Arlitz v. GEICO Casualty Company

• Court: District Court, D. Nevada
• Decided: August 8, 2023
• Docket: 2:19-cv-00743
• Status: Unknown

Opinion

1 2 UNITED STATES DISTRICT COURT DISTRICT OF NEVADA 3 4 Kelsy Arlitz, et al., Case No. 2:19-cv-00743-CDS-DJA

5 Plaintiffs Order Denying GEICO’s Motion for

Reconsideration, Granting the Arlitzes’ 6 v. Motion for Reconsideration

7 GEICO Casualty Company, [ECF Nos. 190, 194]

8 Defendant

9 10 Both parties move for reconsideration of my prior order granting and denying in part 11 GEICO’s motion for summary judgment and denying the Arlitzes’ motion for summary 12 judgment. Because GEICO fails to demonstrate that it is entitled to summary judgment on either 13 its breach of contract claim or its affirmative defense of collusion, I deny its motion for 14 reconsideration. But because the Arlitzes have demonstrated that I erroneously construed their 15 claim for breach of the implied covenant and fair dealing, I grant their motion for 16 reconsideration and reinstate that claim (count II of the complaint). The parties are further 17 instructed to attend a mandatory settlement conference before the magistrate judge assigned to 18 this case. If they fail to settle, they are to file a joint pretrial order no later than 14 days after the 19 final settlement conference. 20 I. GEICO’s Motion for Reconsideration (ECF No. 190) 21 GEICO seeks reconsideration of my decisions to (1) deny summary judgment on whether 22 the Schultes resided together, (2) deny summary judgment on whether GEICO’s failure to 23 defend its insureds caused the excess judgment, and (3) deny summary judgment on GEICO’s 24 affirmative defense of collusion during the arbitration. 25 26 1 A. Summary judgment remains inappropriate on the plaintiffs’ claim for breach of contract because a 2 genuine dispute remains as to whether the Schultes resided together. 3 GEICO argues that I erred by holding that the word “reside” carries with it ideas of 4 permanency and continuity. ECF No. 190 at 6–11. It contends that the word “reside” only 5 requires physical presence, such that Richard’s (allegedly sporadic) physical presence at 6 Christopher’s house established that he resided there. Id. But GEICO’s argument relies on a 7 narrow holding from the Nevada Supreme Court, which states, “residence under NRS 125.020 8 plainly requires only ‘physical presence’—not an extra-textual intent to remain.” Senjab v. 9 Alhulaibi, 497 P.3d 618, 620 (Nev. 2021) (emphasis added). The Nevada Supreme Court 10 constrained its holding to the divorce context, and overruled Vaile v. Eighth Judicial District Court ex 11 rel. County of Clark, 44 P.3d 506 (Nev. 2002), insofar as Vaile considered residence synonymous 12 with domicile in the context of divorce jurisdiction. Id. 13 My prior order did not rely upon Vaile in defining the term “reside”—to the contrary, I 14 surveyed a number of dictionary definitions and found that most of them, too, defined “reside” 15 by reference to permanence and continuity. ECF No. 189 at 16. While Senjab does not impute 16 those concepts onto the word “residence” as used in the statute establishing subject-matter 17 jurisdiction over divorce complaints, it also does not contravene my finding that generally—and 18 especially in the ordinary usage of the word—“reside” carries with it an intent to remain. As the 19 plaintiffs point out, even GEICO’s own claims manual states that the presence of an individual 20 claiming to be a resident of the same household as the named insured “require[s] more than 21 temporary physical presence in the named insured’s household” and “must be accompanied by 22 an intention to remain there for some length of time[.]” ECF No. 193 at 5–6 (citing ECF No. 116- 23 13). I never intended to give the impression that my definition of “reside” solely relied upon Vaile, 24 which is why I relegated my discussion of the case to a footnote. Rather, I discerned the ordinary 25 usage of the term “reside,” which in all contexts outside of a very narrow construction of a 26 Nevada divorce statute, carries with it ideas of permanence and continuity. 1 Of course, as a sophisticated drafter of insurance policies, GEICO could have chosen to 2 define the word “reside” itself. It also could have asked Richard whether he resided with 3 Christopher before it disclaimed coverage under that clause of the insurance contract. But then 4 it would not have had wiggle room to construe the word flexibly in favor of its subsequent 5 litigation position. A contract is ambiguous when it is subject to more than one reasonable 6 interpretation. Shelton v. Shelton, 78 P.3d 507, 510 (Nev. 2003). And, as the parties are well aware, 7 any ambiguity should be construed against the drafter. Mullis v. Nev. Nat’l Bank, 654 P.2d 533, 535 8 (Nev. 1982). Because the word “reside” is subject to at least two reasonable interpretations—one 9 carrying with it an idea of permanence and continuity, and one without—I must construe it 10 against GEICO. I thus decline to reconsider my prior order with respect to the claim for breach 11 of contract. 12 B. Summary judgment remains inappropriate on whether the GEICO’s failure to defend the Schultes caused 13 the excess judgment and on GEICO’s collusion defense. 