Court Opinion

ID: 2994055
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:09:46.279809+00
Date Added: 2024-06-11T11:45:19.943530
License: Public Domain

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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