State Farm Mut. Auto. Ins. Co. v. Hansen

131 Nev., Advance Opinion 74
IN THE SUPREME COURT OF THE STATE OF NEVADA
STATE FARM MUTUAL AUTOMOBILE No. 64484= n n Ft
INSURANCE COMPANY, 10.
Appellant,
vs. SEP 2 it 2015
STEPHEN TANNER HANSEN, TRACE K. 1.:NDEr..!..*1
CLB4 \ CA: SUENiki c/T.A!
Respondent. BY
CHIEF DE
Certified questions under NRAP 5 regarding counsel in an
insurance matter. United States District Court for the District of Nevada;
Miranda M. Du, District Judge.
Questions answered.
Lewis Brisbois Bisgaard & Smith, LLP, and V. Andrew Cass and Jeffrey
D. Olster, Las Vegas,
for Appellant.
Bowen Law Offices and Jerome R. Bowen and Sarah M. Banda, Las
Vegas,
for Respondent.
Morales, Fierro & Reeves and Ramiro Morales, Las Vegas,
for Amici Curiae American Insurance Association, National Association of
Mutual Insurance Companies, and Property Casualty Insurers Association
of America.
Payne & Fears, LLP, and Gregory H. King and J. Kelby Van Patten, Las
Vegas,
for Amici Curiae Centex Homes, Centex Real Estate Corporation, and
Southern Nevada Home Builders Association.
BEFORE THE COURT EN BANC. 1
1 TheHonorable Ron D. Parraguirre, Justice, voluntarily recused
himself from the consideration of this matter.
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OPINION
By the Court, CHERRY, J.:
The Federal District Court for the District of Nevada certified
two questions to this court concerning Nevada's conflict-of-interest rules in
insurance litigation. The first question asks whether "Nevada law
require [s] an insurer to provide independent counsel for its insured when
a conflict of interest arises between the insurer and the insured." The
second asks whether, if the first question is answered affirmatively, this
court would "find that a reservation of rights letter creates a per se conflict
of interest."
We conclude that Nevada law requires an insurer to provide
independent counsel for its insured when a conflict of interest arises
between the insurer and the insured. Nevada recognizes that the insurer
and the insured are dual clients of insurer-appointed counsel. When the
insured and the insurer have opposing legal interests, 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. We further conclude that an insurer is only
obligated to provide independent counsel when the insured's and the
insurer's legal interests actually conflict. A reservation of rights letter
does not create a per se conflict of interest.
FACTS AND PROCEDURAL HISTORY
Our consideration of the facts in this case is limited to those in
the certification order. In re Fontainebleau Las Vegas Holdings, 128 Nev.,
Adv. Op. 53, 289 P.3d 1199, 1207 (2012). In this case, the federal district
court's November 19, 2013, certification order incorporated by reference
the facts set forth in its December 12, 2012, order.
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While leaving a house party, Stephen Hansen was injured in
an altercation with other guests. The other party guests tried to prevent
Hansen and his friends from leaving the party by sitting on or standing
around their vehicle. Eventually Hansen and his friends were able to
leave the party in their vehicle, but they later had to stop at the gated exit
of the residential subdivision. While stopped at the gate, the vehicle of
another party guest, Brad Aguilar, struck the vehicle in which Hansen
was riding. Hansen filed a complaint against Aguilar and others in
Nevada state district court alleging both negligence and various
intentional torts.
Aguilar was insured by State Farm Mutual Automobile
Insurance Company. 2 State Farm agreed to defend Aguilar under a
reservation of rights. The reservation of rights letter reserved the right to
deny coverage for liability resulting from intentional acts and punitive
damages.
Aguilar admitted to negligently striking the other vehicle, and
the district court granted summary judgment in favor of Hansen on the
negligence claim. Aguilar then agreed to a settlement with Hansen, in
which he assigned his rights against State Farm to Hansen.
Hansen filed this lawsuit in the United States District Court
for the District of Nevada, alleging that State Farm, in its representation
2Aguilar was also insured, through his parents' homeowners'
insurance, by State Farm Fire and Casualty Company. Whether State
Farm Fire's coverage applies appears to be at issue in the federal district
court. However, because the distinction is irrelevant to the issues now
before us, we will not distinguish between State Farm Auto and State
Farm Fire.
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of Aguilar, breached a contract, contractually or tortiously breached an
implied covenant of good faith and fair dealing, and violated the Nevada
Unfair Claims Practices Act. Hansen also asked for declaratory relief
based on the stipulated judgments and assignment of rights. State Farm
moved for summary judgment, arguing that Aguilar's assignment of rights
to Hansen was void because it violated Aguilar's insurance contract.