14 GEICO argues that I erred by conflating whether the Schultes had the benefit of an 15 attorney in mounting a defense to the Arlitzes’ lawsuit with whether the Schultes chose, with 16 the benefit of such an attorney, to mount a collusive defense rather than an adversarial one. ECF 17 No. 190 at 11–12. It contends that Christopher made clear to the Schultes’ lawyer that she should 18 “do whatever she needed to do so [Christopher] wouldn’t be sued by [the Arlitzes] anymore,” 19 which constitutes a collusive defense. Id. at 12. 20 I first note that GEICO relies upon a number of cases from California and Arizona which 21 stand for the proposition that as a matter of law, an insurer is not liable for an excess judgment 22 when the insureds it disclaimed mount a non-adversarial defense. ECF No. 190 at 12–13. The only 23 Nevada case it cites, Andrew v. Century Surety Company, 134 F. Supp. 3d 1249 (D. Nev. 2015), 24 explicitly delineates between when a breach of the duty to defend would or would not 25 proximately cause an excess judgment. It held that the causal link between breach and the 26 excess judgment would arise when an insured was unrepresented by counsel and noted that the 1 causal link would be absent when “the judgment would be the same as if the defense had been 2 conducted by the insurer’s counsel.” Andrew, 134 F. Supp. 3d at 1258–59 & n.2 (quoting Rogan v. 3 Auto-Owners Insurance Company, 832 P.2d 212 (Ariz. Ct. App. 1991)) (emphasis added). The key 4 language in Rogan and Andrew is that causality is most attenuated when the judgment would be 5 the same regardless of the defense presented. And that is the area of genuinely disputed fact 6 here—GEICO argues that Upson could have presented a variety of defenses, but it is not 7 undisputed that even if Upson had presented those defenses, the judgment would have 8 differed. Upson and the Schultes may have decided not to pursue GEICO’s preferred line of 9 defense (i.e., presented testimony from a medical expert, an accident reconstructionist, etc.) for a 10 host of reasons, perhaps related to the merits of those defenses or perhaps related to a desire to 11 mount a non-adversarial defense in the face of the covenant not to execute. Of course, the 12 plaintiffs bear the burden at trial of demonstrating that GEICO’s breach of the duty to defend 13 caused the excess judgment. But GEICO bears the burden at summary judgment of 14 demonstrating that its breach did not cause the excess judgment. It has failed to demonstrate 15 that there is no genuine dispute that the judgment would have differed if Upson presented 16 alternate defenses. GEICO assumes that the covenant not to execute is sufficient to find a 17 collusive defense, whereas the undisputed record belies that view. While Upson may have done 18 more to attempt to mitigate the damages awarded by the arbitrator, there is no evidence 19 suggesting that the arbitrator’s judgment would have actually differed had she heard those 20 defenses. The same is true of whether the arbitrator would have altered the judgment if she had 21 learned of the covenant to not execute.1 22 To be clear, I am not stating that as a matter of law, the Schultes were permitted to 23 inflate the damages levied against them. I simply hold that whether the arbitrator’s judgment 24 1 GEICO asserts that I erred in stating that there was a genuine dispute as to whether the arbitrator was 25 informed about the covenant not to execute. ECF No. 190 at 24. GEICO is correct in this regard—the deposition testimony suggests that neither attorney mentioned the covenant and the Arlitzes did not put 26 forth any evidence that the arbitrator was so informed. I thus reconsider my prior ruling insofar as I found a genuine dispute about whether Judge Glass was informed of the covenant not to execute. 1 would have differed had she been presented all of the facts GEICO asserts are relevant—a more 2 adversarial defense, the covenant not to execute—is still genuinely disputed by the parties. And 3 it is not my place at summary judgment to decide that the arbitration award would have been 4 different had those facts been presented. 5 GEICO argues that my reasoning creates a “tails Plaintiffs lose” and “heads GEICO wins” 6 scenario. ECF No. 190 at 22–23. It argues that if the Schultes’ litigation strategy did not create a 7 difference in the arbitration award from GEICO’s hypothetical strategy, then the plaintiffs will 8 not be able to prove that GEICO’s breach caused the excess judgment. Id. But if the Schultes’ 9 litigation strategy did create a difference from GEICO’s, then GEICO wins its collusion defense. 10 Id. This is patently incorrect, as a collusion defense does not “win” simply based on the fact that 11 the award would have been different based on an alternate litigation strategy. Instead, as the 12 authority to which GEICO cited and I reference in my prior order states, “what may constitute 13 fraud or collusion is a fact-intensive inquiry determined on a case-by-case basis,” determined by 14 whether “the arbitration award was unreasonable, it involved any misrepresentation or 15 concealment of material facts, there was a lack of arms-length negotiation, there were attempts 16 to affect the insurance coverage or artificially increase damages flowing from the insurer’s breach 17 . . . and there was profit to the insured.” ECF No. 189 at 30 (citing Andrew, 134 F. Supp. 3d at 18 1267–68) (other citations omitted). Undoubtedly, it will be difficult for the plaintiffs to argue 19 that GEICO’s breach caused them to suffer an increased judgment while also arguing that the 20 arbitration was non-collusive. But the factors to be considered in determining whether an 21 arbitration was collusive make it possible—to borrow GEICO’s analogy—for the plaintiffs’ coin 22 to land on the thin-ridged edge, neither heads nor tails. 