Keeping Up with the Times: Nevada Supreme Court Declares Under What Circumstances Insurers Must Provide Independent Counsel

In an opinion issued on September 24, 2015, the Nevada Supreme Court addressed the issue of under what circumstances an insurer is obligated to provide its insured with independent counsel.

The case, State Farm Mut. Auto. Ins. Co. v. Hansen, arises out of injuries sustained by Hansen while attempting to leave a house party. A number of guests at the party were crowding around and sitting on Hansen and his companions’ vehicle in an attempt to prevent them from leaving. Eventually, amidst a hail of thrown bottles and rocks, the group managed to make their escape. Unfortunately however, the night did not end there. It came to a climatic conclusion when Brad Aguilar, a member of the “311 Boyz gang,” crashed his vehicle into the truck in which Hansen was riding while it was stopped at the residential subdivision’s security gate.

Hansen sued Aguilar, who was insured by State Farm. State Farm agreed to defend him under a reservation of rights. Specifically, the reservation of rights letter reserved the right to deny coverage for liability arising out of intentional acts and punitive damages. In a settlement agreement, Aguilar, in part, assigned his rights against State Farm to Hansen. Hansen then sued State Farm, alleging, in part, that State Farm had breached its contract with Aguilar by failing to provide him with independent counsel of his choosing. From this case, two questions were certified to the Nevada Supreme Court: (1) does Nevada law require an insurer to provide independent counsel to its insured when a conflict arises; and (2) if so, do reservation of rights letters create a per se conflict of interest?

The court decided the first question in accordance with the landmark California case San Diego Fed. Credit Union v. Cumis Ins. Soc’y, 208 Cal. Rptr. 494 (1984) to the extent that “when a conflict of interest exists between an insurer and its insured … the insurer [is required] to provide representation by permitting the insured to select independent counsel and by paying the reasonable costs of such counsel.” State Farm Mut. Auto Ins. Co. v. Hansen, 2015 Nev. LEXIS 86, *11 (2015).

The court decided the second question in accordance with the California approach as well, holding that courts must inquire on a case by case basis whether there is an actual conflict of interest. “[J]oint representation is permissible as long as any conflict remains speculative … [and] [a] reservation of rights does not create a per se conflict of interest.” Id. at *15-*16 (citations omitted).

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