Fernandez v. State Farm Mut. Auto. Ins. Co.

Citation: 338 F. Supp. 3d 1193Docket: Case No.: 2:17-cv-00731-JAD-VCF

Court: District Court, D. Nevada; September 4, 2018; Federal District Court

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An insurance-coverage dispute involves State Farm Mutual Automobile Insurance Company's refusal to pay underinsured-motorist (UIM) benefits to Angelica Fernandez due to a policy clause that reduces UIM benefits by amounts that "could have been paid" by workers' compensation. Fernandez is seeking a declaration that this clause violates Nevada law, in addition to claims for breach of contract, bad faith, and violations of the Nevada Administrative Code (NAC). The court grants summary judgment in favor of Fernandez on her declaratory-relief claim, determining that the reduction clause is unenforceable under Nevada public policy. However, State Farm is granted summary judgment on the NAC claims, which fall under the exclusive jurisdiction of the Insurance Commissioner, and on the punitive-damages claim, as the evidence does not support such relief. The case is referred for a mandatory settlement conference regarding the remaining contract and bad-faith claims.

Fernandez's background includes being involved in an accident with Mario Johnson that resulted in $27,449.56 in medical expenses. After receiving $25,000 from Johnson's insurance, she sought additional compensation from State Farm under her UIM policy, which was denied based on the reduction clause. Fernandez's motions for partial summary judgment include requests for a ruling on the enforceability of the reduction clause, a judgment on two NAC violation theories, and a declaration that she cannot be assumed to have received workers' compensation benefits. State Farm counters with motions for summary judgment against her claims, except for the breach-of-contract claim. 

The summary-judgment standards highlight the responsibility of the moving party to demonstrate the absence of genuine issues of material fact and the subsequent burden on the opposing party to present specific facts for trial.

When a party moving for summary judgment carries the burden of proof at trial, typically the plaintiff, it must present evidence that would lead to a directed verdict if unchallenged. Once it shows the absence of genuine factual disputes on material issues, the burden shifts to the opposing party, which must provide substantial evidence supporting its claims or defenses. If the opposing party holds the burden of proof on a key issue, the moving party, often the defendant, only needs to indicate evidence showing a lack of genuine factual issues, rather than disproving the claim entirely. A moving party can secure summary judgment by undermining any essential element of the nonmoving party's case, rendering other facts immaterial.

In cases with cross-motions for summary judgment on the same claim, the court must consider the evidentiary materials submitted for both motions prior to making a decision. In this context, B. Fernandez is entitled to summary judgment on her declaratory-relief claim, as the reduction clause in question is deemed unenforceable under Nevada public policy. The dispute centers on State Farm's reliance on this clause to deny coverage. Fernandez argues that Nevada law permits reductions only for amounts actually paid to prevent double recovery, contending that the "could have been paid" clause unjustly benefits the insurer and fails to fulfill state policy by leaving the insured inadequately compensated.

State Farm contends that the Nevada Supreme Court upheld a similar clause in the case of Phelps v. State Farm and dismissed Fernandez's public-policy argument. However, the application of the Phelps decision is misrepresented; the clause examined there did not include the disputed "could have been paid" language and only allowed offsets for amounts actually received. In Phelps, the court emphasized that offset provisions preventing double recovery while ensuring full compensation for the insured are valid. The decision favored State Farm as Phelps had been made whole through other compensatory payments, allowing the offset without violating public policy. Thus, the court's reasoning in Phelps does not support State Farm's position regarding Fernandez's claim.

The enforceability of reduction clauses in Nevada hinges on the actual receipt of offsetting benefits, as established in case law, particularly Phelps and Continental Casualty v. Riveras. The latter case upheld a reduction clause allowing offsetting of UIM benefits by amounts received from workers' compensation. In contrast, Maxwell v. Allstate Insurance Company found a subrogation clause void for violating public policy, emphasizing the need to prevent double recovery while ensuring the insured is made whole. Nevada's jurisprudence consistently supports enforcing reduction clauses only when the insured has alternative means of compensation. 

The only noted exception, Rydingsword v. Liberty Mutual Insurance Company, upheld a reduction based on potential workers' compensation recovery, but its reasoning conflicts with Nevada's public policy of ensuring the insured is made whole. Therefore, the "could have been paid" clause in Fernandez's case is deemed to violate public policy, as enforcing it would reduce her UIM recovery based on hypothetical benefits, resulting in a windfall for the insurer and leaving the insured less than whole. Consequently, the clause is invalid and unenforceable, leading to summary judgment in favor of Fernandez against State Farm regarding her declaratory-relief claim.

