Does there have to be insurance coverage as a prerequisite to an unfair claims practices action?
Even in the absence of coverage, an insured can bring a claim for breach of Nevada’s Unfair Claims Practices Act against an insurer
In an effort to ensure fair dealings with insureds by their insurers, in 1975 the Nevada Legislature enacted the Nevada Unfair Claims Practices Act (N.R.S. 686A.310). The Act identified sixteen specific activities which, if engaged in by an insurer (such as failing to act promptly upon receipt of a claim or failure to effectuate prompt and equitable settlements of claims when the insured’s liability has become reasonably clear), could subject the insurer to a private cause of action from its insured. However, until recent years, it was uncertain whether the existence of coverage under a policy was a prerequisite to a claim that an insurer violated the Act.
That all began to change in 2007, when the issue was presented in the United States District Court, District of Nevada matter of D&L Framing, LLC v. Clarendon American Insurance Company (case no. 2:05-cv-1307). In that case, Judge Roger L. Hunt determined in a ruling on the insured’s motion for summary judgment that insureds could assert a claim for violation of the Act without the Court first making a finding on the existence of coverage.
Then, in the 2009 case of Turk v. TIG Ins. Co., 616 F.Supp.2d 1044 (D.Nev.2009), the same Judge Hunt further elaborated on the issue and the justification for allowing insureds to assert claims for violation of the Act without a finding of coverage, this time on a motion for summary judgment filed by an insurer against an insured:
“TIG moves for summary judgment, arguing that a claim under this statute cannot be brought in the absence of insurance coverage. In support of its assertion, Defendant cites to a California insurance statute that allows claims to be brought only if the insured is entitled to coverage. Cal. Ins.Code. § 790.03. The Court disagrees with Defendant’s argument and holds that an insured can bring a claim for violation of § 686A.310 in the absence of actual coverage. The plain language of the statute guides the Court’s decision. Under § 686A.310(1)(d) an insurer violates this statute when it fails to “affirm or deny coverage within a reasonable time,” Thus, an insured has a cause of action against an insurer if the insurer waits an inordinate amount of time before informing the insured that there is no coverage. In addition to this plain language, the fact that the statute provides a private right of action and was enacted as “part of a comprehensive plan to regulate insurance practice in Nevada” supports the conclusion that liability under the statute is not limited by whether or not insurance coverage exists. Pioneer Chlor Alkali Co., 863 F.Supp. at 1241. Finally, it should be noted that in Pioneer Chlor Alkali v. National Union Fire Insurance this Court held that “the provisions of NRS § 686A.310 address the manner in which an insurer handles an insured’s claim whether or not the claim is denied.” Id. at 1243. TIG’s Motion for Summary Judgment on this cause of action is denied.”
Turk at 1052-1053. This rule is obviously beneficial to insurers, particularly in the area of the duty to defend. A duty to defend arises when there exists a potential for coverage; there need not be a finding of actual coverage for the duty to arise. United National Insurance Co. v. Frontier Insurance Co., 120 Nev. 678, 687, 99 P.3d 1153, 1158 (2004). A ruling to the contrary may have encouraged insurers to deny their insureds a defense until an actual determination that coverage exists is made. As such, the ruling is in step with the comprehensive effort by the Nevada legislature to regulate activities of the insurance industry within the state to ensure fairness in an insurer’s dealings with its insureds.