In American Casualty v. Union Welfare Fund (1997) 113 Nev. 764 942 P.2d 172, the international trustees of a union trust fund merged assets with a local fund and agreed as part of the merger to defend and indemnify the local fund for any claims brought against it.
The local fund was later sued, but the international trustees refused to provide a defense. The local fund paid its own defense costs and prevailed in the litigation.
In a second action, the local fund sued the international trustees to recover its defense costs, alleging a breach of the merger agreement. The international trustees, in turn, sought a defense from their insurer, American Casualty, under a policy that defined "loss" and "wrongful acts" in language virtually identical to the policy at issue here. (See id. at p. 769 942 P.2d at pp. 175-176.)
American Casualty provided the international trustees with a defense.
Nevertheless, the local fund recovered a judgment against the international trustees, resulting in a settlement of $ 750,000. American Casualty refused to pay for the settlement.
The international trustees and American Casualty litigated the indemnity issue in a declaratory relief action. The district court found for the trustees. The Nevada Supreme Court reversed, explaining: "American contends correctly that the judgment against it in this case represents an amount that cannot be properly considered a 'loss' resulting from any 'wrongful act' of the international trustees. The policy provides that American agrees that 'if claim or claims are ... first made against the Insureds i.e., the international trustees, individually or collectively during the policy year for a Wrongful Act, then American Casualty will pay on behalf of the Insureds all loss which said Insureds shall be legally obligated to pay.' ... Although a loss is defined very broadly to include almost any amount awarded against the insureds, the issue in this case is not the definition of 'loss,' or whether the damages in this case could fall within that definition. Instead, the issue is whether the judgment which the international trustees were required to pay was a 'loss' that resulted from any 'wrongful act' of the international trustees. Simply put, the policy only covers loss resulting from wrongful acts, whether actually committed or merely alleged.
"American argued in the district court and in its briefs in this court that the policy did not cover the loss in this case because the loss ... did not result from any 'wrongful act' of the international trustees; the 'loss' was not a loss at all; it was merely the judicial enforcement of the international trustees' contractual obligations to the local fund under the merger agreement. American argues that it never agreed to pay the international trustees' obligations under the merger agreement, an obligation for which the international trustees were fully paid by the local fund under that agreement.
"The 'loss' in this case did not result from any actual or alleged 'wrongful act' of the international trustees. The 'wrongful act' was the failure to defend. ... This failure to defend did not result in the local fund's costs in defending the third party action against it, because the costs involved in defending the third party suit would have been incurred whether or not the international trustees had committed the wrongful act of failing to defend the local fund. Although the local fund initially paid the costs of defending against the third party suit, the international trustees were contractually obligated to bear those costs. Had the international trustees not committed the wrongful act of failing to defend the local fund, i.e., had the international trustees elected to honor their obligation and defend the local fund, the international trustees would have been obligated to pay the cost of the defense, and they would not have been in a position to pass their legal obligation on to their insurance carrier. It is the cost of this defense that was reduced to a judgment in the ... action against the international trustees.
"The international trustees were required to pay their contractual obligation. This contractual obligation did not result from their wrongful act of refusing to satisfy it. To hold otherwise would allow an insured to turn all of its legal liabilities into insured events by the intentional act of refusing to pay them. The refusal to pay an obligation simply is not the cause of the obligation, and the international trustees' wrongful act in this case did not result in their obligation to pay; their contract imposed on them the obligation to pay. ...
"American did not insure the international trustees against debts they are obligated to pay pursuant to the merger agreement with the local fund. Because the judgment of the district court is based on a theory that the contractual obligation of the international trustees under the merger agreement is covered as a loss under the policy, we must reverse that judgment." (American Casualty v. Union Welfare Fund, supra, 113 Nev. at pp. 769-771 942 P.2d at pp. 176-177.)
In short, an insured's alleged or actual refusal to make payment under a contract does not give rise to a loss caused by a wrongful act.