Strategies, Challenges, and Answers

Is A Nevada Insurance Company Obligated To Provide Its Policyholder With A Conflict-Free Defense? Nevada and Cumis.

CumisLike a classic American western, the stage is set for a showdown.  If this were a movie,  the overhead sun would reflect off the lawman’s brightly polished star.  The gunslinger would strap on his belt and tie the holster to his thigh.  You would see mothers rushing their children inside, as the clock ticks closer to noon.  People in the saloon would be placing their bets on who would win this upcoming confrontation.  However this battle isn’t one of gunpowder and bullets.  Instead it is one of legal ethics.  The question is whether the Nevada Supreme Court will obligate insurance carriers to provide their policyholder with a defense attorney that has no conflicts of interest.

The potential for a conflict of interest arises as a result of the Nevada Supreme Court’s decision in Nevada Yellow Cab Corp. v. Dist. Ct., 123 Nev. 44, 152 P.3d 737 (2007).  See the Nevada Law Blogs treatment of the Nevada Yellow Cab case HERE  In that case the Nevada Supreme Court decided that an attorney who is assigned by an insurance company to defend the policyholder under a liability policy owes an ethical duty to both the insurance company and the policyholder.  Both of them are clients of the attorney.  Because there is an attorney/client relationship between the attorney and the insurance company and the policyholder, irreconcilable conflicts between the interests of the two clients can sometimes arise.   See Nevada Rules of Professional Responsibility 2.1.  The follow-up question is if such a conflict arises, what obligation if any does the insurance company owe to the policyholder to make sure that the policyholder gets properly defended?  As pointed out by the Nevada Law Blogs HERE, this issue remains unanswered in Nevada.

However, like the townspeople in the saloon, a number of people have already weighed in on how they predict this showdown will end.  Shortly after the issuance of the Nevada Yellow Cab opinion, Professor Jeffrey Stempel placed his bet.  Professor Stempel teaches legal ethics at UNLV’s Boyd School of Law.  Professor Stempel predicted that when the Nevada Supreme Court is called on to decide this question, he expects that the Nevada Supreme Court will impose Cumis-like obligations on the insurance company where there is a conflict between the interests of the two clients.

In the case of San Diego Navy Credit Union v. Cumis Ins. Society, 162 Cal.App.3d 358 (1984) the California Supreme Court found that the panel counsel assigned by the insurance company had a conflict of interest.  The court required the insurance company to give up its contractual right to control the defense of the case.  But it also obligated the insurance company to pay for the defense of the insured by an attorney that was chosen by the policyholder, rather than forcing the policyholder to accept the company’s regularly-retained panel counsel.  In particular, the California court felt that irreconcilable conflicts would likely arise when the insurance company had reserved its rights to deny indemnify the policyholder while at the same time agreeing to defend the policyholder in the ongoing litigation.  The court allowed the policyholder to choose its own council and obligated the Cumis insurance company to pay for the cost of that policyholder-chosen attorney in order to alleviate the conflict.  In other words, the policyholder was allowed to hire its own defense attorney at the insurance company’s expense.

Since the Cumis decision, the California legislature has passed a statute to better define the circumstances when the insurance company would have to allow the policyholder to retain its own attorney.  See California Civil Code 2860.  Professor Stempel also believes that the Nevada Supreme Court will follow the Cumis lead because the court has said it has said in the past that Nevada will follow the California’s lead in situations where Nevada law is undeveloped.

Another very influential decision-maker had also recently weighed in on this question.  That would be Judge Miranda Du of the U.S. District Court of the District of Nevada.  In the case of Hansen v. State Farm Mutual Insurance Company, Case No. 2:10-cv-0143 MMD-RJJ, 202 WL 6205722 (D. Nev. Dec.12, 2012) Judge Du predicted under the law and the facts, the Nevada Supreme Court would adopt the Cumis decision and would have obligated State Farm to allow its policyholder to pick his own counsel and that State Farm would have an obligation to pay this Cumis-type attorney.

If the Nevada Supreme Court ultimately agrees with Professor Stempel and Judge Du, what changes will come to the practice of coverage law in Nevada as a result?  And what consequences could befall an insurance company that is aware of these predictions but does not grant a policyholder a conflict free defense? Stay tuned to the Nevada Law Blogs to learn more about this impending showdown.  In the meantime if you have questions, keep your children off the street and contact Mike Mills at 702‑240‑6060, Extension 114.  He will discuss with you more about how Cumis might affect you.

Share

Speak Your Mind

*

Are you human? * Time limit is exhausted. Please reload CAPTCHA.