Hansen responded that, even if Aguilar violated the insurance contract,
State Farm's prior breach terminated Aguilar's obligations under the
contract.
The federal district court found that State Farm breached its
contractual duty to defend Aguilar because it did not provide Aguilar with
independent counsel of his choosing. The court said that State Farm's
interests conflicted with Aguilar's interests because the insurance policy
only covered Aguilar if he acted negligently; the policy did not cover
intentional tortious acts. The court therefore applied the rule from San
Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 208
Cal. Rptr. 494, 506 (Ct. App. 1984), superseded by statute as stated in
United Enters., Inc. v. Superior Court, 108 Cal. Rptr. 3d 25 (App. 2010),
which states that an insurance company must provide independent
counsel if its interests conflict with the insured's. Because State Farm did
not comply with the Cumis rule, the district court found that State Farm
violated its contractual duty to defend Aguilar.
State Farm moved for reconsideration. The federal district
court granted, in part, State Farm's motion and certified these questions
to this court. We accepted the certified questions under NRAP 5 because
they present issues of first impression in Nevada.
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DISCUSSION
The right to insurer-provided independent counsel
RPC 1.7(a) states the general rule that "a lawyer shall not
represent a client if the representation involves a concurrent conflict of
interest." 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. By
reserving the right to determine coverage after litigation, the insurer
hopes• that the litigation outcome effectively determines coverage on its
behalf and in its favor. The insurer-provided lawyer will have a
relationship with both the insured and the insurer, who each have legal
interests opposing the other.
The Cumis rule says that, in order to avoid a conflict of
interest resulting when an insurer reserves its rights to determine
coverage, an insurer must satisfy its contractual duty to provide counsel
by paying for counsel of the insured's choosing. Cumis, 208 Cal. Rptr. at
506. The issue here is whether the Cumis rule, or some alternative,
applies in Nevada.
Courts rejecting the Cumis rule have not recognized the
existence of a conflict of interest in such cases. These courts have
reasoned that the sole client is the insured and, therefore, counsel only
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owes a duty to the insured. See Finley v. Home Ins. Co., 975 P.2d 1145,
1152-53 (Haw. 1998). 3 True, some courts have mentioned other rationales,
such as that professional ethics rules will keep counsel honest and that
insureds have other remedies against unethical counsel. See id. But the
main rationale is still that there is no conflict: The sole client is the
insured, not the insurer. See id. at 1153.
Nevada, in contrast, is a dual-representation state. Insurer-
appointed counsel represents both the insurer and the insured. See Nev.
Yellow Cab Corp. v. Eighth Judicial Dist. Court, 123 Nev. 44, 52, 152 P.3d
737, 742 (2007). In Nevada Yellow Cab, this court explicitly adopted the
rule of dual representation, which is the same rule applied by the
California courts and addressed in Cumis. See id. at 51-52, 152 P.3d at
741-42 (citing Unigard Ins. Grp. v. O'Flaherty & Belgum, 45 Cal. Rptr. 2d
3 See also L & S Roofing Supply Co. v. St. Paul Fire & Marine Ins.
Co., 521 So. 2d 1298, 1303-04 (Ala. 1987) (adopting the Washington
Supreme Court's approach requiring that counsel hired by the insurer
understand that only the insured is a client); Higgins v. Karp, 687 A.2d
539, 543 (Conn. 1997) ("[A]n attorney's allegiance is to his client, not to the
person who happens to be paying for his services. ... Thus, even when an
attorney is compensated. . . by a liability insurer, his or her duty of loyalty
and representation nonetheless remains exclusively with the insured."
(internal quotations omitted)); In re Youngblood, 895 S.W.2d 322, 328
(Tenn. 1995) ("The employment of an attorney by an insurer to represent
the insured does not create the relationship of attorney-client. . . . Where
the employer is not also a client, a conflict will not occur. ."); Tank v.
State Farm Fire & Cas. Co., 715 P.2d 1133, 1137 (Wash. 1986)
(Washington Rule of Professional Conduct] 5.4(c) demands that counsel
understand that he or she represents only the insured, not the company.").
But see Norman v. Ins. Co. of N. Am., 239 S.E.2d 902, 907 (Va. 1978)
(addressing conflict of interest question without first discussing whether
insurer is a client).
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565, 568-69 (Ct. App. 1995)); Cumis, 208 Cal. Rptr. at 498. We held that
an attorney-client relationship exists between insurer-appointed counsel
and the insurer. Nev. Yellow Cab, 123 Nev. at 52, 152 P.3d at 742.
