The Nevada Supreme Court, responding to certified questions, determined that an insurer must provide independent counsel for its insured when a conflict of interest arises between the insurer and insured. State Farm Mut. Auto. Ins. Co. v. Hansen, 2015 Nev. LEXIS 86 (Nev. Sept. 24, 2015).
The insured struck the vehicle of another driver, Hansen. Hansen sued the insured alleging both negligence and various intentional torts. State Farm agreed to defend under a reservation of rights. The reservation of rights letter reserved the right to deny coverage for liabiltiy resulting from intentional acts and punitive damages.
The insured admitted to negligently striking the other vehicle, and summary judgment was granted in Hansen's favor on the negligence claim. A settlement was reached and the insured assigned its rights against State Farm to Hansen. Hansen then sued State Farm in federal court, alleging that State Farm had breached its contract, breached the implied covenant of good faith and fair dealing, and violated the Nevada Unfair Claims Practices Act.
The federal district court certified questions to the Nevada Supreme Court.
The Nevada Supreme Court first considered the right to insurer-provided independent counsel. It noted that courts rejecting the Cumis rule had not recognized the existence of a conflict of interest in such cases. The court cited the Hawaii Supreme Court's decision in Finley v. Home Ins. Co., 975 P.2d 1145 (Haw. 1998), as one court which reasoned that the sole client is the insured, and therefore, counsel only owes a duty to the insured.
Nevada, however, was a dual-representation state where the insurer-appointed counsel represented both the insurer and the insured. Therefore, counsel could not represent both the insurer and the insured when their interests conflict and no special exception applies. Where the clients' interest conflicted, the rules of professional conduct prevented the same lawyer from representing both clients. Therefore, Nevada law required the insurer to satisfy its contractual duty to provide representation by permitting the insured to select independent counsel and by paying the reasonable costs of such counsel.
The second certified question asked whether a reservation of rights created a per se conflict of interest. The Nevada court followed the California approach and held that a reservation of rights did not create a per se conflict. Courts would have to inquire, on a case-by-case basis, whether there was an actual conflict of interest.