Gaining momentum – and being explored by at least one local municipality – are actions and claims against sureties for violation of Nevada’s Unfair Claims Practices Act (“Act”). See NRS 686A.310. Claimants seek not only compensatory damages, but also punitive damages – to incentivize the surety to pay otherwise questionable or invalid claims. In our economic climate, such claims may become more common as claimants employ more zeal to enhance a settlement or to increase damages by exploring, threatening or bringing a claim under the Act.

Although Nevada has rejected common law bad faith by a principal, the Act allows a private cause of action and punitive damages for violation of the Act. Many attorneys incorrectly consider the Act to constitute the statutory elements of a bad faith claim. Rather, the Act states that engaging in certain enumerated activities constitutes an unfair practice such as “Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.” NRS 686A.310(1)(d). The UPCA makes an “insurer” liable to the insurance commissioner and “to its insured for any damages sustained by the insured as a result of the commission of any act set forth in subsection 1 as an unfair practice.” NRS 686A.310(2).

The Act has gone through a number of legislative modifications. When first enacted in 1975, the Act did not allow a private right of action and required evidence of a “general business practice” to establish a violation. In 1987, the Act was modified to allow a private right of action by an “insured” and to delete the language requiring evidence of a “general business practice.” The result of the 1987 amendment is that the Act may be interpreted to allow an “insured” to recover damages against an “insurer” who engages in a single enumerated unfair act. See Hart v. Prudential Property & Casualty Ins. Co., 848 F. Supp. 900, 903 (D. Nev. 1994) (opining without holding that “an insurer would be in violation of the statute for engaging in a single enumerated unfair act”).

Substantial hurdles exist for claimants to establish a claim under the Act, such as: (1) the Court recognizes the distinction between insurance and suretyship; (2) the claimant must be an “insured” and there is no “insured” in the surety context; (3) the regulatory purpose for inclusion of sureties in the Nevada Insurance Code (“NIC”) does not morph insurance principles into suretyship; and (4) the Nevada Administrative Code arguably excludes suretyship from certain “Unfair Practices.”

The primary argument for applying the Act to sureties is that the NIC includes “surety insurance.” Thus, claimants assert that the surety must be the “insurer” and the bond beneficiary or obligee the “insured.” If the legislature wanted to exempt sureties from the Act, it would have done so specifically.

The Nevada Supreme Court has not yet decided whether a cause of action against a surety may be asserted under the Act. Even if the Nevada Supreme Court were to determine that the Act applies to sureties, the claimant must establish specific damages suffered because of a violation of the Act. This may and should be a difficult task.

Of course, this is only a brief synopsis and overview. Please feel free to contact us with any questions you may have.

Nevada DMV Bonds:
Can Lenders Recover?

Nevada Courts now allow financing companies to recover on a Nevada Motor Vehicle Dealer License Bond, but limit such recoveries to situations involving fraud or deceptive trade practices.

On March 17, 2011, the Nevada Supreme Court held in Western Surety Company v. ADCO Credit, Inc. d/b/a Auto Dealers Consolidated, 251 P.3d 714 (Nev. 2011) that a defrauded finance company was within the meaning of the phrase “any person” in NRS 482.345, thereby making the finance company a proper claimant under a Nevada Motor Vehicle Dealer License Bond. Id. at 715. The Nevada Supreme Court rejected the surety’s argument that the term “any person” was limited to consumer victims. In finding for the finance company the Nevada Supreme Court relied on what it believed was the plain meaning of the term “person” from the dictionary, which included “a corporation, a partnership, an estate, or legal entity … recognized by law as have rights and duties.” Id. at 716.

However, in so doing, the Nevada Supreme Court expressly limited the ability of a non-consumer’s recovery on the License Bond to instances involving fraud and unfair trade practices. The Court stated “[t]he fact that contract breaches are limited to consumer contracts does not imply that claims based on deceptive trade practices or fraud are limited to those committed against consumers.” Id. at 719. Therefore, to recover against the bond, a non-consumer must prove that the dealer committed trade practices or fraud. Deceptive trade practices are defined in Nev. Rev. Stat. 589. Like other states, fraud in Nevada requires (1) that a false representation was made; (2) which the dealer knew or believed was false; (3) for the purpose of inducing the other party to act; (4) and upon which the other party did in fact justifiably rely (5) thereby suffering damage. Barmettler v. Reno Air, Inc., 114 Nev. 441, 956 P.2d 1382 (1998).

This narrowing application of ADCO Credit was echoed by a Nevada Department of Motor Vehicles Administration Law Judge at a recent hearing litigated by our office involving a claim by one licensed dealer against the bond of another licensed dealer. The claim of the dealer claimant was wholly rejected by the Administrative Law Judge for failure to establish fraud or deceptive trade practices.

Many entities will attempt to change the routine breach of contract into fraud. Accordingly, sureties should be diligent in investigating claims received from non-consumers in Nevada to make sure that fraud or a deceptive trade practice is involved.

Please contact Faux Law Group for additional information.

Utah Update:
Developers Surety and Indemnity Co. v. Pacific West, LLC

An interesting decision denying cross motions for summary judgment pertaining to indemnity and joint venture / partnership (“JV”) issues is addressed in Developers Surety and Indemnity Co. v. Pacific West, LLC, Case No. 2:10-cv-188 (D.Utah September 29, 2011). The case deals with whether an alleged JV can recover against a bond and whether the alleged JV is an indemnitor.