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Federal District Court in Nevada Rules Insurer Has Right to Reimbursement for Settlement Monies Paid for Non-Covered Damages

June 4, 2008

Federal District Court in Nevada Rules Insurer Has Right to Reimbursement for Settlement Monies Paid for Non-Covered Damages

June 4, 2008

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In an important decision for the insurance industry in Nevada, on April 24, 2008, Duane Morris LLP, through partner Dominica Anderson, was successful in obtaining a ruling from the federal district court in Las Vegas that insurer Great American Insurance Company has the right to reimbursement for settlement monies it paid for work done by its insured, Distinctive Homes, and for other non-covered items (e.g., defects that do not constitute "property damage," i.e., "physical injury to tangible property"). In response, the insured contended that the insurer should lose because there is no evidence of which damage relates to the work it did and which falls into the "no property damage" category, as the underlying settlement was not allocated on these issues. The insured's counter-motion on these issues was defeated. In addition, the insured's claim of bad faith was dismissed in its entirety. Great American Insurance Company of New York v. Vegas Construction Company, Inc. et al., U.S. District Court, 9th Cir., case no. 2:06-cv-00911-BES-PAL.

Specifically, the court ordered that the insured must reimburse the insurer for portions of the settlement that do not constitute "property damage" or that represent work excluded by the "Your Work" exclusion. In ruling on the "no property damage issue," the court ruled that the definition of "property damage" is not ambiguous and concluded that the insurer "is entitled to reimbursement of all settlement payments made . . . for alleged defects . . . that do not constitute 'property damage'" as defined in the insurance policies.

On the topic of the "Your Work" exclusion, the court held that the exclusion "is not ambiguous" and "that if any of the alleged defects in the . . . settlement were for work performed by [the insured], [the insurer] is entitled to reimbursement."

Also of significance was the court's ruling that the insured has the burden to prove that the claim for which coverage is sought falls within the policy's insuring agreement. Further, the court held that where, as here, the settlement had not been apportioned, the court will do a "rough apportionment" and that "in these situations, the burden is on the insured to prove the amounts attributable to covered claims."

In dismissing the bad faith counterclaim, the court found that the insurer had "followed the proper procedure by filing a declaratory relief action to settle the coverage issues between the parties. Moreover, such conduct does not constitute bad faith . . . ."

Not only was this a precedential ruling interpreting insurance policy language in Nevada, but it also upheld insurers' rights to recoup monies paid for non-covered damages. Thus, in light of the court's ruling, insurers may want to consider pursuing reimbursement from their insureds on amounts paid to settle a case for non-covered items or defects, whether not covered because excluded (such as under the "Your Work" exclusion) or because the alleged defects do not constitute property damage under the policy. Further, in order to avoid litigation after the fact, insureds may want to participate in settlement negotiations in cases where some portion of the settlement may not be covered by the insurer.

For Further Information

If you have any questions about this Alert or would like more information, please contact Dominica Anderson in Duane Morris' Las Vegas office, any other member of the Insurance and Reinsurance Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.