Insurance in the Courts (Formerly Recent Court Decisions)

• Date: 01 September 2007
• DOI: http://doi.org/10.1111/j.1540-6296.2007.00121.x
• Author: Randy Maniloff,Jeffrey W. Stempel,Marc Mayerson
• Published date: 01 September 2007

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Risk Management and Insurance Review, 2007, Vol.10, No. 2, 309-356

INSURANCE IN THE COURTS

(FORMERLY Recent Court Decisions)

Randy Maniloff

White & Williams

Marc Mayerson

Spriggs & Hollingsworth

Jeffrey W. Stempel

University of Nevada Las Vegas

NEVADA ADOPTS “TWO-CLIENT”MODEL OF INSURANCE DEFENSE PRACTICE.PRIOR

RETENTION BY INSURER FOR DEFENSE OF UNDERLYING TORT ACTION AGAINST

POLICYHOLDER DISQUALIFIES SUCCESSOR LAW FIRM FROM REPRESENTING POLICYHOLDER

IN BAD FAITH ACTION AGAINST INSURER.STATU S OF “CUMIS COUNSEL”OR INSURER

MALPRACTICE ACTIONS AGAINST DEFENSE COUNSEL NOT SPECIFICALLY ADDRESSED

Nevada Yellow Cab Corporation v. District Court, 152 P.3d 737 (Supreme Court of Nevada,

March 8, 2007)

It happens constantly in civil litigation. An insurance company hires a lawyer to defend

its policyholder from a third party’s claim of injury. But just who is the lawyer’s “client?”

Is it the policyholder who is the named defendant in the case and is “represented” in

court proceedings? Or is it the insurer that, in most cases, selects the attorney, pays the

attorney,supervises the litigation, and has (by the terms of the liability insurance policy)

the right to settle the case, even over the objections of the policyholder? Ordinarily, the

liability insurer has both the duty to defend a policyholder sued by a third party and

the right to control the defense and settlement of the case. In addition, the insurer has

a “duty to settle” claims if this can reasonably be done for an amount at or below the

policy limits.

Mr. Maniloff and his firm represent insurers in coverage disputes. He is a frequent author on

insurance matters, including an annual survey of the “Top Ten” insurance cases for Mealey’s

Publications. Mr. Mayerson and his firm representpolicyholders in coverage disputes. He main-

tains an insurance weblog at insurancescrawl.com. Professor Stempel is the Doris S. and Theodore

B. Lee Professor of Law at the William S. Boyd School of Law at UNLV and author of Stempel

on Insurance Contracts (3d ed. 2006 & Supp. 2007). Given the collaborative nature of this article,

the views expressed are not necessarily those of each author. Neither are opinions expressed in

this article necessarily those of the University of Nevada Las Vegas, White & Williams, Spriggs

& Hollingsworth, or their respective clients or constituents.

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310 RISK MANAGEMENT AND INSURANCE REVIEW

For years, one of us (Stempel) has been telling students that Nevada followed a “one

client” model of this three-part relationship between insurer, policyholder, and lawyer.

Three separate Formal Opinions of the State Bar Committee on Ethics and Professional

Responsibility1spanning nearly 20 years seemed to clearly adopt the view that the

lawyer’s only “client” is the policyholder/defendant and that the insurer has only

contract-based rights vis-`a-vis the retained defense lawyer. See, e.g., Formal Opinion No.

28 (November 19, 2002) (“under Nevada law, the attorney’s client is the policyholder”

while “insurer has the subordinate rights of a third-partypayer”). However, the insurer’s

contract rights in Nevada as elsewhere have always been considered substantial, both in

law and as a practical matter, at least if the attorney wished to continue to receive future

business from the insurer.

On March 8, 2007 the Nevada Supreme Court decided Nevada Yellow Cab Corp. v. District

Court, 152 P.3d 737 (Nev.2007), which will require some obvious revisions for teachers of

professional responsibility, insurance law, and civil procedure. In Yellow Cab, the Court

held that both the policyholder and the insurer are clients of the defense attorney. The

Nevada Supreme Court, like others following the two-client model, also stated that

counsel’s “primary” client is the policyholder with the insurer as a secondary client. See

152 P.3d at 741. This portion of Yellow Cab means that there is no change in pre-Yellow

Cab Nevada law (as reflected in Formal Ethics Opinions Numbers 9, 26, and 28 and

the general understanding of practicing lawyers) that when policyholder and insurer

interests conflict, counsel must not betray the interests of the policyholder in favor of the

insurer, no matter how steady a stream of business the insurer may provide to counsel

and her law firm. For example, insurers typically demand regular reports on significant

events in the litigation. Insurer retained counsel defending the policyholder cannot in

the course of keeping the insurer informed reveal ethically protected information (i.e.,

information acquired during the course of representing the policyholder) that could be

used by the insurer to deny coverage.

