At the end of last month, the Supreme Court of Nevada ruled an insured is entitled to independent counsel in situations where there is an actual conflict of interest between the insurer and the insured. State Farm Mut. Auto. Ins. Co. v. Hansen, 131 Nev. Adv. Op. 74 (2015) creates new conundrums and requirements for Nevada insurers.

What does Nevada consider a conflict of interest requiring independent counsel?

The Supreme Court rejected the idea that all reservations of rights created a conflict. Instead, the Court borrowed from California law and adopted Civil Code § 2860(b). In each case, if the three factor analysis below is satisfied, the insurer must pay for independent counsel selected by the insured.

1.Has a reservation of rights been issued?

2.Does the insurer-provided counsel havecontrol over an issue in the case that will also decide the coverage issue?

3.The perceived conflict must be significant, not merely theoretical, actual, not merely potential. Coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action do not create a conflict of interest.

Do punitive and excess damages create a conflict of interest in Nevada?

The Supreme Court did not answer this question. However, Hansen did borrow heavily from California Civil Code § 2860(b). If Nevada continues to follow California’s lead in this area, it may also adopt § 2860(b)’s statement that “[n]o conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.”

Mere allegations of excess and/or punitive damages do not create an “either / or” scenario, where one argument benefits the insured and the other benefits the insurer. Both the insured and insurer want to argue for lower damages and no punitive damages. Where excess or punitive damages are sought, the insurer-assigned attorney is not placed in a position of benefiting either the insured or the insurer.

How much can independent counsel charge?

Hansen did not answer this question. The normal checks and balances in an attorney-client relationship are not present when independent counsel is involved. Normally, if a lawyer’s bill is too high, a client becomes unhappy and may terminate the relationship. But independent counsel has no such restraint because the party that pays him (the insurer) has no control over whether to retain him in the first place and cannot fire him later. Independent counsel also has little prospect of repeat business, which further reduces the incentive to restrain billing.

If Nevada continues to follow California’s lead, it may adopt two other provisions in California Civil Code § 2860. One limits independent counsel’s rate to that normally paid by the insurer for defense of similar matters in the same geographic area. The other requires binding arbitration to resolve billing disputes. The arbitration requirement is less likely to be adopted via a judicial ruling and may require legislative action to implement.

Can the insurer audit independent counsel’s bills?

Hansen did not answer this question. Normally, an insurer’s assigned counsel is subject to auditing and bill review. This means the insurer will meticulously review all bills to detect overbilling or inappropriate billing. This benefits the insurer and insured by ensuring defense costs are reasonable and appropriate.

Yet what can an insurer do with independent counsel? If an exorbitant rate is charged and the billing provided is insufficient to evaluate what work was done and how it benefited the insured, can a insurer refuse to pay the bill? This area is fraught with peril, however it seems reasonable to insist that independent counsel utilize the litigation code set issued by the ABA and others, as well as to follow the billing guidance these professional bodies have issued.

What qualifications must independent counsel have?

Hansen did not answer this question. Insurers are a wealth of experience in selecting appropriately qualified attorneys to defend their insureds. Insureds, especially in personal lines, typically have little, if any, experience with the legal process or experience in evaluating which attorney is qualified to represent them in a particular case. A legitimate fear exists that the insured may select an independent counsel with minimal, if any, qualifications to defend the case.

If Nevada continues to follow California’s lead, Civil Code § 2860 allows the insurer to require 1) at least five years experience; 2) substantial defense experience in the areas of law at issue in the suit against the insured; and 3) independent counsel have errors and omissions coverage. These requirements do not affect the independence of the lawyers retained by the policyholder. Instead, it creates a safety net for the insured.

Must independent counsel cooperate with assigned counsel?

Hansen did not answer this question. In California, independent counsel must share all information except privileged information relating to coverage and panel counsel may fully participate in the defense alongside independent counsel. Even if independent counsel is involved, the insurer still has a strong interest because ultimately the insured will want it to pay any settlement or verdict. Further, Hansen did not extinguish the insurer’s contractual right to control settlement. Nor did Hansen extinguish the insured’s duty to cooperate with the insurer’s defense. This means, at a minimum, that the insurer will need its own counsel to review materials as the case proceeds and be present at settlement discussions and mediation.