By Dominica C. Anderson and Daniel B. Heidtke
In a 6-0 decision issued on September 24, 2015, the Nevada Supreme Court held that the California rule first announced in San Diego Fed. Credit Union v. Cumis Ins. Soc’y, 162 Cal. App. 3d 358 (1984), and the analysis of the California Court of Appeal’s decision in Fed. Ins. Co. v. MBL, Inc., 160 Cal. Rptr. 3d 910, 920 (Ct. App. 2013), a case in which Duane Morris LLP represented the insurer, also applies in Nevada. With its decision in State Farm Mutual Automobile Ins. Co. v. Hansen, 131 Nev. Adv. Op. 74, Case No. 64484 (2015), the Nevada Supreme Court held Nevada law requires an insurer to provide independent counsel for its insured when an actual conflict of interest arises between the insurer and the insured. Consistent with California law on the matter, the Court also held that a reservation of rights does not create a per se conflict of interest between insurer and insured.
In Hansen, the U.S. District Court for the District of Nevada, District Court Judge Miranda M. Du, submitted the following two certified questions to the Nevada Supreme Court:
(1) Whether “Nevada law require[s] an insurer to provide independent counsel for its insured when a conflict of interest arises between the insurer and the insured[;]” and
(2) Whether, if the first question is answered affirmatively, the Nevada Supreme Court would “find that a reservation of rights letter creates a per se conflict of interest”?
In response, the Nevada Supreme Court discussed its earlier decision in Nev. Yellow Cab Corp. v. Eighth Judicial Dist. Ct., 123 Nev. 44, 152 P.3d 737 (2007), and noted that Nevada is a “dual-representation state: Insurer-appointed counsel represents both the insurer and the insured.” Because Nevada is a dual-representation state, like California, counsel may not represent both the insurer and the insured when their interests conflict, and no special exception applies. According to the Court, therefore, when the insured and the insurer have opposing legal interests, Nevada law requires insurers to fulfill their contractual duty to defend their insureds by allowing insureds to select their own independent counsel and paying for such representation. However, an insurer is only obligated to provide independent counsel when the insured’s and the insurer’s legal interests actually conflict and the existence of a reservation of rights is not a per se conflict.
In arriving at its decision that an actual conflict is required in order to trigger the requirement of independent counsel, the Nevada Supreme Court analyzed California law. In California, courts must consider whether a conflict of interest actually exists and not simply look for a reservation of rights. Fed. Ins. Co. v. MBL, Inc., 160 Cal. Rptr. 3d 910, 920 (Ct. App. 2013). The Nevada Supreme Court accepted the reasoning of the MBL case, and held that “[c]ourts must inquire, on a case-by-case basis, whether there is an actual conflict of interest[,]” rather than looking merely at the existence of a reservation of rights. The Court stated, “dual-representation is appropriate as long as there is ‘no actual conflict.’” See Nev. Yellow Cab, 123 Nev. at 51, 152 P.3d at 741.