When Defending Subject to a Reservation of Rights, the Insurer and Defense Counsel Must Adhere to Certain Criteria

When Defending Subject to a Reservation of Rights, the Insurer and Defense Counsel Must Adhere to Certain Criteria

Under Washington law, “the duty of good faith of an insurance company defending under a reservation of rights [or “ROR”] includes an enhanced obligation of fairness toward its insured.” Tank v. State Farm, 105 Wn.2d 381, 387-88, 715 P.2d 1133 (1986) (emphasis added). The “[p]otential conflicts between the interests of insurer and insured, inherent in a [ROR] defense, underlie this enhanced obligation.” Id.

To meet its enhanced obligation of fairness towards its insured, an insurer defending under a ROR must adhere to certain criteria:

  1. The insurer “must thoroughly investigate the cause of the insured’s accident and the nature and severity of the plaintiff’s injuries.” Tank, 105 Wn.2d at 388.
  2. The insurer “must retain competent counsel for the insured.” Id.
  3. “Both retained defense counsel and the insurer must understand that only the insured is the client.” Id.
  4. The insurer “has the responsibility for fully informing the insured not only of the [ROR] defense itself, but of all developments relevant to [the insured’s] policy coverage and the progress of his [or her] lawsuit. Information regarding progress of the lawsuit includes disclosure of all settlement offers made by the company.”
  5. “Refrain from engaging in any action which would demonstrate a greater concern for the insurer’s monetary interest than for the insured’s financial risk.” Id.
  6. Refrain from using defense counsel to obtain statements for a coverage action. Safeco Ins. Co. v. Butler, 118 Wn.2d 383, 395, 823 P.2d 499 (1992).
  7. Not commingle information between the insured’s defense and coverage files. Id.

Insurance defense counsel defending an insured under a ROR must also meet certain criteria.

  1. “[S]uch attorneys owe a duty of loyalty to their clients.” Per Rule of Professional Conduct 5.4(c), counsel must not allow the insurer “to influence his or her professional judgment.” Counsel must “understand that he or she represents only the insured, not the [insurer].” Tank, 105 Wn.2d at 387-88.
  2. Counsel owes a “owes a duty of full and ongoing disclosure to the insured.” Id. This duty has three aspects.
    1. First, “potential conflicts of interest between insurer and insured must be fully disclosed and resolved in favor of the insured.” Id.
    2. Second, “all information relevant to the insured’s defense, including a realistic and periodic assessment of the insured’s chances to win or lose the pending lawsuit, must be communicated to the insured.” Id.
    3. Third, “all offers of settlement must be disclosed to the insureds as those offers are presented.” Id.

The insurer and defense counsel may be liable if they fail to satisfy the above criteria, which may apply to any situation where the insurer and insured may have differing interests or when the insured’s assets are at risk. Tank, 105 Wn.2d at 387-88.

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