Conflict of Interest Requires Insurers to Pay for Insured’s Independent Counsel

In a recent opinion, the Nevada Supreme Court responded to certified questions from a federal district court judge, and stated that a conflict of interest requires insurers to provide independent counsel for their insured. In the case of Hansen v. State Farm Mut. Auto. Ins. Co., 2013 WL 6086663 (D. Nev.), the court aligned itself with the majority view, applying the California rule laid out in San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal. App. 3d 358, 208 Cal. Rptr. 494 (Ct. App. 1984). The majority view has governed the obligation upon insurers in Mississippi when a conflict is created by a reservation of rights since the decision in Moeller v. Am. Guar. & Liab. Ins. Co., 707 So.2d 1062, 1069, 1072 (Miss.1996). The court cited Moeller as one of the majority of cases applying the rule that where the insured and insurer have conflicting interests, the insurers are required to fulfill their duty to defend by allowing the insureds to select their own counsel and paying the reasonable costs for the independent counsel’s representation.  Unlike Mississippi, however, the Nevada Supreme Court did not hold that a reservation of rights letter was a per se conflict, as did the court in Moeller.

The Nevada Supreme Court was asked to resolve questions on State Farm’s Motion for Reconsideration filed after the company’s loss in the United States District Court for the District of Nevada. The questions pertained to State Farm’s decision that it would not provide independent counsel to an insured who injured fleeing party guests when he and others attacked them and he rammed his Jeep into their vehicle. State Farm agreed to defend the insured, while reserving the right to deny coverage for intentional acts and punitive damages, in a suit brought by the guests against the insured for damages exceeding his policy limits. The plaintiffs then sued State Farm for failing to avoid the excess judgment by not appointing the insured independent counsel. The District Court judge denied State Farm’s motion for summary judgment, finding that the insurer breached its policy under Cumis. The judge agreed to reconsider her order and subsequently certified her questions to the Nevada Supreme Court as part of the process. The Nevada Supreme Court answered that, without exception, an attorney cannot represent both an insurer and insured if their interests conflict under Cumis; in this scenario, the insurer must allow the insured to select their own counsel and pay for reasonable defense costs. If State Farm intends to seek a rehearing on the matter, the petition must be filed within 18 days after the filing of the court’s decision pursuant to the Nev. R. App. P. 40(a)(1), unless the time is shortened or expanded by an order. Our firm will continue to monitor the case and update the blog with any developments.