INSURANCE IN THE COURTS (FORMERLY Recent Court Decisions)
Maniloff, Randy, Mayerson, Marc, Stempel, Jeffrey W., Risk Management and Insurance Review
NEVADA ADOPTS "TWO-CLIENT" MODEL OF INSURANCE DEFENSE PRACTICE. PRIOR RETENTION BY INSURER FOR DEFENSE OF UNDERLYING TORT ACTION AGAINST POLICYHOLDER DISQUALIFIES SUCCESSOR LAW FIRM FROM REPRESENTING POLICYHOLDER IN BAD FAITH ACTION AGAINST INSURER. STATUS OF "CUMIs COUNSEL" OR INSURER MALPRACTICE ACTIONS AGAINST DEFENSE COUNSEL NOT SPECIFICALLY ADDRESSED
Nevada Yellow Cab Corporation v. District Court, 152 P.3d 737 (Supreme Court of Nevada, March 8, 2007)
It happens constantly in civil litigation. An insurance company hires a lawyer to defend its policyholder from a third party's claim of injury. But just who is the lawyer's "client?" Is it the policyholder who is the named defendant in the case and is "represented" in court proceedings? Or is it the insurer that, in most cases, selects the attorney, pays the attorney, supervises the litigation, and has (by the terms of the liability insurance policy) the right to settle the case, even over the objections of the policyholder? Ordinarily, the liability insurer has both the duty to defend a policyholder sued by a third party and the right to control the defense and settlement of the case. In addition, the insurer has a "duty to settle" claims if this can reasonably be done for an amount at or below the policy limits.
For years, one of us (Stempel) has been telling students that Nevada followed a "one client" model of this three-part relationship between insurer, policyholder, and lawyer. Three separate Formal Opinions of the State Bar Committee on Ethics and Professional Responsibility1 spanning nearly 20 years seemed to clearly adopt the view that the lawyer's only "client" is the policyholder/defendant and that the insurer has only contract-based rights vis-à-vis the retained defense lawyer. See, e.g., Formal Opinion No. 28 (November 19, 2002) ("under Nevada law, the attorney's client is the policyholder" while "insurer has the subordinate rights of a third-party payer"). However, the insurer's contract rights in Nevada as elsewhere have always been considered substantial, both in law and as a practical matter, at least if the attorney wished to continue to receive future business from the insurer.
On March 8, 2007 the Nevada Supreme Court decided Nevada Yellow Cab Corp. v. District Court, 152 P.3d 737 (Nev. 2007), which will require some obvious revisions for teachers of professional responsibility, insurance law, and civil procedure. In Yellow Cab, the Court held that both the policyholder and the insurer are clients of the defense attorney. The Nevada Supreme Court, like others following the two-client model, also stated that counsel's "primary" client is the policyholder with the insurer as a secondary client. see 152 P.3d at 741. This portion of Yellow Cab means that there is no change in pre-Yellow Cab Nevada law (as reflected in Formal Ethics Opinions Numbers 9, 26, and 28 and the general understanding of practicing lawyers) that when policyholder and insurer interests conflict, counsel must not betray the interests of the policyholder in favor of the insurer, no matter how steady a stream of business the insurer may provide to counsel and her law firm. For example, insurers typically demand regular reports on significant events in the litigation. Insurer retained counsel defending the policyholder cannot in the course of keeping the insurer informed reveal ethically protected information (i.e., information acquired during the course of representing the policyholder) that could be used by the insurer to deny coverage.
But Yellow Cab introduces a substantial new wrinkle in insurance defense practice by adopting the two-client model. Because both the policyholder who becomes a defendant and the insurer are "clients" of the lawyer, greater potential for disqualifying conflict of interest arises, a fact reflected in Yellow Cab itself. The Yellow Cab Court upheld a trial court's disqualification of a prominent attorney and firm because a lawyer in the firm had previously been retained by the insurer in connection with a related matter. …