In a matter of first impression in Washington, the Washington Court of Appeals in a published decision, Arden v. Forsberg & Umlauf, et al., Washington Court of Appeals Division II, May 3, 2016, held a law firm with an insurer for a client may defend that insurer’s policyholder in an unrelated matter without creating a conflict of interest, or even disclosing that it also regularly represents the insurer in coverage matters. The court held this as a matter of law. The court also held a lawyer defending an insured under reservation of rights does not breach its fiduciary duties to its insured client or commit legal malpractice by (1) not persuading the insurer to accept the claimants’ first demand to the insureds; (2) not engaging in settlement discussions with the claimants until receiving the claimants’ written discovery responses, notwithstanding the insureds’ request for prompt resolution; or (3) failing to consult with the insureds before rejecting the claimants’ first and second demands when there was no evidence the insureds were harmed by same.
Forsberg & Umlauf is a law firm in Seattle, Washington that represents insurers in coverage disputes and defends its insurance clients’ insureds in unrelated matters. One of its insurance clients is Hartford, whom it represents in coverage matters. In this case, a couple insured under a Hartford homeowners’ policy, the Ardens, shot and killed their neighbors’ puppy. The neighbors sued the Ardens for willful conversion, malicious injury, intentional or reckless infliction of emotional distress, gross negligence and willful or reckless property damage. The Ardens sought coverage under the liability portion of their homeowners’ policy with Hartford. After initially denying a defense due to the policy’s intentional act exclusion, Hartford agreed to defend the Ardens under a reservation of rights to deny coverage after the Ardens retained personal counsel, Jon Cushman, to assist them on coverage matters and monitor their defense.
When Hartford told Cushman it intended to use panel counsel (Forsberg) to defend the Ardens, Cushman said okay. Forsberg sent the Ardens a letter explaining it was defending them in the suit against them and that it would not provide coverage advice to them or to Hartford. The letter stated that, unless instructed otherwise, Forsberg would assume any settlement authority or instructions received from Hartford to settle were given with the Ardens’ consent and it would proceed accordingly. (The Ardens and Cushman made it clear notwithstanding the reservation of rights that they expected all settlement monies to come from Hartford.) Forsberg did not, in this letter or at any other time, tell the Ardens it represented Hartford in coverage matters. Forsberg attorney Chris Gibson, assigned to the Ardens’ defense, met with the Ardens and explained they were his only clients and his goal was for Hartford to pay full indemnity for the suit against them despite the reservation of rights.
After Forsberg served discovery requests on the claimants but before they answered, the claimants made a timed settlement demand of $55,000 on the Ardens. Cushman demanded Forsberg accept the demand and Hartford pay it. Hartford declined because it needed documentation from the discovery responses regarding claimed damages and information about case value. Forsberg explained to Cushman it wanted to wait until it had received claimants’ discovery responses, and requested and received an extension from the claimants. Cushman did not at the time object to the extension.
After receiving the claimants’ discovery responses, Forsberg prepared a detailed litigation report and case evaluation and shared it with Cushman before sending it to Hartford. It included a number, $35,000, Forsberg believed the case could be settled for. It told Cushman it would allow the timed $55,000 demand to expire, then offer $18,000 with the goal of ultimately getting to $35,000. Neither Cushman nor the Ardens objected. The claimants then made another timed settlement demand, this time for $40,000. Hartford told Cushman it would allow this demand to expire then counter at $25,000. Cushman did not object to this offer at the time but later argued Hartford acted in bad faith by not accepting the $40,000 demand. The claimants rejected the $25,000 offer, but the parties ultimately settled at mediation a few months later. The only claims reserved were the Ardens’ claims for breach of fiduciary duty and legal negligence against Forsberg. The trial court granted Forsberg’s summary judgment motion, dismissing all claims against it. The Ardens appealed.
The Ardens argued Forsberg breached its fiduciary duty of loyalty to them by defending them under reservation of rights while Hartford was a firm client. The appellate court dismissed this argument, holding as a matter of law that Forsberg’s representation of the Ardens while it also represented Hartford did not create a conflict of interest and that Forsberg had no obligation to even tell the Ardens Hartford was a firm client.
The Ardens also argued Forsberg breached its fiduciary duty of loyalty to them during settlement negotiations. The appellate court disagreed. The court held as a matter of law Forsberg owed no duty to the Ardens to persuade Hartford to accept the claimants’ initial $55,000 settlement demand, received while discovery responses were outstanding; that there was no evidence Forsberg breached a fiduciary duty regarding the Ardens’ interest in a swift resolution of the suit against them by seeking an extension to engage in settlement negotiations while waiting for discovery responses (especially when the Ardens and Cushman were adamant that Hartford wholly fund the settlement notwithstanding its reservation of rights); that while a question of fact existed as to whether Forsberg breached its duty to consult the Ardens before rejecting the claimants’ first and second settlement demands, there was no evidence any breach injured the Ardens; and that even if Forsberg had a duty to consult the Ardens before making settlement offers, there was no evidence Forsberg breached that duty with respect to the first settlement offer, or that any breach regarding the second settlement offer injured the Ardens.