Because Nevada is a dual-representation state, counsel may
not represent both the insurer and the insured when their interests
conflict and no special exception applies. RPC 1.7. This suggests that the
Cumis rule, where the insurer must satisfy its contractual duty to provide
counsel by paying for counsel of the insured's choosing, is appropriate for
Nevada.
Amici curiae American Insurance Association, the National
Association of Mutual Insurance Companies, and Property Casualty
Insurers Association of America suggest two alternative approaches that
are supposedly consistent with Nevada's rule of dual representation. 4
First, they suggest the primary-client model, where representation
switches from dual-client to single-client (the insured, primary client) as
soon as a conflict arises. But RPC 1.9(a) prohibits "[a] lawyer who has
formerly represented a client in a matter" from representing a client "in
the same or a substantially related matter in which that person's interests
are materially adverse to the interests of the former client unless the
former client gives informed consent, confirmed in writing." Therefore,
the primary client model appears to be unworkable in a dual-
representation jurisdiction.
4 This court has also granted Centex Homes, Centex Real Estate
Corporation, and Southern Nevada Home Builders Association's motion
for leave to file an amicus brief
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As a second alternative, amici suggest the contract model,
where amici argue that no conflict of interest exists when an insurer
selects an insured's counsel and contractually instructs counsel that only
the insured is a client. But this may not eliminate the lawyer's conflict of
interest because the lawyer is selected by and receives compensation from
someone with legal interests opposed to the lawyer's client. This approach
may violate the spirit of RPC 1.8(f), which says that "[a] lawyer shall not
accept compensation for representing a client from one other than the
client unless . . . Where is no interference with the lawyer's independence
of professional judgment or with the client-lawyer relationship." When
counsel is both selected and paid by a third party with legal interests
directly opposed to the client's, there is a legitimate question whether
counsel can be truly independent. 5 For instance, the attorney might have
an incentive to act favorably toward the insurer in order to garner future
business.
In sum, Nevada, like California, recognizes that the insurer
and the insured are dual clients of insurer-appointed counsel. Where the
clients' interests conflict, the rules of professional conduct prevent the
same lawyer from representing both clients. California's Cumis rule is
well-adapted to this scenario It requires insurers to fulfill their duty to
5 We reject amici's argument that insurers can avoid a conflict of
interest by contractually instructing counsel that they only represent the
insured. That said, we do not hold that a per se conflict exists every time
that an insurer selects and pays for counsel to represent the insured, even
when the insured consents to such representation. Because this case does
not involve informed consent under RPC 1.7(b) or RPC 1.8(f), we decline to
consider that issue.
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defend by allowing insureds to select their own counsel and paying the
reasonable costs for the independent counsel's representation. Cumis Ins.
Society, Inc., 208 Cal. Rptr. 494, 506. We find this approach more
workable than the alternatives presented by amid. Therefore, we answer
the first certified question in the affirmative: When a conflict of interest
exists between an insurer and its insured, Nevada law requires the
insurer to satisfy its contractual duty to provide representation by
permitting the insured to select independent counsel and by paying the
reasonable costs of such counse1. 6
The effect of a reservation of rights
Jurisdictions are divided on whether a reservation of rights
creates a per se conflict of interest. Some jurisdictions apply a per se rule
that a reservation of rights creates a conflict of interest between the
insured and insurer-appointed counsel. See Patrons Oxford Ins. Co. v.
Harris, 905 A.2d 819, 825-26 (Me. 2006). 7 Courts in these jurisdictions
6Although our holding applies to an insurer's contractual duty to
defend its insured, we note that it is the duty of Nevada attorneys not to
undertake the representation of clients with opposing interests. See RPC
1.7. And "kv1hen a lawyer's responsibilities to a third party may impair
the representation of a client, the lawyer must decline or withdraw from
the representation." Duval Ranching Co. v. Glickman, 930 F. Supp. 469,
473 (D. Nev. 1996). "The representation of clients with conflicting
interests and without informed consent is a particularly egregious ethical
violation that may be a proper basis for complete denial of fees."
Rodriguez v. Disner, 688 F.3d 645, 655 (9th Cir. 2012).
7 Seealso Alaska Stat. Ann. § 21.96.100(c) (West 2014) ("Ulf the
insurer reserves the insurer's rights on an issue for which coverage is
denied, the insurer shall provide independent counsel ... ."); Pueblo Santa
Fe Townhomes Owners' Ass'n v. Transcon. Ins. Co., 178 P.3d 485, 491
(Ariz. Ct. App. 2008) ("When an insurer reserves its rights to contest
continued on next page . . .
