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Nevada and the 2015 Adoption of California’s 1984 Law Regarding Insurer Conflicts of Interest

Author: Cheryl Wilson

Guest Editors: Amy Chambers, Ashley Kaye

January 11, 2021 9:00am

Generally speaking, Nevada court cases do not tend to make national headlines of legal or general interest publications.  However, in 2015, the American Bar Association reported when the Nevada Supreme Court certified a question from the Federal District Court and adopted the requirement an insurer pay for independent counsel of the insured’s choosing when a conflict of interest arises.[1] This was significant because California had been operating under the same legal requirement since 1984.[2]

The case at the center of the issue was State Farm Mut. Auto Ins. Co. v Hansen, 131 Nev. 743, 357 P.3d 338 (2015).  The U.S. District Court submitted two certified questions concerning Nevada’s conflict-of-interest rules in insurance litigation. The first question asked if Nevada law requires an insurer provide independent counsel for its insured when a conflict arises between it and its insured. The second question asked if a reservation of rights letter, per se, creates a conflict of interest.  Hansen, supra, 744, 338. The Nevada Supreme Court has jurisdiction to answer questions of law certified to it by a United States District Court when requested, if there are proceedings wherein questions of law are determinative.[3]

Factual Background

Hansen involved a personal injury sustained after a vehicle in which plaintiff was riding was struck by a third party after a party. Hansen sued alleging intentional and negligent torts, seeking general and punitive damages. The alleged assailant was defended in a civil action by his carrier under a reservation of rights that reserved the right to deny coverage for liability for the intentional torts and claim for punitive damages. The alleged assailant admitted to negligently striking the vehicle, settled his claim, and assigned his further rights against his insurer, State Farm, to Hansen.

Hansen sued State Farm in federal court alleging it breached a contractual duty by failing to retain independent counsel of the insured alleged assailant’s choosing. The District Court found State Farm’s interests collided with its insured (the alleged assailant) because the policy only covered negligent acts. The Court then adopted the California rule necessitating independent counsel from San Diego Navy Federal Credit Union v Cumis Insurance Society, Inc., Cal. App. 3d 358, 208 Cal. Rptr., 494, 506 (1984).[4]  State Farm moved for reconsideration, and the federal court granted, in part, and certified the issues to the Nevada Supreme Court as an issue of first impression.

The Court’s Analysis

The Nevada Supreme Court analyzed the issue pursuant to the Rules of Professional Responsibility, to which all Nevada attorneys are bound.

RPC 1.7(a) states the general rule that, “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.” But when an insurer provides counsel to defend its insured, a conflict of interest may arise because the outcome of litigation may also decide the outcome of a coverage determination—a determination that may pit the insured’s interests against the insurer’s. Hansen, supra at 747.

The Nevada Supreme Court next analyzed the duties created since Nevada is a “dual-representation state”.  An insurer-appointed counsel “represents both the insurer and the insured. Hansen, supra at 341, 747.

Based on Nevada law, the Supreme Court answered the first certified question in the affirmative.  Because Nevada is a dual-representation state, counsel may not represent both the insurer and the insured when their interests conflict and no special exception applies. RPC 1.7. This suggests that the Cumis rule, where the insurer must satisfy its contractual duty to provide counsel by paying for counsel of the insured’s choosing, is appropriate for Nevada. Hansen, supra at 748.

The second certified question asked if a reservation of rights letter, by itself, created a conflict of interest.  The Nevada Supreme Court answered that question in the negative.

We conclude that the California approach, that a reservation of rights does not create a per se conflict, is most compatible with Nevada law. Courts must inquire, on a case-by-case basis, whether there is an actual conflict of interest. This approach follows Nevada law: We have held that dual-representation is appropriate as long as there is “no actual conflict.” (Citations omitted)  … Therefore, an insurer is obligated to provide independent counsel of the insured’s choosing only when an actual conflict of interest exists. A reservation of rights does not create a per se conflict of interest.

Takeaway

In conclusion, in 2015, Nevada joined California in determining that where there is an actual conflict between the interests of an insured and insurer, and it is not merely speculative, an insurance carrier is obligated to provide independent counsel of the insured’s own choosing to defend the interests.

 

[1] https://www.americanbar.org/groups/litigation/committees/insurance-coverage/practice/2015/nevada-adapts-cumis-rule/

[2] San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 208 Cal. Rptr. 494, 506 (Ct. App. 1984),

[3] Nevada Rule of Appellate Procedure 5(a)

[4] superseded by statute as stated in United Enters, Inc., v Superior Court, 183 Cal.App. 4th 1004, 108 Cal. Rptr. 3d 25 (2010)

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