Bad Faith Isn't So Bad When No Damages Are Suffered
December 4, 2017
The Supreme Court of Washington recently determined that a law firm with an insurer as a client may defend a policyholder of that insurer in an unrelated matter, without creating a conflict of interest. They do not even have to disclose to the insured that it regularly represents the insurer in coverage matters, but only because the insured (plaintiff) had not established any damages as a result of the failure to disclose. The case is Arden v. Forsberg & Umlauf, PS, 189 Wash. 2d 315, 402 P.3d 245(2017).
The plaintiffs, Roff and Bobbi Arden, had a homeowners insurance policy through Property and Casualty Insurance Company of Hartford (Hartford). In late 2011, Roff suffered a posttraumatic stress disorder attack and shot and killed a six-month-old Labrador puppy owned by his neighbors, the Duffys. In June 2012 the Duffys sued the Ardens for willful conversion, malicious injury, intentional infliction of emotional distress, and gross negligence. In response to the suit, the Ardens sought liability coverage through Hartford, who initially denied defense and coverage based on an exclusion in the policy for intentional acts. The Ardens retained private counsel, Jon Cushman, to seek coverage from Hartford and assert counterclaims against the Duffys.
In November, Hartford agreed to defend and provide representation for the Ardens and retained the law firm Forsberg Umlauf PS (Forsberg) to defend the Ardens against the Duffy's claims after discussions with the Ardens private counsel. Hartford made it clear that Forsberg would not be representing the Ardens for their counterclaims against the Duffys. Forsberg sent the Ardens a letter that explained that it was defending them in a lawsuit and would not be providing any coverage advice to them or to Hartford. Although Hartford did not reserve their rights to deny coverage, when the Ardens issued a settlement demand Hartford sent a reservation of rights letter.
Deposition testimony showed that the appointed attorneys, who worked for Forsberg, had a “long-standing relationship” with Hartford including representing Hartford on coverage matters as well as representing Hartford's insureds. Hartford did not disclose their relationship with Forsberg to the Ardens.
Forsberg planned to develop a settlement plan for the Ardens that depicted Hartford paying any settlement that was reached and the Ardens paying nothing. The Duffys made a timed settlement demand of the Ardens for $55,000. Cushman demanded that Forsberg accept the demand and Hartford pay the money, but Hartford declined because they didn't have enough information about claimed damages and case value. Cushman did not object to a request for a time extension.
After receiving discovery responses, Forsberg completed a case evaluation, shared it with Cushman, and sent it to Hartford. It included information that Forsberg believed the case could be settled for $35,000, and informed Cushman that it would let the timed demand expire, then offer $18,000 in an effort to eventually settle for $35,000. Neither the Ardens nor their attorney, Cushman, objected. The Duffys then made another timed settlement demand for $40,000. Hartford told Cushman it would allow this timed demand to also expire then offer $25,000. Although Cushman did not object to this proposal at the time, he later argued that Hartford acted in bad faith when they did not accept the $40,000 demand. The Duffys rejected the offer for $25,000.
The Ardens filed suit against Hartford asserting, among other claims, bad faith. They later added Forsberg as a defendant for breach of fiduciary duty and legal negligence. Eventually Hartford, the Ardens, and the Duffys settled their claims at a mediation, leaving only the Ardens' claims against Forsberg. The trial court dismissed the Ardens' claim against Forsberg. The Ardens then appealed, asking the Supreme Court of Washington to clarify the duties of insurance defense counsel and the remedies available when those duties are breached.
The Court determined that the requirements of Tank (Tank v. State Farm Fire & Casualty Co.,105 Wn.2d 381, 715 P.2d 1133 (1986)) may not apply because the “inherent conflict of interest concern in Tank did not fully materialize” in the case at hand. Then the Court assessed Forsberg's duty to disclose, and whether or not that duty applied to its relationship with Hartford. The Court identified that Forsberg could be found liable under RPC 1.7 if Forsberg's work for Hartford created a “significant risk” of a material limitation on the Ardens' representation. The Court held that, even if they assumed there was a breach of the duty to disclose a preexisting relationship, the Ardens would not have grounds on which to recover because they failed to establish any damages as a result of the alleged breach of duty.
Editor's Note:
Although the Court of Appeals applied the Tank analysis and believed that the Tank analysis fit the case, the Supreme Court of Washington decided that because (1) the insurer did not initially defend under a reservation of rights and (2) the insurer still made settlement offers notwithstanding its reservation to deny coverage and was never asked to contribute for a settlement, Tank may not apply. The Court determined that since Forsberg fully investigated the incident, informed the Ardens that it represented only the Ardens, and kept the Ardens fully informed of all settlement movement, Forsberg did not breach the duty of good faith.
During this case two experts provided differing opinions on whether the conduct in this case constituted a breach of duty. The Court noted that competing expert opinions generally would give rise to a genuine issue of fact, which would have precluded a decision of summary judgment.