United States: Washington Supreme Court Imposes RPC 1.7 Conflict Waiver Requirement On Insurance Defense Counsel Retained Subject To Reservation Of Rights

On September 14, 2017, the Supreme Court of Washington issued its long-awaited opinion in Arden v. Forsberg & Umlauf, P.S, No. 93207-7, 2017 Wash. LEXIS 911 (Wash. Sept. 14, 2017). Arden brings into focus yet again the potential conflicts of interest inherent in the practice of insurance defense law and demonstrates the unique contours of these issues in Washington, which long ago forged its own tripartite relationship path with the Supreme Court's decision in Tank v. State Farm, 105 Wn.2d 381, 715 P.2d 1133 (1986).

In Arden, Hartford's insureds, the Ardens, were sued by their neighbors, the Duffys, after Mr. Arden allegedly shot the Duffys' Labrador puppy while purportedly suffering from the effects of Post-Traumatic Stress Disorder. Hartford retained the Forsberg firm to defend the Ardens. Hartford eventually issued a reservation of rights (ROR) letter, reserving the right to disclaim coverage based on the intentional acts exclusion and other policy provisions. The Ardens retained personal counsel to advise them on coverage issues and to monitor the litigation. The Duffys made a settlement demand, which Hartford countered, based upon Forsberg's evaluation. The Ardens contended that Forsberg made the counter without consulting them. The case did not settle at that time.

The underlying litigation between the Ardens and the Duffys metastasized, with the Ardens eventually bringing claims against Hartford for bad faith and Forsberg for legal malpractice and breach of fiduciary duty. All claims were resolved at mediation except the claims against the lawyers. Forsberg obtained summary judgment when the trial court found that there was no disqualifying conflict of interest as to Forsberg nor a breach of fiduciary duty, and the Duffys had failed to show support for their damages claim. The Court of Appeals affirmed, and the Supreme Court, in en banc review, affirmed.

At issue on appeal was whether Forsberg fell below the standard of care and breached its fiduciary obligations to the clients, the Ardens, by failing to disclose to them that Forsberg enjoyed a longstanding relationship with Hartford, including not only representing other Hartford insureds in the defense of lawsuits but also in representing Hartford itself in insurance coverage matters. Although not explicitly stated in either the Court of Appeals or Supreme Court opinions, both courts implied that Forsberg represented Hartford in other matters at the same time it represented the Ardens. 

The Court rejected the Ardens' contention that Forsberg was disqualified per se from representing the Ardens because of Forsberg's longstanding (and undisclosed) relationship with Hartford, which they contended created a conflict of interest. The Court acknowledged the conflict of interest created by the concurrent representation but held that Forsberg would be ethically permitted to represent the Ardens if the requirements of Rule of Professional Conduct (RPC) 1.7 were satisfied. Specifically, Forsberg would be permitted to concurrently represent Hartford (in unrelated matters) and the Ardens if Forsberg "reasonably believed" it would be able to provide competent and diligent representation to each affected client, there was no "significant risk" that the representation of either client would be materially limited, and if Forsberg secured informed consent from each client before undertaking the representation. Given that it was apparently undisputed that Forsberg failed to disclose its concurrent attorney-client relationship with Hartford to the Ardens, the Court implied that the firm had violated Rule 1.7 by proceeding as the Ardens' defense counsel. The Court held, however, that the Rule 1.7 violation was not controlling, rather, the dispositive question was whether the attorneys complied with the applicable standard of care, and if not, whether any deviation caused the Ardens to sustain damages.

On this note, the Court considered competing expert opinions, finding that a genuine issue of fact remained for trial on the issue of whether the standard of care required Forsberg to reveal to the clients the existence and extent of its concurrent client relationship with Hartford and to have obtained their informed written consent to the representation given the potential conflict of interest between Hartford and the Ardens. The Court also considered and rejected the notion that Forsberg could be found by the trier of fact to have breached its duty to inform the clients of settlement offers and to have obtained their consent to extend offers of settlement on behalf of Hartford.

Although a question of fact remained on the alleged breach of the disclosure requirement, the Court affirmed dismissal on the basis that the Ardens had failed to offer any evidence that they suffered damages as a result of any breach by Forsberg, with the threat of exposure to the Duffys having been extinguished by the settlement funded by Hartford.

This is an important case for insurance practitioners in Washington. To understand its importance, it is helpful to recall the principles announced in Tank v. State Farm in 1986. In Tank, the Court found that when an insurer retains counsel to represent the insured while reserving the right to later disclaim coverage, the only attorney-client relationship established is that between the insured and defense counsel. The insurer's relationship with counsel is that of a mere third-party payor of legal services being supplied to the insured. Despite relegating the insurer to the status of non-client, the Tank court also imposed heightened duties of care upon defense counsel and the insurer in cases where the insurer is providing the defense while reserving the right to disclaim indemnity based on a coverage defense. Importantly, defense counsel in Washington is required to not only inform the insured client of counsel's relationship with the insurer but also to explain that the insured is the attorney's only client in the case. In the ROR setting, counsel has a heightened duty of disclosure to the client, including continuously apprising them of the exposure in the case, the likelihood of prevailing, and of all pertinent developments in the litigation. Tank also held that where defense is under reservation of rights, the insured, not the insurer, "must make the ultimate choice regarding settlement." As such, counsel has a duty to keep the insured clients fully informed of all settlement offers.

Forsberg was exonerated from civil liability in Arden because there was no proof that any professional failure by the lawyers caused the Ardens any cognizable harm. However, the firm's close call does provide other insurance defense practitioners and insurers in Washington with some new valuable lessons and reinforces some old ones.

  1. When retained by an insurer to represent an insured, counsel must disclose to the client that the insured is the only client in the matter at issue. Counsel must also disclose to the client the nature and extent of counsel's current client or other relationship with the insurer.
  2. In the reservation of rights setting, there is a conflict of interest between the insured and the insurer. Therefore, where the insurer is also a present client of the firm, the representation of the insured is conditioned on a knowing, signed waiver of conflicts pursuant to RPC 1.7, and both the insurer and defense counsel are held to "heightened" duties of care to the insured.
  3. Whether rights are reserved by the insurer or not, counsel has a duty to both the insured and the insurer to keep them continuously apprised of all relevant developments in the case, including factual developments, the chance of prevailing, the exposure, and the status of all settlement opportunities and negotiations.
  4. In the reservation of rights setting in Washington, the insured has the right to "make the ultimate choice regarding settlement." Therefore, counsel must promptly advise the insured of all settlement developments and, specifically, must disclose to the insured any offers received from the plaintiff or which the carrier has asked to be extended. In Arden, the Court found that Forsberg had protected itself on this issue by stating in its retention letter to the clients that "unless instructed otherwise, we will assume that any settlement authority or instructions we receive from Hartford are given with your consent." While inclusion of such a phrase in the initial letter to the clients is advisable, it is best practice to always advise the clients immediately upon receipt of any offer from plaintiffs and to give advance notice of any offer authorized by the insurer.

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