This is the first post at PLUS Blog from Mary Haddad. Mary Haddad

Mary Haddad is a Seattle, Washington litigator whose practice focuses on professional liability, employment and construction matters at the trial and appellate level. Mary works with clients to strategically develop an effective resolution, implementing innovative solutions to best serve her client’s litigation and financial goals.

Mary co-chairs the Northwest Chapter of the Professional Liability Underwriting Society.  She is AV rated by Martindale-Hubbell and recognized by Washington Law & Politics Magazine as a Rising Star.

The Washington State Supreme Court addressed in Arden v. Forsberg & Umlauf, P.S., — P.3d — 2017 WL 4052300 in a decision issued on September 14, 2017, the potential conflict where the same firm is hired by the same insurance company to defend insureds in litigation and handle coverage dispute matters.

The Court ruled that a firm who previously represented an insurer on a coverage matter and currently defends its insured is not disqualified per se from representation under RPC 1.7(b), that a claim by the insured that prior consent should have been obtained does not give rise to damages regardless of whether the insured is being defended under a reservation of rights but cautions that where coverage is disputed, an attorney with an established relationship with the insurer could be “materially limited” in his or her ability to represent solely the interests of the insured.

The decision results from Roff and Bobbi Ardens claim of legal malpractice against their attorneys for failing to disclose a potential conflict between the law firm, Forsberg & Umlauf, P.S. (“Forsberg”) and Property and Casualty Insurance Company of Hartford (Hartford), the insurance company that provided the Ardens their defense because the law firm represented the insurance company in coverage disputes.

In the underlying action, the Ardens were sued by Wade and Ann Duffy.  Roff Arden, allegedly suffering post-traumatic stress disorder, shot and killed the Duffy’s six month old Labrador puppy in December, 2011.  The Duffys claimed willful conversion, malicious injury, intentional infliction of emotional distress, and gross negligence. The Ardens sought liability coverage that was denied based on the policy’s intentional act exclusion.  The Ardens retained private counsel, Jon Cushman, to seek coverage.  Six months after suit was filed, Hartford agreed to defend and appointed counsel from Forsberg.  Mr. Cushman continued to represent the Ardens in their counterclaims.  Three weeks into the matter, the Ardens, Forsberg and Cushman agreed a settlement plan would be developed by Forsberg and the Ardens understood that Hartford would fund the settlement and they would pay nothing.

The Duffys presented a $55,000 settlement demand on January 18, 2013.  The Ardens, concerned about criminal liability, requested that the settlement be accepted.   Hartford refused and requested an extension on the offer to obtain discovery from the Duffys.  The Hartford issued a reservation of rights (ROR) letter on January 30, 2013.  On February 25, 2013, discovery was completed and Forsberg reported to Hartford and Cushman that the value of the claim was $35,000.  On March 5, 2013, Hartford authorized settlement of $18,000.  The Duffys rejected this offer and made a $40,000 demand indicating it was their final offer.  The Ardens requested Forsberg accept the offer and Hartford authorized a $25,000 counteroffer which Hartford would pay.  On March 15, 2013, the Ardens, represented by Cushman, filed a bad faith suit against Hartford and later added Forsberg.  The State filed criminal charges on March 19, 2013 against Roff Arden.  In August 2013, the parties mediated all claims and Hartford agreed to pay $75,000 to the Duffys.  The claims not resolved were those against Forsberg.  The Ardens claimed Forsberg breached its fiduciary duties of disclosure and loyalty by failing to disclose its relationship with Hartford, and by failing to communicate and seek consent from the Ardens during settlement negotiations.  Both parties made cross motions for summary judgment.  The trial court granted Forsberg’s motions and dismissed Arden’s claims.  The court held that there was no disqualifying conflict of interest and therefore no breach of fiduciary duty.

The Court of Appeals affirmed summary judgment dismissal, finding no breach, and the Washington State Supreme Court affirmed the decision.  In its ruling, the Supreme Court clarified the duty of a lawyer hired by an insurance company and how and whether defending under a reservation of rights changes that duty. It found that the lawyers who had a previous coverage relationship with the insurer were not disqualified from representing an insured insured by the same company and the failure to obtain consent of this relationship between the insurer and the insured did not give rise to damages.  The Court reasoned, “[w]e reject the suggestion advanced that wherever a previous relationship between the insurer and retained counsel exists, a per se disqualification rule is supported.  We have no concerns recognizing the rule requiring disclosure of conflicts, potential or actual, in the context of attorneys hired by insurance companies to represent insureds’ interests in civil litigation, whether such representation is provided under a ROR or not.  These same responsibilities exist in the context of dual representation.” The Court determined that Forsberg met its duty of good faith under Tank v. State Farm Fire and Casualty Co., 715 P.2d 1133 (1986) that prohibits a law firm engaged from engaging in actions that demonstrate greater concern for interests of insurers that hired it over interests of insureds who it represented in the underlying action because Forsberg fully investigated the incident, informed the Ardens that it represented on the Ardens, and fully informed the Ardens of all settlement activity.

The Ardens argued that Tank required Forsberg to disclose a potential conflict under RPC 1.7. RPC 1.7(a)(2) states that a concurrent conflict of interest exists if there is “a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.” The Court found that no evidence that established a concurrent representation or actual conflict at the outset. But cautioned that the phrase “significant risk” underscores that this inquiry does not require a fully materialized conflict, but rather looks to the potential for conflict. In insurance cases where coverage is disputed, Tank recognizes the risk of potential conflicts and notes that the defense should be closely scrutinized. Under the rule, an attorney with an established relationship with the insurer could be “materially limited” in his or her ability to represent solely the interests of the insured.