When an insurer agrees to defend its insured for a liability claim, it retains counsel to represent the interests of the insured, forming a so-called “tripartite relationship.” Often the interests of the insured and insurer are aligned: both want to avoid or minimize liability. Situations sometime arise where the interests of the insured and the insurer are in conflict, like when an insurer agrees to defend but reserves its right to deny coverage based on certain policy exclusions. In those cases, the defense counsel could have divided loyalty on how to defend the claim where it might espouse one theory to avoid liability for the insurer, but saddle the insured with uncovered liability. A classic example is when an insurer reserves its right to deny coverage for conduct found to be intentional and not negligent. The defense counsel can try to prove negligence and require the insurer to indemnify a judgment; or counsel could protect the interests of the party who pays the bills (and retains her on a consistent basis) and not fight against a finding that the insured acted intentionally.
Because of this possibility of a conflict, California pioneered a requirement for the insurer to retain independent counsel for the insured in the case San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc., Cal. Rptr. 494 (1984). The requirement was subsequently codified in a statute. Many states have adopted the requirement for independent counsel—so-called “Cumis counsel”—where an insurer has reserved its rights and created a conflict of interest. Nevada has now joined those ranks with the recent decision in State Farm Mutual Automobile Ins. Co. v. Hansen, Case No. 64484, September 24, 2015.
The issue of independent defense counsel was brought to the Nevada Supreme Court by a certification request from the United States District Court for the District of Nevada. In the initial case, an individual injured by the acts of a policyholder was assigned the insured’s rights to recover from his insurance company, State Farm. In the suit against the insurer, the plaintiff alleged State Farm breached the insurance contract by failing to provide independent counsel for the insured after it had reserved its rights to deny coverage for liability resulting from allegedly intentional conduct and for resulting punitive damages. The District Court ruled that State Farm breached its duty to defend by failing to provide independent counsel for the insured, finding that the Cumis rule applied to State Farm. State Farm moved for reconsideration and the District Court certified the issue to the Nevada Supreme Court.
The court ruled that Nevada law did require an insurer to provide independent Cumis counsel in case of a conflict. The court stated that Nevada is a “dual-representation” state, meaning that defense counsel represent both the insured and the insurer. Because of this dual representation, the potential for a conflict in the counsel’s representation can arise, and therefore the insurer must retain counsel chosen by the insured to avoid such a conflict. The court went further to define when the requirement to provide independent counsel exists. Some states consider a reservation of rights by an insurer as a per se conflict of interest, and independent counsel must be retained at that point. The Nevada Supreme Court chose to follow California again, though, and require independent counsel only when an actual conflict exists. Following California precedent, the court found that a conflict exists if the insurer-provided counsel has “control over an issue in the case that will also decide the coverage issue,” and the reservation of rights is not “extrinsic or ancillary to the issues actually litigated in the underlying action.”
While Nevada’s recognition of a right to independent counsel is a favorable development for policyholders, they must still contend with requirement that an actual conflict exist before being entitled to that counsel.