Thursday, March 16, 2017

Can an Insurance Company Write a Reservation of Rights Letter and Still Have the Insurance Lawyers Represent the Insured Driver?



You cause a car accident and get sued. Now what? Part of having car insurance means your insurance company has to hire a lawyer to defend you in lawsuits. What happens if your insurance company thinks you didn’t have coverage for the acts alleged against you? Your insurance company can write a “reservation of rights” letter, saying that they will hire a lawyer to represent you. But if it turns out that you acted intentionally or did something else that is “excluded” under your policy, your insurance company will not have to pay any damages. This issue came up after a rowdy house party in Las Vegas. See State Farm Mutual Insurance Company v. Hansen, 131 Nev.Ad.Op. 74 (2015).


In the Hansen case, Stephen Hansen went to a house party. When things got out of control, Stephen tried to leave. To keep Stephen and the fight going, some of the party guests tried to prevent Stephen from leaving the party. Eventually Stephen drove off. But, as luck would have it, the party was in a gated community. In waiting for the gates to open, one of the party guests, Brad Aguilar, rammed his car into Stephen’s car. Stephen later filed a lawsuit against Brad for his injuries.

Brad was insured by State Farm. State Farm initially agreed to defend Brad. But, they wrote Brad a “reservation of rights”. The letter said they would pay one of their lawyers to defend him, but they may not pay out any judgment. This is because insurance companies agree to pay claims for “negligent” or careless acts, but not “intentional” ones, like Brad intentionally ramming his car into Stephen’s car! Go figure, you can’t vandalize a neighbor’s house and expect your insurance company to pay for your acts!

The issue for the Court in Hansen, was whether it was legal for State Farm to hire a lawyer for Brad, but that they may not pay for damages if it turns out he intentionally tried to hurt Stephen. The seminal case comes out of California, decided over 30 years ago. The case is Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal.App.3d 358, 208 Cal.Rptr. 494, 506 (Ct.App.1984).   Since the case deals with an attorney or “counsel” for an insured, people generally refer to this as “Cumis counsel”.

In Nevada, the ethical rules for lawyers say that “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.” RPC 1.7(a). In discussing the conflict of interest issue, the Court said:

But when 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. For example, an insurer will want the litigation outcome to determine coverage in a way favorable to the insurer, such as by deciding that the insured's acts were intentional and therefore not covered. Conversely, the insured will want to be found negligent so that the insurer will pay his liabilities.

The Hansen Court confirmed that Nevada is a considered a “dual-representation” state: where the insurance company lawyers represent both the insurance company and its insured. See Nev. Yellow Cab Corp. v. Eighth Judicial Dist. Court, 123 Nev. 44, 52, 152 P.3d 737, 742 (2007).
The Court acknowledge that this approach may violate the spirit of the ethical rules that“[a] lawyer shall not accept compensation for representing a client from one other than the client unless .. [t]here is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship.” RPC 1.8(f). When the insurance company picks the lawyer, the Hansen Court noted that there is a “legitimate question” whether the hired gun could really be independent. “For instance, the attorney might have an incentive to act favorably toward the insurer in order to garner future business.”


Despite all of the above issues, the Hansen Court affirmed the Cumis rule that “For independent counsel to be required, the conflict of interest must be significant, not merely theoretical, actual, not merely potential.” MBL, 160 Cal.Rptr.3d at 920 (internal quotations omitted). Therefore, even when (1) there is a reservation of rights and (2) insurer-provided counsel has control over an issue in the case that will also decide the coverage issue, courts must still determine whether there is an actual conflict of interest.”

In the end, the Hansen Court said trial courts must determine, on a case-by-case basis, whether there is an actual conflict of interest. A reservation of rights letter itself doesn’t necessarily mean there is conflict of interest. This, despite the fact that the lawyer for the insured is selected and paid for by the insurance company.

Next time, we will talk about injury settlements and worker’s compensation.