The Washington Court of Appeals recently found (Arden v. Forsberg & Umlauf, P.S., 193 Wash.App. 731, 373 P.3d 320 (2016)), on first impression, that insurer retained attorneys (defense attorneys) were not automatically prohibited from representing insureds merely because the defense attorneys had an ongoing relationship with the insurance company where they were receiving defense case assignments as well as coverage assignments. Moreover, the Court found that defense counsel were not required by the duty of loyalty imposed on counsel under Washington law to disclose to the insured the defense attorney’s business relationship with the insurer. However, the Court did note that it was “better practice for attorneys handling the reservation of rights (ROR) defense … to inform their clients if they have a long-standing relationship with the insurer and represent the insurer in other cases.”
The Court in Arden also found that the defense attorney’s duty of loyalty did not require the defense attorney to “persuade” the insurance company to fund the settlement demand that claimants had made in which the insureds were requesting be accepted. While the Court recognized that a defense attorney clearly had an obligation to communicate the insured’s request to settle to the insurer, the defense attorney was not required to advocate and “persuade” the insurance company to accept the settlement as requested by the insured. This was especially true when the insured had personal counsel who was actively involved in the case. The Court observed:
Such a duty would be inconsistent with the defense attorney’s role in a reservation of rights defense. When coverage is disputed, an insurer’s decision to settle necessarily involves an evaluation of the strength of its coverage defenses. Imposing a duty on defense counsel to attempt to persuade an insurer to settle would require that attorney either to argue the insured’s position on coverage or advise the insurer on coverage issues, both of which would give rise to actual conflicts of interest. … [W]hen as here the insured has personal counsel who is actively involved in the case, there is no reason for defense counsel to become involved in persuading the insurer to settle. Personal counsel is in the best position to advocate for settlement with the insurer.
The State of Washington is one of only a few states where the courts have declined to automatically allow an insured to retain independent counsel in reservation of rights situations. Under Washington law, a defense attorney handling a reservation of rights case is required to represent only the insured, not the insurer, and owes a duty of loyalty to the insured that has no exceptions. See Arden, Id., 373 P.3d at 329, citing Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 388, 715 P.2d 1133 (1986).