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June 23, 2016

Court of Appeals Addresses Insurance Defense Conflicts in Reservation of Rights Context

by contributor
Abstract depiction of a scale and gavel
A recent court ruling may be useful for lawyers defending an insured when they and their carrier are engaged in a separate coverage dispute.

Abstract depiction of a scale and gavelDivision II of the Court of Appeals recently addressed conflicts when an insurance defense counsel is representing an insured in a reservation of rights case. The plaintiffs in Arden v. Forsberg & Umlauf, P.S., ___ Wn. App. ___, ___ P.3d ___, 2016 WL 2647685 (May 3, 2016), asserted that the defendant law firm had a conflict when representing them in an earlier tort case and were pursuing breach of fiduciary duty and related claims against the firm. On summary judgment, the firm argued that it had no conflict. The trial court agreed and dismissed the case. The Court of Appeals affirmed.

In taking on the tort case, the law firm was careful to emphasize in its engagement agreement that it was representing the insureds only in the defense of that case and not on any associated coverage issues. The insureds, in turn, had their own lawyer on coverage issues in light of the carrier’s reservation of rights. A dispute arose during settlement negotiations in the tort case between the insureds and the carrier over the amount to be offered. The insureds later sued the carrier on a bad faith claim and then amended their complaint to add the law firm.

Mediation resolved all of the litigation except for the insureds’ claims against the law firm. On the latter, the insureds argued that the law firm had a conflict because it handled work for other insureds assigned by the carrier and did some coverage work for the carrier directly. The insureds contended that in the reservation of rights context, both constituted conflicts. As noted, the trial court and the Court of Appeals rejected both theories.

The Court of Appeals began by noting that in Washington under Tank v. State Farm Fire & Casualty Co., 105 Wn.2d 381, 715 P.2d 1133 (1986), an insurance defense counsel generally has only one client — the insured. In this instance, the law firm had made that plain in its engagement agreement. The Court of Appeals, therefore, concluded that there was no multiple client conflict under RPC 1.7(a)(1) and the underlying fiduciary duty of loyalty. The Court of Appeals next found that the fact that the law firm also did some unrelated coverage work for the carrier did not — in and of itself — constitute a “material limitation” conflict under RPC 1.7(a)(2) against the backdrop of the coverage dispute again because the firm was simply handling the direct defense of the tort case.

Although Tank has been the touchstone for analyzing insurance defense conflicts for a generation, Arden is a useful addition for lawyers in the occasionally uncomfortable position of defending an insured when the insured and the carrier are at the same time engaged in their own separate coverage dispute.

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