Court Opinion

ID: 7076382
Source: CourtListenerOpinion
Date Created: 2022-07-24 08:16:52.138591+00
Date Added: 2024-06-11T16:12:38.389395
License: Public Domain

BARNES, Judge,
concurring.
I concur in affirming the denial of American Fire’s motion for partial summary judgment under part I of the majority opinion. Under part II, I believe it is more accurate to say that we also are affirming the denial of American Fire’s partial summary judgment motion because of possible bad faith, not that we are affirming the denial of the Rollers’ and DDI’s cross-motions for summary judgment. Because of the procedural posture of this case, we are not permitted to rule on the propriety of denying the Rollers’ and DDI’s cross-motions for summary judgment. That is, the trial court certified the denial of American Fire’s summary judgment for interlocutory appeal and we accepted appellate jurisdiction on that basis, over the Rollers’ and DDI’s objection. The denial of their summary judgment motions was not certified or accepted for interlocutory appeal and, therefore, cannot be ruled on in this appeal. See Coca-Cola Co. v. Babyback’s Int'l, Inc., 841 N.E.2d 557, 561 (Ind.2006). Additionally, in their opening briefs the Rollers and DDI did not ask that we reverse the denial of their summary judgment motions; they only asked for affirmance of the denial of American Fire’s summary judgment motion and remand for further proceedings on the bad faith issue.
I write separately to discuss in more detail why I believe American Fire might be estopped from denying coverage because of its alleged bad faith handling of DDI’s defense. First, I believe this court has already implicitly, and correctly, recognized that an insurance company can be estopped from denying coverage if it represents to its insured that it will defend a claim under a reservation of rights, but then proceeds to handle that defense in bad faith. We have stated when an insurance company undertakes to defend an insured under a reservation of rights, the insurer is not immunized from responsibility for all of its actions. Employers Ins. of Wausau v. Recticel Foam Corp., 716 N.E.2d 1015, 1029 (Ind.Ct.App.1999), trans. denied. Our supreme court not only has recognized the legal duty implied in all insurance contracts that the insurer deal in good faith with its insured, but also has provided for a cause of action if that duty is breached. Erie Ins. Co. v. Hickman by Smith, 622 N.E.2d 515, 519 (Ind.1993). It makes sense to me that if an insured can bring an independent tort action against an insurer based on bad faith, the insured should also be able to estop the insurer from denying coverage, by establishing bad faith during the course of a declaratory judgment action seeking to clarify the insurer’s coverage responsibilities.
I believe that the Washington Supreme Court has set forth comprehensive guidelines that Indiana courts should adopt and follow when evaluating whether an insurer has discharged its duty to defend its insured in good faith under a reservation of rights. As that court has stated, “an insurer owes the same duty of good faith to its insured, regardless of the type of defense it has undertaken.” Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 715 P.2d 1133, 1137 (1986). It has gone even further and held, “the potential conflicts of interest between insurer and insured inherent in [a reservation of rights] defense mandate an even higher standard: an insurance company must fulfill an enhanced obligation to its insured as part of its duty of good faith. Failure to satisfy this enhanced obligation may result in lia*1282bility of the company, or retained defense counsel, or both.” Id.
The Tank court continued:
This enhanced obligation is fulfilled by meeting specific criteria. First, the company must thoroughly investigate the cause of the insured’s accident and the nature and severity of the plaintiffs injuries. Second, it must retain competent defense counsel for the insured. Both retained defense counsel and the insurer must understand that only the insured is the client. Third, the company has the responsibility for fully informing the insured not only of the reservation-of-rights defense itself, but of all developments relevant to his policy coverage and the progress of his lawsuit. Information regarding progress of the lawsuit includes disclosure of all settlement offers made by the company. Finally, an insurance company must refrain from engaging in any action that would demonstrate a greater concern for the insurer’s monetary interest than for the insured’s financial risk.
Id. With specific respect to defense counsel retained by insurers to defend insureds under a reservation of rights, counsel must understand that he or she represents only the insured, not the company. Id. Additionally, retained counsel owes a duty of full and ongoing disclosure to the insured, which includes disclosure of all potential conflicts of interest between the insurer and insured and resolution of any potential conflicts in favor of the insured. Id.
Using the Tank formulation of the duty to defend under a reservation of rights, the summary judgment record raises a material issue of fact regarding whether American Fire violated its obligation to fully investigate the claim against DDI. There is evidence that as early as June 2002, an American Fire claims adjustor and his supervisor both agreed that a construction expert was needed to evaluate the claim against DDI. However, no expert was ever hired, and the Rollers took steps in April 2008 to remediate the alleged damage caused by DDI and/or its subcontractors, thus making any subsequent expert evaluation of the home worthless or impossible. Viewing this evidence in a light most favorable to DDI and the Rollers, it is descriptive of a bad faith failure on American Fire’s part to evaluate a claim against its insured.
