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Former Coverage Counsel Precluded From Participating in Bad Faith Litigation

Author: Bryan D. Scholnick

Guest Editor: Danielle Vukovich

September 3, 2019 10:00am

In late July, 2019, Division One of the Washington State Appellate Court addressed whether an insurer’s former coverage counsel could participate in a bad faith action against the insurer.   In Richard Plein, Et Ano, v. USAA Casualty Ins Co., the Appellate Court examined whether the action the firm wanted to participate in would be substantially related to the firm’s former representation under RPC 1.9(a).  RPC 1.9(a) states:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

Background

In the underlying matter, Richard Plein and Deborah Plein filed a complaint for insurance bad faith and various other claims against USAA Casualty Insurance Company.  The Pleins claims related to issues they faced following home repairs completed by USAAA’s recommended company following a house fire.  The remediation process allegedly only concealed the fire damage.  The Pleins and USAA both investigated this allegation.  The investigation revealed numerous deficiencies in the repair work.  The Pleins claim USAA did not make a coverage decision as to the additional repairs.

A few months after the Pleins brought suit, attorneys from USAA’s former coverage counsel’s firm joined the Pleins’ legal team. USAA objected to the participation by these attorneys because the company and law firm had recently ended their extensive attorney-client relationship.  The relationship was a decade long  with the firm representing “USAA and its affiliates in at least 165 cases, approximately 12 of which involved insurance bad faith litigation by homeowners.”  The firm served as USAA’s primary law firm in Washington for bad faith litigation.  Specifically, during this relationship, the firm represented USAA against an allegation of insurance bad faith relating to the handling of repairs after a house fire.  The similarities were ironic.  That said, the specific attorneys joining in for the Pleins never worked on these cases and did not have any knowledge of attorney-client communications with the company.

USAA asked the trial court to remove its former firm’s attorneys from the Pleins’ action. The trial court denied this request finding “the matter is factually distinct from and not substantially related to [Keller]’s prior representation of USAA, and as a result, the firm’s representation of the Pleins is not a conflict under RPC 1 .9.”

USAA sought a discretionary review.  It was granted.  In addition to addressing the application of RPC 1.9, the Appellate Court also addressed the application of RPC 1.10(a).  It provides:

While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or 1.9, unless the prohibition is based on a personal interest of the disqualified lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm.

The Court’s Ruling

The court found the RPC sections incorporate both the duty of loyalty and the duty of confidentiality to former clients and that “these duties correlate to bedrock principles of the legal profession.”  Furthermore, “[t]hey remain critical toward former clients because ‘the attorney may hold confidences of the former client that could be used, sometimes subtly, against the former client.’  In re Marriage of Wixom, 182 Wn. App. 881, 908-09, 332 P.3d 1063 (2014).  Furthermore, effective representation necessitates protection of the confidential relationship between an attorney and client.  In re Disciplinary Proceedings Against Schafer, 149 Wn.2d 148, 160, 66 P.3d 1036 (2003).”  As such, the court turned its focus to determining whether the firm representing the Pleins is “substantially related” to their former representation of the company.  All prior cases determining what is considered “substantially related” were determined before the Washington Supreme Court adopted the current version of RPC 1.9 in 2006.  Looking to the comments of RPC 1.9, Comment 3 guided the Court.  It states: “[m]atters are ‘substantially related’ for purposes of this Rule if they involve the same transaction or legal dispute or if there otherwise is a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.”  The former firm had access to the following:

  • Confidential and proprietary business information of USAA CIC and its affiliated companies;
  • Confidential claims handling materials, thought processes of adjusters and in-house attorneys;
  • Business and litigation philosophies; and
  • Strategies to settlement discussions, motion practice, case analysis, trial preparation, and discovery both on a case-by-case and institutional, company-wide level.

The former firm also provided advice including “insurance coverage matters, litigation strategies, factual positions, litigation mitigation recommendations for training and communication materials, and legal arguments.”  The Court determined that USAA showed a significant risk that its former firm had “knowledge of both specific and general confidential information that could materially advance the Pleins’ case.”   The court then, referencing Comment 3 addressed the role of specific versus general information as well as information disclosed to third parties: “In the case of an organizational client, general knowledge of the client’s policies and practices ordinarily will not preclude a subsequent representation; on the other hand, knowledge of specific facts gained in a prior representation that are relevant to the matter in question ordinarily will preclude such a representation.”   The court found the firm’s “representation of the Pleins generated a substantial risk that USAA’s confidential information would materially advance the Pleins’ position in this case.”   Accordingly, the Court determined a conflict of interest existed under RPC 1 .9(a).

Takeaway

In the ever changing bad faith litigation landscape in Washington, at least insurers can take comfort in the Court determining that their prior counsel may not be able to jump on the bandwagon.

 

Brian D. Scholnick is Senior Counsel at TYSON & MENDES, LLP, and primarily focuses on defending general liability cases with a focus on professional liability and automotive claims.  Mr. Scholnick has extensive experience litigating a variety of cases involving automotive and trucking personal injury claims, automotive rental liability issues, engineering error and omissions claims, medical malpractice, products liability, workplace injuries, wrongful death, construction defect, and breach of contract.

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