Additionally, genuine issues of material fact prevent summary judgment on State Farm's bad-faith claim. Nevada law recognizes an implied covenant of good faith and fair dealing in contracts, which is breached when an insurer acts unreasonably with knowledge that its conduct lacks a reasonable basis. The plaintiff must demonstrate that the insurer acted with knowledge or reckless disregard of its unreasonable conduct, rather than merely acting unreasonably in hindsight.

An insurer is not considered to act in bad faith solely due to disagreement over a claimant's injury assessment or delays in payment pending relevant documentation or expert opinions. A bad-faith claim can be subject to summary judgment if the insurer can show a genuine dispute regarding coverage; if the insurer has a reasonable basis for denying coverage, it is not typically aware of acting unreasonably. State Farm argues that its disagreement with claimant Fernandez is a typical valuation dispute, which does not constitute bad faith. However, the question of whether State Farm had a reasonable basis to deny her claim remains contested. State Farm lacked evidence supporting its assertion that Fernandez could have fully recovered medical expenses through workers' compensation, making the reasonableness of this assumption a matter for jury determination. Consequently, State Farm's request for summary judgment on Fernandez's bad-faith claim is denied.

In contrast, State Farm is granted summary judgment on Fernandez's claims under the Nevada Administrative Code, as these claims fall under the exclusive jurisdiction of the Nevada Insurance Commissioner. Fernandez argues that her claims are based on Nevada Revised Statute 686A.310, which allows for a private right of action, but her complaint does not adequately state a claim under this statute. Instead, her claims are explicitly for violations of specific administrative code provisions. While she references NRS 686A.310, this is insufficient to establish a claim under it, and her claims are correctly categorized as violations of the Nevada Administrative Code, over which this court lacks enforcement jurisdiction. Therefore, State Farm is entitled to summary judgment on Fernandez's fifth, sixth, and seventh causes of action, and her motion for summary judgment on these claims is rendered moot.

The record lacks sufficient evidence to support Fernandez's claim for punitive damages against State Farm. State Farm seeks summary judgment, arguing that punitive damages require clear and convincing evidence of oppression, fraud, or malice, which Fernandez has not demonstrated. The definitions provided clarify that oppression involves despicable conduct causing unjust hardship, fraud entails intentional misrepresentation to harm another, and express or implied malice involves intentional or reckless disregard for others' rights. 

Fernandez lists six points she believes support her claim: 1) State Farm allegedly knew her UIM claim was valid due to under-compensation; 2) it improperly assumed the value of her hypothetical workers' compensation benefits; 3) it failed to account for subrogation interests when calculating offsets; 4) it lacked evidence of her employer’s compliance with workers' compensation laws; 5) it did not provide a necessary explanation regarding claim valuation; and 6) it violated statutory obligations to timely investigate her claim. However, these points are primarily theoretical and do not meet the stringent requirements for proving punitive damages.

As a result, the court grants State Farm's motion for summary judgment on the punitive damages claim. The ruling concludes with various motions being granted or denied, stating that the trial will proceed only on claims of breach of contract and breach of the implied covenant of good faith and fair dealing. Additionally, the case is referred for a mandatory settlement conference, and the requirement for a joint pretrial order is stayed until after this conference. The court also emphasizes the need for State Farm to establish federal subject-matter jurisdiction due to the specifics of the case. If jurisdiction is not established before final judgment, the case will be remanded.

State Farm asserts that it neither accepted nor denied Fernandez's claim but indicated that her claim was subject to offsets from workers' compensation and the tortfeasor's policy, allowing her to resubmit if necessary. The court interprets this response as a de facto denial of the claim. Fernandez's second claim for underinsured motorist benefits is deemed a breach of contract claim, overlapping with her broader breach of contract claim in her third cause of action, and will be treated as a single claim at trial. Relevant legal precedents, including *Phelps v. State Farm*, highlight that insurers may reduce amounts owed by the amount collected from other sources, provided certain conditions are met. The goal of underinsured motorist (UIM) coverage is to make the claimant whole, as supported by various legal cases. Additionally, unfair practices claims are brought under specific Nevada regulations, holding insurers liable for damages resulting from unfair practices. The Nevada Insurance Commissioner has exclusive authority to enforce the insurance code provisions.