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have reasoned that, if an insurer could control the case under a
reservation of rights, it could insist on full litigation. The insurer would
thereby expose the insured to the risk of personal liability and then seek
to deny coverage if the verdict is unfavorable to the insured. See id. at
826. Courts see it as unfair to give insurers an opportunity for a second
bite of the apple. See id.
Other jurisdictions look to the facts of the case to determine
whether there is an actual conflict 8 Courts in these jurisdictions stress
that the point of the Cumis rule is to enforce conflict-of-interest rules, so
. . . continued
indemnification liability, however, a conflict of interest is created between
the insurer and the insured."); Herbert A. Sullivan, Inc. v. Utica Mut. Ins.
Co., 788 N.E.2d 522, 539 (Mass. 2003) ("When an insurer seeks to defend
its insured under a reservation of rights, and the insured is unwilling that
the insurer do so, the insured may require the insurer either to relinquish
its reservation of rights or relinquish its defense of the insured and
reimburse the insured for its defense costs.").
8See Travelers Prop. v. Centex Homes, No. C 10-02757 CRB, 2011
WL 1225982, at *8 (N.D. Cal. Apr. 1, 2011) (applying Cal. Civ, Code §
2860(b) to determine whether conflict existed); Cardin v. Pac. Emp'rs Ins.
Co., 745 F. Supp. 330, 336 (D. Md. 1990) ("[T]he [Maryland] Court •[of
Appeals] did not hold. . . that in every circumstance where a reservation
of rights is made due to the presence of covered and uncovered claims a
conflict is created."); Mitt. Serv. Gas. Ins. Co. v. Luetmer, 474 N.W.2d 365,
368 (Minn. Ct. App. 1991) ("[B]efore an insured will be entitled to counsel
of its own choice, an actual conflict of interest, rather than an appearance
of a conflict of interest, must be established."); Nisson v. Am. Home
Assurance Co., 917 P.2d 488, 490 (Okla. Civ. App. 1996) ("[N]ot every
perceived or potential conflict of interest automatically gives rise to a duty
on the part of the insurer to pay for the insured's choice of independent
counsel.").
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the focus should be on whether there is actually a conflict. See, e.g., Fed.
Ins. Co. v. MBL, Inc., 160 Cal. Rptr. 3d 910, 920 (Ct. App. 2013). Courts
must therefore consider whether a conflict of interest exists and not
simply look for a reservation of rights. See id.
For example, in California, the codified Curt/is rule requires an
actual conflict of interest; it does not apply to every case in which there is
a reservation of rights. "[VV]hen an insurer reserves its rights on a given
issue and the outcome of that coverage issue can be controlled by counsel
first retained by the insurer for the defense of the claim, a conflict of
interest may exist." Cal. Civ. Code § 2860(b) (West 2014) (emphasis
added). There are two elements: (1) a reservation of rights and (2) that
the outcome of the coverage determination can be controlled by counsel in
the underlying defense of the claim. See id.; Travelers Prop. v. Centex
Homes, No. C 10-02757 CRB, 2011 WL 1225982, at *8 (N.D. Cal. Apr. 1,
2011) (applying Cal. Civ. Code § 2860(b) to determine whether conflict
existed). But even after laying out those two elements, the statute uses
the word "may," implying that it is still an issue of fact whether a conflict
of interest actually exists.
What, then, is the standard that a trial court must apply when
looking at whether the facts of the case create a conflict of interest? In
California, courts apply the rules of ethics: "[T]he Cumis rule is not based
on insurance law but on the ethical duty of an attorney to avoid
representing conflicting interests. 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
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also decide the coverage issue, courts must still determine whether there
is an actual conflict of interest. This means that there is no conflict if the
reservation of rights is based on coverage issues that are only extrinsic or
ancillary to the issues actually litigated in the underlying action. See id.
We conclude that the California approach, that a reservation
of rights does not create a per se conflict, is most compatible with Nevada
law. Courts must inquire, on a case-by-case basis, whether there is an
actual conflict of interest. This approach follows Nevada law: We have
held that dual-representation is appropriate as long as there is "no actual
conflict." See Nev. Yellow Cab, 123 Nev. at 51, 152 P.3d at 741. And we
have approvingly cited opinions holding that "joint representation is
permissible as long as any conflict remains speculative." Id. Moreover,
because the Cumis rule derives from rules of professional conduct, see
MBL, 160 Cal. Rptr. 3d at 920, it follows that the appropriate standard is
whether there is an actual conflict under RPC 1.7. Therefore, an insurer
is obligated to provide independent counsel of the insured's choosing only
when an actual conflict of interest exists. A reservation of rights does not
create a per se conflict of interest.
J.
Cherry
We concur:
J.
Saitta Gibbons
J.
Pickering
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