It's a fair question: If an insurance company is found to have breached its contractual duty to defend a case against an insured party, but hasn't acted in bad faith in doing so (in other words, it made a conscientious decision to deny coverage in good faith), is its liability capped by policy limits plus defense costs?
Or, as is queried in a recent article discussing the matter, can the insurer "be held liable for further damages resulting from its breach?"
The question is presently being considered by Nevada's Supreme Court in a case that commentators say is relevant in Colorado and every other state of the country because it "will impact interests well beyond those of the [litigating] parties."
In a nutshell, the relevant facts surrounding the matter are these. Several years ago, the insured badly injured a young girl in a car accident. In good faith, the insurer declined to defend the insured, with the matter ultimately ending with a default judgment for the victim's family well in excess of the limits cited in the insured's policy.
The insured now wants the insurer to pay the entire amount, which the latter party is strongly resisting on what it and several other industry actors that have joined the case in support say is a long-standing and inviolable principle that is threatened by the demand. A so-called amicus brief in the case argues that the company's liability must be "capped at the policy's limits, plus ... costs incurred to defend the underlying claim."
The brief adds that an outcome in which an insurer acting in good faith must pay out an amount exceeding policy limits "would improperly penalize insurers for reasonably disputing coverage and inject undesirable uncertainty into the insurance bargain."
Such an outcome, the insurers say, would broadly disservice insurers by setting a harmful precedent based upon an ignoring of agreed-upon policy limits.
And, they argue, that would ultimately damage both insurers and would-be insureds contracting for coverage.