Counsel, Conflicts & Fees: A Dynamic Duo of Cases in 2017

Returning to the work routine after the winter holidays can certainly be a drag—but some new case law from the past year should put policyholders in higher spirits as 2018 begins. In two decisions with the potential for broad impact, courts expanded the ability of policyholders to recover attorney’s fees from actions against their insurers and to obtain independent counsel in cases where the insurer accepts the defense under a reservation of rights.

In one form or another, the laws of 45 states make it possible for a policyholder to recover attorney’s fees if the policyholder is the “prevailing party” in a coverage action against its insurer. However, in a recent decision, the Oregon Supreme Court held that the meaning of “prevailing party” might be much broader than previous decisions have recognized.

What Counts as a Win in Awarding Attorney’s Fees to the Policyholder?
In Long v. Farmers Insurance Co., the Oregon Supreme Court addressed the Oregon state statute under which policyholders may recover attorney’s fees in coverage litigation. The policyholder argued that, under the Oregon statute, if a policyholder files an action against its insurer and later obtains more recovery from the insurer, then the policyholder is entitled to recover attorney’s fees—even if the insurer voluntarily paid the additional amounts. The insurer countered that the policyholder was only entitled to attorney’s fees if it won a money judgment in the coverage action.

The court found for the policyholder, and held that the insurer may be required to pay attorney’s fees if the policyholder obtains monetary recovery after filing an action against its insurer, even if there is no formal judgment or decision arising from the coverage case. Although based on an Oregon statute, the court’s reasoning relied on one of the same fundamental principles used by courts in most states when permitting policyholders to recover attorney’s fees; namely, policyholders should not have to pay attorney’s fees to obtain the coverage they are already owed under their policies. Given this common logical foundation, Long has the potential for a long reach indeed (and a big payout to policyholders, too).

When Is the Policyholder Entitled to Independent Counsel?
A number of states permit a policyholder to hire independent counsel, as opposed to insurer-appointed counsel, when the policyholder can establish that the legal positions outlined in the insurer’s reservation of rights creates a conflict of interests for the appointed defense counsel. However, that is often a difficult point for policyholders to prove. In Arden v. Forsberg & Umlauf, the Washington Supreme Court considered whether a policyholder could be entitled to independent counsel for a different reason—conflicts based on the insurer-appointed counsel’s relationship with the insurer.

In Arden, the policyholder argued that the firm appointed by the insurer to defend the policyholder should be disqualified based on the firm’s representation of the insurer in unrelated coverage matters. The policyholder claimed that, since it did not consent to the representation as required by the Rules of Professional Responsibility with respect to conflicts, the insurer-appointed law firm should be disqualified, and the policyholder should be awarded damages arising from legal malpractice and breach of fiduciary duty.

The court ultimately rejected the policyholder’s argument that it was entitled to damages. While the court also rejected a “per se disqualification” rule where a prior relationship between an insurer and retained counsel exists, the court did expressly hold that attorneys hired by insurers to represent policyholders had a duty to disclose potential or actual conflicts to the policyholder, whether the representation is provided under a reservation of rights or not. Given that insurers repeatedly engage the same panel of firms for both coverage and defense work, the Washington Supreme Court may have just handed policyholders a powerful new argument in the fight to secure independent counsel.

While we certainly cannot know what 2018 will bring, these important cases from 2017 bode well for policyholders fighting for independent counsel and coverage in the coming year.