The appellate court upheld the trial court’s grant of summary judgment for Forsberg on both breach of fiduciary duty of loyalty and legal negligence. The court stated a lawyer’s duties of loyalty and disclosure to its clients arise under the RPCs and Tank v. State Farm, 105 Wn.2d 381 (1986) and noted the parties’ experts disagreed about whether Forsberg’s longstanding representation of Hartford in coverage cases precluded it from defending a Hartford insured in a reservation of rights context. Answering a question of first impression in Washington, the court held an attorney who represents an insurer in coverage cases is not automatically prohibited from representing that insurer’s insured when the insurer reserves its right to deny coverage.
The appellate court held under RPC 1.7 Hartford’s interests were not directly adverse to the Ardens with regard to Forsberg’s defense of them. Hartford and the Ardens did have adverse interests with respect to coverage issues, but Forsberg made it clear it did not represent Hartford or the Ardens on those issues. Moreover, the appellate court held an attorney who follows Tank protects herself against claims that a conflict of interest automatically arises under RPC 1.7 when she defends an insured under reservation of rights but also represents that insured’s insurer. The appellate court also dismissed the Ardens’ attempt to follow California’s Cumis rule, pointing out that Tank, decided just two years after Cumis, specifically rejected Cumis by crafting its own set of rules for defense counsel. So long as the specific Tank criteria are followed, an insurer-retained attorney does not violate her duty of loyalty to an insured. The court held as a matter of law that Forsberg did not breach its fiduciary duty of loyalty by undertaking the reservation of rights defense of the Ardens.
The appellate court similarly dismissed the Ardens’ claim that Forsberg breached its fiduciary duty of loyalty by failing to give them notice of its long-standing relationship with Hartford and of potential conflicts of interest arising from Hartford’s reservation of rights, stating RPC 1.7 does not create an automatic conflict in this situation and Tank does not require the defense attorney disclose its relationship with the insurer defending under reservation of rights. The fact that attorney Gibson specifically told the Ardens under Tank his obligations were solely to them and it was his practice to get the insurance company to pay everything, even in a reservation of rights situation and that the Ardens had their own personal counsel engaged in the reservation of rights process, further bolstered the court’s conclusion that there was no evidence Forsberg breached its duty to disclose a potential conflict of interest between Hartford and the Ardens.
The appellate court disagreed that Forsberg put Hartford’s interests above the Ardens’ during settlement negotiations by failing to consult with them before rejecting the claimants’ settlement demands and making counteroffers. The court held a defense attorney has no obligation to persuade an insurer in a reservation of rights context to settle a case. When coverage is disputed, an insurer’s decision necessarily involves an evaluation of the strength of its coverage defenses. Imposing a duty on defense counsel to persuade an insurer to settle would require that attorney either to argue the insured’s position on coverage or advise the insurer on coverage issues, both of which would give rise to actual conflicts of interest. Moreover, the Ardens had personal counsel who was in the best position to advocate for settlement with the insurer. The court ruled a defense attorney’s duty is to give a fair evaluation of the liability and damages without regarding to coverage.
The appellate court acknowledged Forsberg did not expressly consult with the Ardens or Cushman before rejecting the claimants’ two settlement demands. But Forsberg’s initial representation letter stated unless instructed otherwise it would assume any settlement authority or instructions from Hartford to settle are given with your [the Ardens’] consent; and the Ardens clearly stated they would not personally pay any part of a settlement and expected Hartford to pay it all. Based on this competing evidence the court found a question of fact whether Forsberg breached its duty to consult with the Ardens, but pointed out an attorney can be liable for breach of fiduciary duty only if the breach caused some injury, and there was no evidence Forsberg’s breach harmed the Ardens. (There was no evidence if Forsberg had consulted with the Ardens they would have funded the settlement themselves or negotiated a separate settlement with the claimants.)
The court ruled the same way on the Ardens’ argument that Forsberg was required to consult with them before making counteroffers. With respect to the $18,000 counteroffer, Cushman expressly approved it. And with respect to the $25,000 counteroffer, Cushman did not disagree with it or object to it after it was made. Even if Forsberg breached some duty to consult with the Ardens, there was no evidence its breach harmed the Ardens.
Finally, the appellate court found no evidence Forsberg was negligent in making a judgment decision extending the time for settlement negotiations, despite the Ardens’ desire to settle promptly to minimize criminal charges arising from their shooting the claimants’ dog and to avoid exacerbating Mr. Arden’s PTSD and depression. The court observed the Ardens’ predominant interest was for Hartford to fully fund any settlement. Because at the time the first settlement demand came in Forsberg had not yet received the claimants’ responses to its written discovery so Hartford did not have the necessary information to evaluate the case, Forsberg was not negligent in delaying the beginning of settlement negotiations.