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    3.  » Washington Court of Appeals Delineates Insurance Defense Counsel’s Obligations under Washington’s Duty of Loyalty to the Insured in an Ror Context

Washington Court of Appeals Delineates Insurance Defense Counsel’s Obligations under Washington’s Duty of Loyalty to the Insured in an Ror Context

By Steven Plitt

Insurance defense attorneys, representing insureds under reservation of rights (ROR) owe a fiduciary duty of loyalty to the insureds that they are defending.  The scope of the insurance defense lawyer’s obligations in an ROR context are delineated by a combination of rules of professional conduct and the Washington Supreme Court’s decision in Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 715 P.2d 1133 (1986).  Recently, the Washington Court of Appeals discussed the defense attorney’s duty of loyalty in Arden v. Forsberg & Umlauf, P.S., 193 Wash.App. 731, 373 P.3d 320 (2016).

In Arden, the Washington Court of Appeals (Division 2), found the following:   First, provided that the defense attorney follows the criteria outlined by the Court in Tank, there is not a significant risk that the attorney’s representation of the insured will create a conflict of interest because a defense attorney handling an ROR case knows that, under Tank, the attorney represents only the insured, not the insurer, and owes a duty of loyalty to the insured that has no exceptions.  Id. at 747, 373 P.3d at 329.  Therefore, a conflict of interest does not automatically arise in the insurer-retained ROR context.  The insurance company’s retention of defense counsel in an ROR situation did not create a conflict of interest even though defense counsel may have represented the insurance company in other cases.

Second, the defense counsel did not owe a duty to the insured to inform the insured of its relationship with the insurance company even when the defense attorney represented the insurer in other cases unless a concurrent conflict of interest existed.  A concurrent conflict of interest existed under the Rules of Professional Conduct only if, (1) the representation of one client would be directly adverse to another client, or (2) there is a significant risk that the representation of one client will be materially limited by the attorney’s responsibility to another client.  Id. at 747, 373 P.3d at 328.  In the insurance defense context neither situation exists typically.  As an example, the insurer’s interests are not directly adverse to the insured’s interests with regard to the defense of the lawsuit.  Both the insurer and the insured might have adverse interests with regard to coverage issues, but where defense counsel make it clear to the insured that defense counsel will not represent the insurer or the insured on coverage issues, there is no adversity.  The insurer’s interests and the insured interests are aligned on the defense aspect of the claim because both are typically interested in winning the case or settling it.  This is bolstered by the fact that an insurance defense attorney handling a ROR case knows that under the Tank decision the attorney represents only the insured.  The Court did state that “[t]he 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.”  Id. at 751, 373 P.3d at 330.  However, the Court held, as a matter of law, that insurance defense lawyers had no fiduciary duty to provide such notice to the insured.

Third, by implication, the Court reaffirmed that defense counsel handling a ROR defense must explain the ROR process, i.e., that the insurer could refuse to indemnify the insured even though it was providing a defense and that the attorney represents only the insured and not insurer.

Fourth, the defense attorney was not obligated under the fiduciary duty of loyalty to “persuade” the insurance company to fund a particular settlement demand that was requested by the insured.  Although the defense attorney has an obligation to communicate an insured’s request to settle to the insurer, there was no legal support for imposing a duty on the defense attorney to attempt to “persuade” the insurer to settle the case.  In fact, such a duty would be inconsistent with the defense attorney’s role in an ROR defense.  The Court noted that when coverage is disputed, an insurer’s decision to settle necessarily involves an evaluation of the strength of its coverage defenses.  Imposing a duty on defense counsel to attempt to persuade an insurer to settle would require the attorney either to argue the insured’s position on coverage or advise the insurer on coverage issues, both of which would give rise to actual conflicts of interest.  Id. at 753, 373 P.3d at 332.

Finally, the Court rejected the insured’s argument for the adoption of a rule which would require an insurer defending under a ROR to retain an independent defense attorney who had no connection at all to the insurance company.  In a prior case, Johnson v. Continental Casualty Co., 57 Wash.App. 359, 788 P.2d 598 (1990), the Court expressly rejected the insured’s argument that a conflict of interest automatically arose whenever insurers defended under reservation.  Because the Tank decision imposed enhanced obligations of fairness on the insurer, the Court in Johnson found that no actual conflict of interest necessarily existed in a ROR context.