But Yellow Cab introduces a substantial new wrinkle in insurance defense practice by

adopting the two-client model. Because both the policyholder who becomes a defendant

and the insurer are “clients” of the lawyer, greater potential for disqualifying conflict of

interest arises, a fact reflected in Yellow Cab itself. The Yellow Cab Court upheld a trial

court’s disqualification of a prominent attorney and firm because a lawyer in the firm

had previously been retained by the insurer in connection with a related matter. See 152

P.3d at 739.

In addition, adoption of the primary-secondary client model appears to equate Nevada

with the approach to the “tripartite” relationshipof insurer-policyholder-defense counsel

used in California and other states following the two-client model. Under California law,

1State Bar of Nevada Standing Committee on Ethics and Professional Responsibility Formal

Opinion No. 9 (April 21, 1988), No. 26 (March 20, 2001), and No. 28 (Nov. 19, 2002). Professor

Stempel is a member of the Standing Committee and was involved in the preparation of Formal

Opinion No. 28. Pursuant to Nevada law, the Standing Committee responds to requests for

advisory opinions on matters of legal ethics submitted by the bar or the public. After a draft

Formal Opinion is prepared, it is submitted to the Nevada Supreme Court for review and must

be approved by the Court for publication. However, pursuant to Nevada Supreme Court rule

225 Formal Opinions are not binding on the Court.

INSURANCE IN THE COURTS 311

where there is concrete conflict between insurer and policyholder over coverage and

the conduct of counsel may affect resolution of the coverage issue, the policyholder is

permitted to select its own counsel with the insurer providing payment of reasonable

fees. In such situations, the policyholder need not accept the insurer-selected defense

lawyer as its counsel. California’s jurisprudence in this area is particularly well known,

stemming from San Diego Fed. Credit Union Ins. Co.v. Cumis Ins. Soc’y, Inc., 162 Cal.

App.3d 358, 208 Cal. Rptr. 494 (Cal. Ct. App. 1984), which was modified and codified by

statute in Cal. Civ. Code §2860, discussed below.

The case began in 1999 when Insurance Company of the West(“ICW”) retained Vannah,

Costello, Canepa, and Riedy & Rubino (“Old Vannah”) to defend Yellow Cab, an ICW

policyholder against a personal injury lawsuit by plaintiff Heather Nash arising from an

accident involving her vehicle and a yellow cab. The ICW policy had limits of $500,000,

with Yellow Cab required to pay a self-insured retention of $50,000 in accident cases.

Old Vannah partner Michael Rubino and associate Denise Cooper Osmond defended

Yellow Cab from January 1999 to November 2002. During this time period, there was

significant litigation activity, including document discovery and several depositions.

Like most insurer-selected defense counsel, Rubino, Osmond, and the Old Vannah Firm

were required to give the insurer periodic updates on the case. See Yellow Cab, 152 P.3d

at 738-39.

In November 2002, ICW discharged the Old VannahFirm and substituted a different law

firm to defend YellowCab, which did not consent to the substitution. Under the terms of

a typical liability insurance policy,the insurer has both the duty to defend a policyholder

sued by a third party and the right to control the defense and settlement of the case. In

addition, the liability insurer has a “duty to settle” claims if this can reasonably be done

for an amount at or below the policy limits. Just before trial, PlaintiffNash offered to settle

her claim for the $500,000 policy limits. ICW instructed the new defense counsel to reject

the offer. During trial in March 2003, the case was settled for $1.3 million, with Yellow

Cab paying $500,000 toward the settlement. See 152 P.3d at 739. YellowCab subsequently

felt aggrieved by these developments and this settlement because it asserted that ICW

breached its duty to settle when it could have done so for substantially less money, saving

Yellow Cab nearly half a million dollars and the burdens of trial.

Also in 2003, Old Vannah split into two firms—Vannah Costello Vannah & Ganz (“New

Vannah”)and Canepa Riedy & Rubino. Osmond stayed with New Vannah while Rubino

joined the Canepa Firm as a name partner.In June 2003, Yellow Cab retained well-known

plaintiff’s lawyer Robert Vannah individually as counsel to prosecute a bad faith action

against ICW based on ICW’s failure to settle the Nash claim within the YellowCab policy

limits. After the original Vannah Firm split, Yellow Cab continued to be represented in

the bad faith action by Attorney Vannah and New Vannah.

ICW in turn retained counsel to represent it in the Yellow Cab bad faith case and then

objected to Vannah’s representation of Yellow Cab on conflict of interest grounds. ICW

took the position that it was a former “client” of the New Vannah Firm by virtue of the

Old VannahFirm’s work on the Nash v. YellowCab case. Consequently, arguedICW, it was

a “former client” of New Vannahin connection with a current matter (Yellow Cab v. ICW)

that was substantially related to the matter (Nash v. Yellow Cab) on which Vannah had

worked at the behest of ICW. For obvious reasons, New Vannah was now representing

a client (Yellow Cab) within interests adverse to the purported old client, ICW.