Nevada Coverage and Bad Faith Law

A FINDING OF BAD FAITH DOES NOT AUTOMATICALLY ENTITLE THE POLICYHOLDER TO AN AWARD OF ATTORNEY’S FEES

Does a finding of bad faith trigger entitlement to an award of attorney’s fees? In Nevada, the answer is no. This issue was addressed in the 2007 case of Merrick v. Paul Revere Life Ins. Co., 500 F.3d 1007 (9th Cir., 2007).

Paul Revere Life and co-defendant Unum Provident denied Merrick’s disability insurance claim.  Merrick filed suit alleging breach of contract and of the duty of good faith and fair dealing.  Applying Nevada law under the doctrine of Erie Railroad v. Tompkins, 304 U.S. 64 (1983), the jury ruled in favor of Merrick on his claims for breach of contract and bad faith.  Post trial, the U.S. District Court awarded attorney’s fees.   Both insurance companies appealed the award.

The District Court premised its award of attorney’s fees on its interpretation of Farmers Home Mut. Ins. Co. v. Fiscus, 102 Nev. 371, 725 P. 2d 234 (1986). (For more about the Fiscus case, see HERE).  The court decided that the Fiscus decision required an award of attorney’s fees in every case where bad faith damages were awarded.  The District Court said that the bad faith determination was tantamount to a finding that the insurance company lacked reasonable ground for maintaining a defense, subjecting the plaintiff to attorney’s fees pursuant to Nevada Revised Statute Section 18.010(2)(b) in every case.

The Ninth Circuit said that the District Court had misread Fiscus.  The court pointed out that in Fiscus, the Nevada Supreme Court awarded attorney’s fees based on the insurance company’s bad faith interpretation of its policy.  When the insurance company’s defense is based on that same bad faith interpretation, attorney’s fees could be awarded under this statute.  However, according to the Merrick decision, this is not a categorical rule. 

Because the trial court relied solely on the holding in Fiscus as a catch-all basis for awarding attorney’s fees, and because the trial court found that the decision could have gone either way, the Merrick court reversed the attorney’s fees award.

In summary, Merrick confirmed that there is no categorical basis for awarding attorney’s fees in Nevada bad faith cases as a matter of law.  However, it did not preclude consideration of such an award on a case-by-case basis where the insurance company’s conduct in defending a bad faith suit is found to be unreasonable. Nevertheless, a prerequisite to such an award will be based on a fact specific analysis of the case in question.

If you have questions regarding the award of attorney’s fees in bad faith or coverage cases, please give Mike Mills at Mills & Associates a call at 702-240-6060x114 or e-mail him, mike@mcmillslaw.com.

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These posts on the Mills & Associates Nevada Coverage & Bad Faith Law blog are published to provide useful insights on Nevada insurance law to our clients and other subscribers. Many times the topics are suggested by recent case law, or issues raised by litigation.

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If you would like to submit a question, or a suggestion for a future blog post, please contact us at Mail@MCMillsLaw.com.

 

PLAIN VANILLA NEVADA BAD FAITH

Farmers Home Mutual Ins. v. Fiscus, 102 Nev. 371, 725 P.2d 234, (1986) is a text book example of a straightforward bad faith suit.  It all started out simply enough.

The Fiscus family used an evaporative cooler to keep their Boulder City home tolerable during the long, hot Nevada summers.  The cooler’s water supply line hooked into the pipe under the kitchen sink and ran up to the roof.  While the Fiscus family was away on a three-week summer vacation, the cooler’s supply line became disconnected somehow.  They returned to find a flooded house.  Not only did the house need repairs, but the water damaged their personal property too.

Farmers Home denied the claim for repair of the structure because of a policy exclusion for “continuous or repeated seepage or leakage of water or steam over a period of time from within a plumbing, heating or air conditioning system.”  However, the insurance company got into trouble when it denied coverage for damage to the personal property.  The policy said that the company would pay for damage to personal property caused by “accidental discharge or overflow of water or steam from within a plumbing, heating or air conditioning system.” 

The Nevada Supreme Court had no trouble reaching its decision.  The court approved the trial court’s awards for loss and damage to the personal property, as well as damages for the emotional distress caused by the bad faith denial.  Not only did the court approve of the award of prejudgment interest, the court tacked on an additional $5,000.00 in attorney’s fees to supplement the $5,000.00 that the trial court had awarded.  The court did this because of the “continued bad faith denial of the respondents’ claim by bringing this appeal”. 

This opinion is a clean and clear example of the elements in a bad faith suit.  The facts are not complicated by a supplemental claim of delayed processing or mishandling under the “Unfair Claims Practices Act”  N.R.S. 686A.310.  Rather, the elements of the cause of action for bad faith are presented in a straightforward fashion:  (1) A denial of the claim where payment should have been made and (2) A knowing or reckless disregard of a lack of a reasonable basis for denying the claim.  See American Excess Ins. Co. v. MGM Grand Hotels, Inc., 102 Nev. 601, 729 P.2d 1352 (1986).