Court Seeks Clarifiation|of Insurance Bad Faith

(CN) — The Ninth Circuit tasked Nevada's Supreme Court with determining the fate of $3.5 million car-collision judgment based on state law governing insurance bad faith.

Gary Lewis and James Nalder contend that United Automobile Insurance Co. acted in bad faith because it had a duty to defend Lewis when Nalder sued the man for running over his daughter.

While Wednesday's ruling on the case by the Ninth Circuit gives no details on the July 8, 2007, collision, previous decisions by the lower court say Nalder's daughter, Cheyanne, was a minor who survived the accident with severe injuries.

Nalder had initially told the insurance company he would settle for $15,000, the policy limit, but he went to court when UAIC said Lewis was not covered because of his failure to renew his policy.

The men sued UAIC for breach of contract and bad faith after Nalder's state-court lawsuit against Lewis ended in a $3.5 million default judgment.

Though a federal judge sided with the insurer, the Ninth Circuit reversed in 2012, saying the ambiguity of Lewis' insurance policy meant that he was covered on the date of the accident.

On remand the lower court still found that UAIC had a good-faith basis to dispute coverage. It said the insurer should pay Nalder the policy limits, prompting Nalder and Lewis to appeal.

Rather than rule on the case a second time, the Ninth Circuit on Wednesday asked the Nevada Supreme Court to weigh in.

The certified question asks: "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 the losses consequential to the insurer's breach?"

Problematic to the Ninth Circuit is that the lower court's ruling relied on precedent that appears to contravene state law concerning whether a default judgment is a "reasonably foreseeable result" when an insurer refuses to defend a policyholder.

There appears to be no controlling precedent in either the Nevada Supreme Court or Nevada Court of Appeals rulings regarding the legal arguments raised by Nalder, Lewis and United Automobile, according to the Ninth Circuit's ruling.

The ambiguity concerning Lewis' insurance policy stemmed from a statement the insurer sent him before the accident, instructing him to send his renewal payment by June 30, 2007.

Lewis' policy had an expiration date of July 31, 2007, however, and the statement also specified that, "to avoid lapse in coverage, payment must be received prior to expiration of your policy."

Lewis sent his renewal payment on July 10, 2007, two days after the accident.

U.S. Circuit Judge Alex Kozinksi signed the Wednesday order, joined by Judges John Noonan and Diarmuid O'Scannlain.

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