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Independent Counsel Required for Insurers to Avoid Conflicts

By Matthew S. Mulqueen, Litigation News Contributing Editor – February 22, 2016


An insurer must provide independent counsel for its insured when a conflict of interest arises between the insurer and the insured. State Farm Mut. Auto. Ins. Co. v. Hansen. The court’s decision in Hansen, requiring independent counsel when an insurer asserts a reservation of rights that creates a conflict of interest, represents a growing trend across the country.

The 311 Boyz Strike, and a Lawsuit Follows
During a party in 2003, Stephen Hansen found himself in a violent confrontation and car chase with a group of teens known as the “311 Boyz.” Hansen suffered severe injuries in the melee when someone hurled a large rock through the windshield of his car. Hansen sued Bradley Aguilar, one of the 311 Boyz, and Aguilar’s father in Nevada state court, seeking coverage under the Aguilars’ homeowner’s and automobile policies. The Aguilars’ insurer agreed to defend the father and son under a reservation of rights.  

The insurer eventually offered to settle Hansen’s claims for an amount under the limits of the policies. Hansen rejected the offer and instead settled the case with the Aguilars directly. As part of the settlement, the Aguilars agreed to assign to Hansen all rights to pursue and collect against any insurers of the father and son.

Decision Prompts Insurer to Seek State Court Certification
Hansen asserted the assigned claims against the insurer in the U.S. District Court for the District of Nevada. The district court held that the insurer breached its contractual duty to defend Aguilar because it did not provide him with independent counsel of his choosing. The insurer had reserved the right to deny coverage for intentional conduct and sought punitive damages. Since the state court plaintiff had sued the Aguilars for these claims and damages, the district court found that an actual conflict of interest existed.

The insurer moved for reconsideration of the district court’s ruling. After the district court granted the insurer’s motion, in part, the federal court certified two questions to the Nevada Supreme Court.

Nevada Adopts California’s Cumis Rule
The Nevada Supreme Court accepted two questions for review. First, whether Nevada law requires “an insurer to provide independent counsel for its insured when a conflict of interest arises between the insurer and the insured.” Second, the federal court asked whether the court would “find that a reservation of rights letter creates a per se conflict of interest,” if the state court answered the first question in the affirmative.

“Nevada law requires insurers to fulfill their contractual duty to defend their insureds by allowing insureds to select their own independent counsel and paying for such representation” when a conflict exists, the court held, relying on Nevada Rule of Professional Conduct 1.7(a). That rule states that “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.” “[W]hen an insurer provides counsel to defend its insured, a conflict of interest may arise because the outcome of litigation may also decide the outcome of a coverage determination—a determination that may pit the insured’s interests against the insurer’s,” the court concluded.

The court noted that jurisdictions are divided on whether a reservation of rights creates a per se conflict of interest. In California, for example, the codified Cumis rule requires an actual conflict of interest. The court concluded that “the California approach, that a reservation of rights does not create a per se conflict, is most compatible with Nevada law.”

Insureds and Insurers across the Country Take Note
The Hansen decision represents a trend, according to Angela R. Elbert, Chicago, IL, cochair of the ABA Section of Litigation’s Insurance Coverage Litigation Committee. Elbert notes that many other states have adopted a similar rule.  In Illinois, for example, insureds may have a right to Peppers counsel under Maryland Casualty Co. v. Peppers.

A state’s position on whether a reservation of rights creates a per seconflict of interest may not rule the day in a particular case. As a practical matter, “most reservation of rights letters do create a conflict,” says Elbert. At a minimum, a reservation of rights creates “at least the potential” for a conflict of interest, adds Lorelie S. Masters, Washington, D.C., Division I co-director for the Section of Litigation.

Of course, the outcome of particular cases may turn on the facts. Following the Nevada Supreme Court’s recent decision in Hansen, for example, the district court concluded that the insurer’s reservation of rights letters under the homeowners policy “did not create a conflict that would trigger the duty to retain independent counsel for the Aguilars.” The court based its decision on the Nevada Supreme Court’s decision, along with the district court’s previous determination that the insurer did not owe a duty to defend or indemnify the Aguilars under the homeownerspolicy.

“When a reservation of rights letter is issued, insureds should consider whether the law of the jurisdiction whose law is most likely to apply would allow or require independent counsel to be hired,” suggests Elbert. “If you are an insurer, you might consider whether you have an obligation to notify and allow your insured to retain independent counsel. If you are unsure, it is safest to advise in favor of disclosing and hiring independent counsel,” she adds.

Keywords: conflict of interest, insured, insurer, independent counsel, Cumis

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