Even more troubling in this case, though, is American Fire’s hiring of attorney Kevin Tyra to defend DDI. Although Tyra was not an employee of American Fire, there was evidence presented that his firm derived approximately fifty percent of its income from American Fire referrals. From the beginning, this should have raised a red alert in a case where American Fire undertook to defend DDI under a reservation of rights. An insurer who questions whether it is required to cover a claim against its insured essentially has two options: “(1) file a declaratory judgment action for a judicial determination of its obligations under the policy; or (2) hire independent counsel and defend its insured under a reservation of rights.” Gallant Ins. Co. v. Wilkerson, 720 N.E.2d 1223, 1227 (Ind.Ct.App.1999) (emphasis added). It is clear to me that Tyra did not meet the definition of “independent” counsel.
Our supreme court has held that in the ordinary case, it is acceptable for in-house insurance company lawyers to defend insureds in-litigation. Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151, 153 (Ind.1999). Wills, however, did not concern defending an insured under a reservation of rights, and the court was careful to state that “attorneys who are employees of insurance companies do not necessarily trigger an impermissible conflict in violation of the *1283Rules of Professional Conduct when they appear as counsel to defend claims against the companies’ policyholders.” Id. at 155 (emphasis added). The court further stated:
It is of course true that conflicts may arise in the course of representation of an insured by house counsel. The same is true if the insurer pays for a law firm to represent its insured. In either case there may be a conflict based on coverage disputes, the risk of a claim in excess of policy limits, the acquisition of information from the insured that bears on coverage, or a variety of other items. If such a situation arises retention of new counsel to represent the policyholder may be either preferred or necessary. But this potential does not require the abandonment of a mode of doing business that the insurer finds efficient and cost effective, and the insured knowingly accepts....
Finally, as already noted, apart from the unauthorized practice issue, most of the problems identified by the Wills exist whether house counsel or outside counsel are used. If there is any difference between house and outside lawyers in this respect it is quantitative and not qualitative and varies from situation to situation. Employee-attorneys may be subject to pressures from their employer. But it is also unrealistic to suggest that an outside lawyer is immune from the blandishments of a client, particularly a high volume client that may be the source of a significant portion of the firm’s revenues.
Wills, 717 N.E.2d at 162-63.
Here, there is no indication in the record that DDI was aware that Tyra essentially was “captive” counsel of American Fire when it accepted American Fire’s defense under a reservation of rights. American Fire knew it was involved in a coverage dispute with DDI when it hired Tyra to represent DDI, and the fact that Tyra’s firm thrived on referrals from American Fire leaves one to seriously doubt whether Tyra ever could have effectively represented DDI’s interests and completely ignored his and his firm’s dependence on American Fire’s business. Additionally, Indiana Professional Conduct Rule 1.7(a)(2) states that an impermissible concurrent conflict of interest exists if “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer,” unless each affected client gives written, informed consent to the representation. Arguably, Tyra’s representation of DDI while American Fire was providing a defense under a reservation of rights violated this rule.
More than this, however, there is evidence in the record that Tyra actually expressed to American Fire (but not DDI) that he had a severe conflict of interest, but he continued representing DDI for several months thereafter. In communications with American Fire, Tyra raised the possibility that it had not properly or timely investigated the claim against DDI but, despite his nominal representation of DDI at the time, stated that it “turns my stomach” to consider pursuing any claim against American Fire related to a delayed investigation, and “even the suggestion that I would pursue interests contrary to [American Fire’s] is anathema.” App. p. 994. Tyra remained DDI’s counsel for four months after this communication, during which time he defended DDI’s principal in a deposition. Tyra also admitted to doing nothing during this time to advance DDI’s coverage case against American Fire, despite being aware of a basis for doing so.
*1284DDI had the right to expect that American Fire’s tender of a defense came with no strings attached and that any attorney hired by American Fire would not be conflicted. The summary judgment evidence indicates that that did not happen here. In my view the trial court undoubtedly was correct in denying American Fire’s motion for summary judgment. There should be further proceedings below to definitively resolve DDI’s and the Rollers’ claims of bad faith on American Fire’s part, which generally is a question of fact to be resolved by a fact-finder. See Recticel Foam, 716 N.E.2d at 1028. If bad faith is established during trial, American Fire should be estopped from denying coverage to DDI.