United States: Ruling Elevates Conflicts Considerations In Insurance/Tripartite Relationship Cases

Peter Jarvis is a Partner for Holland & Knight's Portland office.

Trisha Thompson is an Associate for Holland & Knight's Portland office.

After Washington Supreme Court Decision, Insurer-Paid Defense Lawyers Should Further Assess the Need for Client Consent in Reservation of Rights Situations

HIGHLIGHTS:

  • Relationships between insurer, insured and insurer-appointed defense counsel – also known as the "tripartite relationship" – have long been recognized as a potential source of conflicts of interest. By a 5-4 majority in Arden v. Forsberg & Umlauf, P.S., the Washington Supreme Court appears to have expanded the need for insurer-paid lawyers in that state to assess the potential for such conflicts.
  • At least until further clarification is provided by future judicial decisions, insurer-paid defense lawyers in Washington State who are handling cases in which there are reservation of rights would be well-advised to seek informed consent from their insured clients.
  • Although different states treat these issues differently, the opinion is nonetheless worth noting – at least for states that do not have clear case or statutory law on these issues.

The relationships between insurer, insured and insurer-appointed defense counsel – often referred to as the "tripartite relationship" – have long been recognized as a potential source of conflicts of interest. See, e.g., Geoffrey C. Hazard Jr., W. William Hodes & Peter R. Jarvis, The Law of Lawyering §§13.23-.25 (4th ed. 2015). By a 5-4 majority in Arden v. Forsberg & Umlauf, P.S., No. 93207-7, 2017 WL 4052300 (Wash. Sept. 14, 2017), the Washington Supreme Court appears to have expanded the need for insurer-paid lawyers to assess the potential for conflicts of interest and the consequent need to obtain informed client consent before proceeding. Although different states treat these issues differently, the opinion is nonetheless worth noting – at least for states that do not have clear case or statutory law on these issues.

Washington Supreme Court Decision

It has long been understood in Washington State that, absent express arrangements to the contrary, a Washington lawyer hired by an insurer to represent an insured represents only the insured and not the insurer. Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 715 P.2d 1133 (1986). This does not mean, however, that conflicts of interest cannot exist. In Arden, the lawyer hired by the insurer had previously represented the insurer on coverage issues in the past and had also represented insureds of the insurer in many matters. The Arden plaintiffs asserted, inter alia, that the insurer-paid lawyer had a duty to disclose these relationships to the plaintiffs and to obtain plaintiffs' informed consent before undertaking or continuing the representation.

All nine Washington Supreme Court justices agreed that the defendant law firm was entitled to summary judgment because the plaintiff could not prove causally connected damages. As the justices all noted, the insurer had settled the case entirely at its own cost and the plaintiffs had not demonstrated any legally cognizable economic or non-economic damages. The majority went further, however, and also addressed the additional question whether the situation gave rise to a conflict – something that the minority believed need not and should not be addressed.

The majority analyzed the conflicts question under Washington Rule of Professional Conduct 1.7(a)(2), which, like ABA Model Rule 1.7(a)(2), provides in part that a current or concurrent client conflict of interest will exist "if there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer." The majority first stated that a "significant risk" meant that the conflict does not need to materialize to require disclosure under the Rule. The majority then added that an attorney or firm that had an established relationship with an insurer could, in some instances, be "materially limited" in the ability to represent the interests of only the insured. This meant that a conflict of interest could exist – a question that requires case-by-case analysis and that seemingly cannot be resolved in the abstract. As the majority noted, for example, the record before it included expert testimony both that there was and was not a conflict of interest.

Given that the plaintiffs did not prove any causally connected damages, the majority did not deem it necessary to decide whether, on the record before it, a conflict of interest was present as a matter of fact or law. Nonetheless, and at least pending further clarification through subsequent developments in case law, the decision not to decide whether a conflict existed should cause Washington insurer-paid lawyers to approach this part of their practice with greater care.

The Arden majority did not assert that when, as in most situations, an insurer provides a defense that is not subject to a reservation of rights either at the outset or as a matter develops, there will be a conflict. In such situations, only the insurer's financial interests are at stake. The Arden majority believed, however, that when an insurer asserts a reservation of rights either at the outset or as a matter develops, it will at least sometimes be necessary to assess whether the insurer-paid lawyer has a conflict that might cause that lawyer to favor the interests of the insurer over the insured.

Additionally, the majority did not address how significant any risk of a conflict must be before a duty to obtain informed consent exists.

Takeaways and Considerations

Given, for example, that insurers cannot reasonably be expected to hire new and different counsel for every reservation of rights matter (and given also the need for insurers to retain counsel whom they have reason to believe to be competent), one can hope that the mere fact of past or even concurrent representations by an insurer-paid lawyer of other insureds will not give rise to a conflict. Nonetheless, it would seem that at least until clarification is provided by future judicial decisions, Washington insurer-paid defense lawyers handling cases in which there are reservation of rights would be well-advised to seek informed consent to proceed from their insured clients.

For example, Washington insurer-paid defense lawyers in reservation of rights cases might wish to consider sending insured clients something along the following lines:

As you know, you have been named as a defendant in [Case]. This Firm has been appointed by [Insurer] to represent you in [Case], and you will therefore be this Firm's only client in [Case]. I am writing to you at this time to call your attention to two aspects of the Firm's representation of you and to seek your consent to proceed notwithstanding these aspects.
First, and as you know, [Insurer] is defending you in [Case] subject to a reservation of rights. This means that at least for the time being, [Insurer] will pay all defense costs and legal fees relating to the case but that [Insurer] has reserved the right not to pay any judgment or settlement that may be entered against you. The Firm cannot advise you with respect to disputes or issues that you may have regarding the scope of your insurance coverage under the policy with [Insurer]. The Firm can only recommend that you obtain legal advice or assistance about such matters with independent counsel of your choice and at your own cost and expense.
Second, you should know that the Firm has had and expects to continue to have other interactions with [Insurer]. For example, the Firm has represented and expects to continue to represent other insureds of [Insurer] in other cases that are factually and legally unrelated to your case. In addition, the Firm has represented and expects to continue to represent [Insurer] itself in insurance coverage disputes with other insureds on matters that are factually and legally unrelated to your case. The Firm has not and will not give any legal advice or assistance to [Insurer] regarding the duties that it does or may owe to you in this case. In addition, I do not believe that my Firm's other contacts with [Insurer] will affect the Firm's ability to represent you competently and diligently because the Firm will take advice and direction solely from you and not from [Insurer] in connection with this case. Nevertheless, you have a right to consider for yourself and to consult with independent counsel of your choice whether you wish to accept representation by this Firm under these conditions or to discuss the potential appointment of other counsel with [Insurer]. You are not required to consult with other counsel if you do not wish to, however. The choice is yours.
Please consider this [email/letter] with care and then let me know if you have any questions or concerns that you would like me to address before you make a decision. If you are willing to allow the Firm to proceed after whatever review you deem appropriate, please let me know in writing [by return email/by signing the enclosed extra copy of this letter and returning it to me for my files by email or in the enclosed prepaid envelope].

Please note that this draft language is just a suggested starting point. We are not stating that everything that is in this draft must be included to have an effective conflicts waiver in the State of Washington, nor are we stating that additional disclosure may not be necessary in particular Washington cases. In addition, the appropriate approach to be taken in other states will necessarily be controlled by the laws of those states.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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