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Vol. 6, Iss. 9
December 13, 2017

Arden v. Forsberg & Umlauf, PS, 402 P.3d 245 (Wash. 2017)

Is There A New Reason For An Insured’s Entitlement To Independent Counsel?

As we all know, policyholders, when being defended under a reservation of rights, sometimes seek to reject the so-called panel counsel provided by their insurers and demand so-called independent counsel. Policyholders generally argue that, on account of the reservation of rights, panel counsel may defend the case in a manner that prejudices the insured’s interests. You know, it’s the old “steering argument.” As the old saw goes, panel counsel, in hopes of getting lots of new cases from the insurer, may steer the defense such that any liability is based on the uncovered claims. The reasons why this is an outrageous proposition are legion. But, nonetheless, many states have adopted the rule that, if an insured can establish that a reservation of rights creates a conflict, the insured is entitled to be defended by counsel of its choice, at the insurer’s expense. [Then, welcome to the dispute over the rates to be paid to the insured’s counsel of choice. That’s for another day.]

But while many states permit independent counsel if an insured can establish that a reservation of rights creates a conflict, that’s often a big IF. Only a handful of states automatically allow independent counsel when an insured is being defended under a reservation of rights. For the rest, it must be established that the reservation of rights creates a conflict. And that is no simple task. It can often be a highly factually intensive inquiry and require making all sorts of predictions about how the case, based on what’s alleged at the outset, my play out down the road.

I selected the Washington Supreme Court’s decision in Arden v. Forsberg & Umlauf for inclusion here as the court addressed the possibility of an insurer owing independent counsel for a different reason. And, most importantly, a simpler one. One that is not tied to the complex analysis of whether the facts and grounds for reservation of rights create a conflict.

The case has some unusual facts and aspects that are unique to Washington. Even the decision itself, and four justice concurrence, is unusual. But despite all this, the case provides an overarching take-away: it may have handed policyholders a new argument in support of independent counsel, when being defended under a reservation of rights, even if the ROR did not otherwise create a conflict to justify independent counsel. That there were four amicus parties before the Supreme Court demonstrates that this was no nothing burger.

I’ll let the court provide the facts: “Roff and Bobbi Arden had homeowners insurance with Property and Casualty Insurance Company of Hartford (Hartford). In December 2011, Roff Arden, allegedly suffering a posttraumatic stress disorder attack, shot and killed a six-month-old Labrador puppy owned by his neighbors Wade and Ann Duffy. In June 2012, the Duffys sued the Ardens, alleging willful conversion, malicious injury, intentional infliction of emotional distress, and gross negligence. The Ardens sought liability coverage with their insurer, Hartford. Initially, Hartford denied a defense and coverage based on the policy’s intentional act exclusion. The Ardens thereafter retained private counsel, Jon Cushman, to seek coverage and to assert counterclaims against the Duffys. In November 2012, after communications from Cushman, Hartford agreed to defend and provide representation to the Ardens. Hartford appointed attorneys John Hayes and William “Chris” Gibson of the firm Forsberg & Umlauf PS to defend against the Duffys’ claims. It was made clear that the appointed attorneys would not represent the Ardens in the counterclaims. Cushman remained as counsel in the lawsuit for those purposes.”

Of note, the court stated: “Although no evidence exists nor do the Ardens claim in the record that Hayes, Gibson, or the Forsberg firm simultaneously represented the Ardens and Hartford, deposition testimony shows that both Hayes and Gibson (hereinafter referred to collectively along with Forsberg & Umlauf PS as “Forsberg”) had a ‘long-standing relationship’ with Hartford. Forsberg had an established relationship with Hartford that included representing Hartford on coverage matters as well as representing Hartford’s insureds. The record indicates Forsberg did not disclose its relationship with Hartford to the Ardens.”

Lots of settlement negotiations took place between the Ardens and Duffys. While Hartford issued a reservation of rights letter, the court made much of the fact that Hartford engaged in settlement negotiations without requiring any contribution from the Ardens. Hartford ultimately settled the case.

However, the Ardens continued to pursue claims “based on the assertions that Forsberg breached its fiduciary duties of disclosure and loyalty by failing to disclose its relationship with Hartford, and by failing to communicate and seek consent from the Ardens during settlement negotiations.” The trial court granted Forsberg’s motions, holding that there was no disqualifying conflict of interest and therefore no breach of fiduciary duty. The Court of Appeals affirmed.

The case made its way to the Washington Supreme Court. At the outset, because Hartford was not seeking for the Ardens to contribute to any settlement, the court was not convinced that Hartford’s defense was provided under a reservation of rights. If it had been, then Forsberg was required to comply with Washington’s “Tank” requirements. Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133 (Wash. 1986) sets out certain duties that insurer-retained defense counsel must comply with.

The court left no doubt that, if the Tank requirements applied, Forsberg complied: “To the extent that Tank informs this case and defense counsel’s duty of good faith, the record shows that like State Farm in Tank, Forsberg fully investigated the incident, informed the Ardens that it represented only the Ardens, and fully informed the Ardens of all settlement activity. We find no evidence to suggest that Forsberg engaged in actions that demonstrated greater concern for Hartford’s interests than for the Ardens.”

But that wasn’t the end of the story. The court went on to address Rule 1.7 of the Rules of Professional Conduct, which “prohibits an attorney from representing two different clients if there is a ‘significant risk’ that the lawyer’s responsibilities to one of the clients will materially limit the lawyer’s responsibilities to the other client.” [Rule 1.7 here is likely the same in most states.] But the court noted that a lawyer may still represent both clients if four conditions are met: “the lawyer reasonably believes that it will be possible to represent both clients competently and diligently, the representation is not prohibited by law, the clients are not directly adverse to one another, and the clients give informed consent after adequate disclosure of the relationships.”

The Ardens were arguing that Forsberg was disqualified from representing them based on Forsberg’s past involvement with Hartford – being the firm’s representation of Hartford in unrelated coverage matters. And since the Ardens did not consent to such representation, as required under Rule 1.7, they claimed an entitlement to damages.

While the court “reject[ed] the suggestion advanced that wherever a previous relationship between the insurer and retained counsel exists, a per se disqualification rule is supported,” it had “no concerns recognizing the rule requiring disclosure of conflicts, potential or actual, in the context of attorneys hired by insurance companies to represent insureds’ interests in civil litigation, whether such representation is provided under an ROR or not. These same responsibilities exist in the context of dual representation.”

The Ardens and Forsberg presented conflicting expert testimony on whether Forsberg’s failure to disclose its relationship with Hartford satisfied the appropriate standard of care for a lawyer. The court noted that such “conflicting expert opinions will generally give rise to a genuine issue of material fact, precluding summary judgment on the question of breach.” However, the court still found in favor of Forsberg on the basis that the Ardens did not suffer any legally recoverable damages.

Four Justices concurred in the result but were not pleased with the majority’s conclusion that it was not a reservation of rights situation. These four justices were of the opinion that the Tank requirements had been triggered. As a result, they felt that the majority introduced “confusing dicta” that they could not endorse and would have simply affirmed based on the Ardens’ failure to establish damages.

Whether the defense was provided under a reservation of rights, the Tank requirements were triggered, the majority opinion had confusing dicta and whatever the concurring opinion adds, is all to do with the case itself.

The real take-away from Arden is this. Insurers often have significant relationships with their panel firms – both for coverage and defense work. Has the Washington Supreme Court handed policyholders the argument that, based on this relationship, in a reservation of rights-defended case, the policyholder must consent to being defended by panel counsel, even if the ROR did not otherwise create a conflict to justify independent counsel.


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