May 11 — A law firm doesn't have an inherent conflict of interest when it represents an insured in a liability matter in which the insurer has reserved the right to deny coverage while the firm also represents the insurer in unrelated coverage matters, the Washington Court of Appeals, Second Division, held May 3 on a question of first impression in that state.
Judge Bradley A. Maxa said a law firm in this situation didn't breach its duty of loyalty to the insured and didn't even have to tell the insured that it was representing the insurer in other matters.
Maxa also said that the firm wasn't obligated to try to persuade the insurer to accept a settlement offer, and that the attorney judgment rule defeated the insured's claim that the firm was negligent in not settling the case quickly.
The rulings are favorable authority for defense counsel who find themselves in the difficult position of representing an insured at the behest of a carrier that is providing counsel under a reservation of rights.
A reservation of rights is an insurer's notice to an insured that the insurance contract may not cover a claim. The notification permits an insurer to investigate and defend a claim without waiving its right to later deny coverage based on information it learns along the way.
The court said there's a difference of opinion among experts as to whether it's ethical for lawyers to represent an insured while concurrently representing the insurer in other matters.
It decided that as a matter of law, no conflict automatically arises under Washington Rule of Professional Conduct 1.7 when a lawyer defends an insured under a reservation of rights while concurrently representing the insurer in other, unrelated matters.
Maxa pointed out that in Washington, lawyers defending under a reservation of rights must follow the instructions announced in Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133 (Wash. 1986). Tank implicitly rejected California's approach requiring insurers to supply independent counsel for a reservation of rights defense, he said.
In a footnote, the court said its holding only addresses the argument that a conflict automatically exists when a lawyer defending under a reservation of rights also represents an insurer.
A defense lawyer is still subject to liability if the facts actually show that the lawyer's representation of the insured will be materially limited by the lawyer's responsibilities to or relationship with the insurer, of if the lawyer doesn't comply with the Tank criteria, Maxa said.
The court said no conflict arose under Rule 1.7 when Forsberg & Umlauf P.S. represented Roff and Bobbi Arden under a reservation of rights while the firm was also representing their insurer, Property & Casualty Ins. Co. of Hartford, in unrelated coverage matters.
Rule 1.7 states that a concurrent conflict exists if the representation of one client will be directly adverse to another client. Here, Hartford's interests were aligned with the Ardens' interests regarding the defense of the tort claims against them, Maxa said. The insurer's interests were adverse to its insureds' interest on coverage issues, but Forsberg made clear to the Ardens that it didn't represent either Hartford or the insureds on those issues, Maxa said.
Rule 1.7 also states that a concurrent conflict exists if there's a significant risk the representation of one client will be materially limited by the attorney's responsibility to another client. That risk doesn't exist in the reservation of rights context so long as defense counsel follows Tank, the court said.
Moreover, the Forsberg firm didn't have a fiduciary duty to tell the Ardens it was representing Hartford in other matters, and it didn't have to disclose its long-standing relationship with Hartford, the court held.
A lawyer defending under a reservation of rights must disclose any conflict of interest between the insured and the insurer, but no conflict existed here, Maxa said. “[N]either RPC 1.7 nor Tank impose a requirement that a defense attorney disclose its relationship with [the] insurer,” he said.
But he also said “The better practice for attorneys handling a reservation of rights defense may be to inform their clients if they have a long-standing relationship with the insurer and represent the insurer in other cases.”
The court held that the Forsberg firm didn't breach its duty of loyalty by not attempting to persuade Hartford to settle the case.
A defense attorney has an obligation to tell the insurer of the insured's request to settle, but no authority imposes a duty on defense counsel to try to get the insurer to settle, Maxa said. Such a duty would be inconsistent with the defense lawyer's role in a reservation of rights situation, he said.
Maxa also rejected the Ardens' claim that Forsberg was negligent in not trying to settle the underlying tort suit quickly so as to avoid exacerbating Roff Arden's depression and to minimize his potential exposure to criminal charges in the underlying dispute.
The attorney judgment rule insulated Forsberg from liability on this claim, the court ruled. The evidence showed that Forsberg made a judgment decision about the best way to obtain a settlement that Hartford would fund, it said.
The firm determined that the best strategy was to extend the time for responding to a settlement offer until after Hartford had enough information to determine the settlement value of the claim. No evidence indicated that decision was outside the range of reasonable alternatives from the perspective of a prudent attorney in Washington or that the firm didn't exercise reasonable care in making that decision, the court said.
Judges Lisa L. Sutton and Rich Melnick concurred.
Cushman Law Offices represented Roff and Bobbi Arden. Lee Smart P.S. Inc. represented Forsberg & Umlauf and attorneys John Hayes and William C. Gibson.
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Copyright 2016, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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