Bad Faith - Nevada Supreme Court Upholds Disqualification Of Insured’s Counsel In Bad Faith Action Against Insurer
Last week, in Nevada Yellow Cab Corporation v. Eighth Judicial District Court, No. 46579 (March 8, 2007), the Nevada Supreme Court denied a mandamus petition challenging the disqualification of the insured’s counsel
in a bad faith action against an insurer, where the disqualified counsel had previously been retained by the insurer to represent the insured in an underlying tort action. In so holding, the court expressly adopted the rule
that counsel retained by an insurer to represent its insured represents both the insurer and insured in the absence of a conflict.
Nevada Yellow Cab arose from an accident between a cab driver and the underlying plaintiff. Nevada Yellow’s Cab’s insurer, Insurance Company of the West (ICW), retained Vannah Costello Canepa Riedy &
Rubino (VCCRR) to defend Nevada Yellow Cab. Petitioner Robert Vannah, who was a partner in VCCRR, did not personally work on the case; instead, work was performed by other VCCRR attorneys. In November 2002, ICW replaced VCCRR with
another firm without Nevada Yellow Cab’s consent. Shortly before trial, the underlying plaintiff offered to settle for policy limits; ICW instructed new counsel to reject the offer. In the middle of trial, the case settled
for $1.3 million, $800,000 more than the policy limits. The insured was required to pay $500,000 towards the settlement.
In 2003, VCCRR dissolved and Vannah formed a new firm, Vannah Costello Vannah & Ganz (VCVG). An associate from VCCRR who had previously defended Nevada Yellow Cab joined the new firm. In June 2003, Nevada Yellow Cab retained
VCVG to file a bad faith action against ICW based on ICW’s failure to accept the policy limits offer and the subsequent settlement in excess of policy limits. ICW asked VCVG to withdraw because of a conflict, but VCVG refused.
After a failed mediation, ICW moved to disqualify VCVG. The district court concluded that the potential conflict was too great and granted the motion. Vannah, VCVG and Nevada Yellow Cab then filed a petition for a writ of mandamus.
In considering the petition, the Nevada Supreme Court found that even though ICW waited two years to seek disqualification, ICW had not waived any conflict because its conduct did not demonstrate a clear intent to relinquish its
rights to challenge VCVG. Turning to the conflict of interest, the court noted that three elements must be established by the party seeking disqualification: (1) that it had an attorney-client relationship with the lawyer; (2) that
the former matter and the current matter are substantially related; and (3) that the current representation is adverse to the party seeking disqualification. Adopting the rule that counsel retained by an insurer to defend its
insured represents both the insurer and insured in the absence of a conflict, the court concluded the first element was satisfied. The court also found the second factor was met because the district court could have reasonably inferred
that the associate obtained confidential information concerning ICW’s handling of the claim during the three-year period of prior representation. It further noted that the manner in which ICW had handled the claim against
Nevada Yellow Cab was the precise subject of the underlying litigation. The third element was not in dispute because VCVG’s current representation was adverse to ICW. Under these circumstances, the court concluded that
the district court had not abused its discretion and accordingly denied mandamus relief.