The Washington Supreme Court recently decided Arden v. Forsberg & Umlauf, P.S., 2017 Wash. LEXIS 911 (September 14, 2017), a case involving the ethical obligations of law firms retained by an insurer to defend the insurer’s policyholder.  While the Court of Appeals had held that 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 Supreme Court affirmed only on the basis that the plaintiffs had not established damages as a result of any potential failure to disclose.  In dicta, the Supreme Court suggested the seminal case recognizing the duty of good faith owed by insurance defense counsel, Tank v. State Farm Fire and Casualty Co., may not apply because the “inherent conflict of interest concern in Tank did not fully materialize.”  The Court also suggested that because the law firm provided coverage advice on unrelated cases, it may have needed to disclose that relationship before representing the insurer’s policyholder.  The majority opinion carried a narrow 5-4 margin, with the minority concurring in the result but disagreeing with the dicta regarding application of Tank and defense counsel’s duty to disclose its relationship with the insurer.

 

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.  After initially denying a defense due to the policy’s intentional act exclusion, Hartford agreed to defend  the Ardens after the Ardens retained personal counsel, Jon Cushman, to assist them on coverage matters and monitor their defense.

 

Hartford retained the Seattle law firm Forsberg Umlauf, which regularly represents Hartford in coverage matters and Hartford’s insureds in unrelated defense matters, to defend the Ardens in a lawsuit by the neighbors.  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.  Hartford did not initially indicate that the defense was subject to a reservation of rights to deny coverage.  Hartford eventually sent a reservation of rights letter after the neighbors issued a settlement demand.

 

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 pending 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 object to the extension at the time.

 

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.

 

The Ardens then filed suit against Hartford asserting bad faith and other claims, and the Ardens later added Forsberg as a defendant.  Hartford, the Ardens, and the neighbors ultimately globally settled their claims 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 the Ardens’ claims against it.  The Ardens appealed.

 

The Supreme Court first determined that the requirements of Tank—which outline the duties of insurance defense counsel when the insurer defends under a reservation of rights—may not apply because the “inherent conflict of interest concern in Tank did not fully materialize.”  The Court explained that Tank may not apply because (1) the insurer did not initially defend under a reservation of rights and (2) the insurer still made settlement offers notwithstanding its reservation to deny coverage and the insured was never asked to contribute toward settlement.  Even if Tank were to apply, the Court reasoned, there was no evidence that Forsberg failed to comply with Tank’s requirements of good faith.  Forsberg fully investigated the incident, informed the Ardens that it represented only the Ardens, and fully informed the Ardens of all settlement activity.

 

The Court then assessed Forsberg’s alleged duty to disclose its relationship with Hartford.  The Court recognized that Forsberg could be liable if its work for Hartford constituted a “significant risk” of a material limitation on its representation of the Ardens under RPC 1.7, because it did not disclose the relationship and obtain the Ardens’ informed consent.  The Court noted the competing expert opinions about whether Forsberg should have disclosed the relationship and obtained informed consent, and explained that the competing opinions would generally give rise to a genuine issue of fact precluding summary judgment.

 

The Court held that, even assuming that a breach of duty existed, the Ardens had not established any damages as a result of the alleged breach of duty.  The Court therefore affirmed summary judgment in favor of Forsberg because there was no evidence of recoverable damages.  The concurring justices agreed that lack of evidence of damages supported affirming dismissal of the Ardens’ claims, but they did not join in the dicta suggesting a limited application of Tank or the discussion of Forsberg’s potential breach of duties.

 

The Court left several questions remaining to be resolved by future decisions, including when the “inherent conflict of interest” in Tank may “fully materialize,” and the type and nature of relationships between law firms and insurers that may require disclosure when defending that insurer’s policyholder.