Nevada Considers Cumis Counsel Requirement

It appears that it will soon be clear whether Nevada will follow California's requirement that an insurer provide independent counsel to an insured where its reservation of rights creates a conflict of interest between the insurer and its insured.  In Hansen v. State Farm Mut. Auto Ins. Co. (2013 WL 6086663), the U.S. District Court, District of Nevada, certified to the Nevada Supreme Court, the question of whether an insurer is required to provided independent counsel to an insured when a conflict of interest arises between the two (i.e., Cumis counsel). The case originally involved civil claims against State Farm’s insured. A demand to defend was made on State Farm, which agreed to defend under a reservation of rights. Ultimately, the insured signed a settlement agreement and assigned their rights against State Farm to the plaintiffs; State Farm did not approve the settlement before it was signed. State Farm claimed that settling without its consent constituted breach of the insurance policy and moved for summary judgment. The court denied the motion, finding that State Farm's defending under a reservation of rights created a conflict of interest between the insured and insurer. Because State Farm did not provide independent counsel to the insured, State Farm breached the insurance policy, not the insured (or the plaintiffs who were standing in their shoes).

State Farm then moved to reconsider summary judgment denial, interlocutory review of the denial of summary judgment, or certification of the question to the Nevada Supreme Court. Other states like California (in the Cumis case) require an insurer to provide independent counsel to an insured where the insurer's reservation of rights creates a conflict.  Although the requirement of independent counsel is consistent with Nevada case law, the Nevada Supreme Court never expressly adopted or applied Cumis or expressly imposed an independent counsel requirement in those circumstances. The District Court certified two questions to the Nevada Supreme Court:

(1) Does Nevada law require an insurer to provide independent counsel for its insured when a conflict of interest arises between insurer and insured; and

(2) If yes, would the Nevada Supreme Court find that a reservation of rights letter creates a per se conflict of interest?

The Court recognized that the question may be rephrased and also denied State Farm’s motion for reconsideration and interlocutory review.