23 Finally, while I have reconsidered that there was a genuine dispute as to whether the 24 arbitrator was informed of the covenant not to execute, I still find a genuine dispute as to 25 whether the arbitration award was in fact the product of collusion. GEICO does not argue with 26 my prior determination that allegations of collusion in the context of settling insurance claims 1 are generally issues to be determined by finders of fact. ECF No. 189 at 32 (citing Century Sur. Co., 2 134 F. Supp. 3d at 1268 (collecting cases)). The issues to be tried in this case are those pertaining 3 to the factors of collusion that I previously mentioned. The existence of the covenant not to 4 compete and the fact the arbitrator was not informed of it are two undisputed factors, but the 5 remainder of the factors pertinent to a collusion defense lies properly with the jury. I thus 6 decline to reconsider my prior order declining to grant summary judgment on GEICO’s 7 affirmative defense. 8 II. The Arlitzes’ Motion for Reconsideration (ECF No. 194) 9 The Arlitzes seek reconsideration of my decision to grant GEICO summary judgment on 10 the claim for breach of the covenant of good faith and fair dealing. They argue that I “never 11 analyzed GEICO’s duty to inform in accordance with Allstate Ins. Co. v. Miller, 212 P.3d 318 (Nev. 12 2009) because [I] incorrectly conflated GEICO’s duty to inform with its coverage obligation, 13 which is separate and distinct.” ECF No. 194 at 9. They add that I should have analyzed GEICO’s 14 duty to inform separately from GEICO’s duties to defend or indemnify, and that GEICO 15 breached its duty to make reasonable settlement decisions by failing to inform the Schultes of 16 the Arlitzes’ settlement offers. See generally id. Because it was not clear that the Arlitzes were 17 pursuing two distinct claims of bad faith (first, in GEICO’s decision to deny coverage, and 18 second, in GEICO’s decision not to inform the Schultes of an available settlement offer), I now 19 consider the Arlitzes’ claim of bad faith as a standalone claim not reliant upon a showing of 20 breach of the duty to defend. 21 The Nevada Supreme Court has held that “an insurer’s failure to adequately inform an 22 insured of a settlement offer is also grounds for a bad-faith claim.” Miller, 212 P.3d at 326. While 23 the insurer’s duty to defend creates a “cascading hierarchy of duties,” including the “right to 24 control settlement discussions,” Miller, 212 P.3d at 324, I erred by assuming that the duty to 25 inform was subsumed in the duty to defend such that an insurer with a reasonable—even if 26 ultimately wrong—basis to deny coverage also had a reasonable basis to not inform its insureds. 1 All contracts include an implied covenant of good faith and fair dealing. Pemberton v. 2 Farmers Ins. Exch., 858 P.2d 380, 382 (Nev. 1993). A violation of this covenant gives rise to a bad- 3 faith tort claim. U.S. Fidelity v. Peterson, 540 P.2d 1070, 1071 (Nev. 1975). And the Nevada Supreme 4 Court “has previously held that a bad-faith action applies to more than just an insurer’s denial or 5 delay in paying a claim.” Miller, 212 P.3d at 325. “An insurer’s failure to adequately inform an 6 insured of a settlement offer may also constitute grounds for a bad-faith claim.” Id. (citing Allen v. 7 Allstate Ins. Co., 656 P.2d 487, 289 (9th Cir. 1981); Miller v. Elite Ins. Co., 100 Cal. App. 3d 739 (Cal. 8 1980)). While Miller seems to imply that the duty to inform cascades from the duty to defend,2 id. 9 at 324, it also states that “if an insurer fails to adequately inform an insured of a known 10 reasonable settlement opportunity prior to the filing of a claimant’s lawsuit, the insurer may 11 breach its duty of good faith and fair dealing.” Id. at 325. The “if . . . [then]” construction of that 12 phrase implies that an insurer’s failure to inform is a sufficient condition for a court to find a 13 possible breach of the implied covenant of good faith and fair dealing. And a sufficient condition 14 is, of course, enough by itself. 15 The Arlitzes cite a bevy of case law supporting this proposition. ECF No. 194 at 11. And 16 at least one court has found that “[f]ailure to communicate a settlement offer may, on its own, 17 give rise to an insurance bad faith claim.” USF Ins. Co. v. Smith’s Food & Drug Ctr., Inc., 921 F. Supp. 18 2d 1082, 1094 (D. Nev. 2013); see also Prosser v. Leuck, 592 N.W.2d 178, 183 (Wisc. 1999) (stating 19 that an insurer must fulfill the obligation to inform an insured of any settlement offers received 20 “as part of its fiduciary duty even if it challenges coverage”). While GEICO attempts to 21 distinguish USF on the basis that the court found the insurer had a duty to defend its insured, 22 ECF No. 198 at 15–16, such a distinction ignores the USF court’s reasoning that liability on a 23 failure-to-inform theory may “on its own” give rise to a bad-faith claim. 921 F. Supp. 2d at 1094. 24

25 2 Miller itself seems to oscillate between finding a failure to inform “a factor . . . to consider when evaluating a bad-faith claim” and finding it a standalone ground for a bad faith claim. 212 P.3d at 325–26. 26 Upon careful review of the cases Miller uses to stand for its proposition, I find that a bad faith claim for failure to inform may exist even without a claim for breach of the duty to defend. 1 Ultimately, I find that a failure-to-inform theory of bad-faith liability may exist separate 2} from a theory of bad-faith liability premised on breach of an insurer’s duty to defend. I 3]| reconsider my decision to grant GEICO summary judgment on the plaintiffs’ claim for breach of 4|| the covenant of good faith and fair dealing. Conclusion 6 For the foregoing reasons, IT IS THEREFORE ORDERED that GEICO’s motion for 7|| reconsideration [ECF No. 190] is DENIED. 8 IT IS FURTHER ORDERED that the Arlitzes’ motion for reconsideration [ECF No. 194] 9} is GRANTED. Their claim for breach of the implied covenant of good faith and fair dealing is reinstated. IT IS FURTHER ORDERED that the order regarding granting GEICO’s motion for 12]| summary judgment regarding plaintiff's covenant of good faith and fair dealing is vacated (ECF No. 189 at 33-35). GEICO’s motion for summary judgment for breach of the implied covenant of good faith and fair dealing is DENIED with respect to the plaintiffs’ claim arising out of GEICO’s 15]| alleged breach of its duty to inform the Schultes of a settlement offer. 16 IT IS FURTHER ORDERED that the parties are to attend a settlement conference before 17] the magistrate judge assigned to this case. Should they fail to settle all of the issues headed for 18]| trial, they must file a joint pretrial order in accordance with the local rules of this district no 19] later than 14 days after the final settlement conference. -) 20 DATED: August 8, 2023 /, / 2 ZL ye — 22 Crist in D. Silva _ 33 Una d States District Judge 24 25 26