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Arden v. