. UAIC never informed Lewis that Nalder was
willing to settle.
Nalder sued Lewis in Nevada state court and obtained a
$3.5 million default judgment. Nalder and Lewis then filed
the instant claim against UAIC in state court, which UAIC
removed to federal court. Plaintiffs alleged breach of
contract, breach of the implied covenant of good faith and fair
dealing, bad faith, fraud and breach of section 686A.310 of
the Nevada Revised Statutes. UAIC moved for summary
judgment on the basis that Lewis had no insurance coverage
on the date of the accident. Plaintiffs argued that Lewis was
covered on the date of the accident because the renewal
notice was ambiguous as to when payment had to be received
to avoid a lapse in coverage, and that this ambiguity had to be
construed in favor of the insured. The district court found
that the contract could not be reasonably interpreted in favor
of plaintiffs’ argument, and granted summary judgment in
favor of UAIC.
We held that summary judgment “with respect to whether
there was coverage” was improper because “[p]laintiffs came
forward with facts supporting their tenable legal position.”
Nalder v. United Auto. Ins. Co., 500 F. App’x 701, 702 (9th
Cir. 2012). But we affirmed “[t]he portion of the order
granting summary judgment with respect to the [Nevada]
statutory arguments.” Id.
On remand, the district court granted partial summary
judgment to each party. First, the court found the renewal
6 NALDER V. UNITED AUTOMOBILE INS. CO.
statement ambiguous, so it construed this ambiguity against
UAIC by finding that Lewis was covered on the date of the
accident. Second, the court found UAIC didn’t act in bad
faith because it had a reasonable basis to dispute coverage.
Third, the court found UAIC breached its duty to defend
Lewis, but awarded no damages “because [Lewis] did not
incur any fees or costs in defending the underlying action” as
he took a default judgment. The court ordered UAIC “to pay
Cheyanne Nalder the policy limits on Gary Lewis’s implied
insurance policy at the time of the accident.” Plaintiffs
appeal.
IV. Discussion
Plaintiffs claim they should have been awarded
consequential and compensatory damages resulting from the
Nevada state court judgment because UAIC breached its duty
to defend. Thus, assuming that UAIC did not act in bad faith
but did breach its duty to defend Lewis, the question now
before us is how to calculate the damages that should be
awarded to plaintiffs. Plaintiffs claim they should have been
awarded the amount of the default judgment ($3.5 million)
because, in their view, UAIC’s failure to defend Lewis was
the proximate cause of the judgment against him.
The district court, however, denied damages because
Lewis chose not to defend and thus incurred no attorneys’
fees or costs. The district court interpreted two Nevada
Supreme Court cases to hold that “[i]f an insurer breaches the
duty to defend, damages are limited to attorneys’ fees and
costs incurred by the insured to defend the action.” See
Reyburn Lawn & Landscape Designers, Inc. v. Plaster Dev.
Co., 255 P.3d 268, 278 (Nev. 2011); Home Savings Ass’n v.
Aetna Cas. & Sur. Co., 854 P.2d 851, 855 (Nev. 1993).
NALDER V. UNITED AUTOMOBILE INS. CO. 7
Home Savings Ass’n addressed whether a trial court properly
dismissed with prejudice a claim raised by an insured against
an insurer that had breached its duty to defend. 854 P.2d at
854–55. The Nevada Supreme Court reversed, holding that,
because an insurer’s duty to defend “continues throughout the
course of the litigation against the insured[,] [t]he statute of
limitations on a claim against an insurer for breach of its duty
to defend commences when a final judgment in the
underlying litigation against the insured is entered.” Id. at
855 (citations omitted). In deciding that the insured wasn’t
barred from continuing to seek fees and costs incurred in
defending an action, the Nevada Supreme Court didn’t
address the amount that could be recovered as a consequence
of an adverse judgment against the insured. See id. at
854–56.
In Reyburn Lawn & Landscape Designers, the Nevada
Supreme Court considered the scope of an indemnification
clause in a construction contract between a general contractor
and a subcontractor. 255 P.3d at 270–71. Largely based on
its interpretation of the language in the indemnification
clause, the Nevada Supreme Court held that “an indemnitor’s
duty to defend an indemnitee is limited to those claims
directly attributed to the indemnitor’s scope of work and does
not include defending against claims arising from the
negligence of other subcontractors or the indemnitee’s own
negligence.” Id. at 278. Moreover, the indemnity clause in
that case “expressly authorize[d] attorney fees.” Id. at 279
n.11. Again, the Nevada Supreme Court didn’t address the
appropriate measure of damages for a breach of an insurer’s
duty to defend. See id. at 277–80.
In two recent orders, the U.S. District Court for the
District of Nevada addressed the “proper measure of
8 NALDER V. UNITED AUTOMOBILE INS. CO.
damages” under Nevada law for an insurer’s breach of the
duty to defend. In its first order, the court recognized that the
Nevada Supreme Court has never “articulated the measure of
damages for an insurer’s mere breach of the duty to defend
absent bad faith.” Andrew v. Century Sur. Co., No. 2:12-cv-
00978, 2014 WL 1764740, at *9 (D. Nev. Apr. 29, 2014).
The court then looked to California law because the Nevada
Supreme Court has “relied on [California law] in articulating
the duty to defend.” Id. (citing United Nat’l Ins. Co. v.
Frontier Ins. Co., 99 P.3d 1153, 1158 (Nev. 2004)). In
California, “[w]here there is no opportunity to compromise
the claim and the only wrongful act of the insurer is the
refusal to defend, the liability of the insurer is ordinarily
limited to the amount of the policy plus attorneys’ fees and
costs.” Comunale v. Traders & Gen. Ins. Co., 328 P.2d 198,
201 (Cal. 1958). Relying on Comunale, the Andrew court
“conclude[d] that the Nevada Supreme Court would not allow
for extra-contractual damages if the insurer did not act in bad
faith.” Andrew, 2014 WL 1764740, at *9.
The Andrew court, however, reconsidered and modified
its ruling, relying on Nevada contract law. Andrew v.
Century Sur. Co., No. 2:12-cv-00978, 2015 WL 5691254, at
*3 (D. Nev. Sept. 28, 2015). The court held: “There is no
special rule for insurers that caps their liability at the policy
limits for a breach of the duty to defend.” Id. at *6. Under
Nevada law, upon a breach of contract, a plaintiff may seek
compensatory damages, which include expectancy damages.
Id. at *3 (citing Rd. & Highway Builders v. N. Nev. Rebar,
Inc., 284 P.3d 377, 382 (Nev. 2012)). Nevada courts
calculate expectancy damages pursuant to section 347 of the
Restatement (Second) of Contracts. Rd. & Highway Builders,
284 P.3d at 382. This section provides:
NALDER V. UNITED AUTOMOBILE INS. CO. 9
Subject to the limitations stated [elsewhere],
the injured party has a right to damages based
on his expectation interest as measured by
(a) the loss in the 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.
Restatement (Second) of Contracts § 347 (1981). Thus, the
Andrew court found that “[u]nder § 347(b), [an insured] . . .
is entitled to consequential damages for [an insurer’s] breach
of the duty to defend.” Andrew, 2015 WL 5691254, at *3.
“Consequential losses are those damages that ‘aris[e]
naturally, or were reasonably contemplated by both parties at
the time they made the contract.’” Id. (alteration in original)
(quoting Hornwood v. Smith’s Food King No. 1, 772 P.2d
1284, 1286 (Nev. 1989)).
Andrew then concluded: “When the insurer breaches the
duty to defend, a default judgment is a reasonably foreseeable
result because, in the ordinary course, when an insurer refuses
to defend its insured, a probable result is that the insured will
default.” Id. (citing Hamlin Inc. v. Hartford Accident &
Indem. Co., 86 F.3d 93, 94 (7th Cir. 1996)). Accordingly, “if
the default judgment was a reasonably foreseeable
consequence of [the insurer’s] breach, then [the insurer] is
liable for the entire amount of the default judgment as
10 NALDER V. UNITED AUTOMOBILE INS. CO.
consequential damages resulting from the breach of its duty
to defend, regardless of the policy limits.” Id. at *5. Thus,
Andrew’s interpretation of Nevada law is directly contrary to
the interpretation rendered by the district court in this case.
V. Conclusion
It appears to this court that there is no controlling
precedent of the Nevada Supreme Court or the Nevada Court
of Appeals with regard to the issue of Nevada law raised by
this case. We thus request the Nevada Supreme Court accept
and decide the certified question. “The written opinion of the
[Nevada] Supreme Court stating the law governing the
question[] certified . . . shall be res judicata as to the parties.”
Nev. R. App. P. 5(h).
The clerk of this court shall forward a copy of this order,
under official seal, to the Nevada Supreme Court, along with
copies of all briefs and excerpts of record that have been filed
with this court.
IT IS SO ORDERED.
Respectfully submitted, Alex Kozinski, John T. Noonan,
Jr. and Diarmuid F. O’Scannlain, Circuit Judges.
____________________
Alex Kozinski
Circuit Judge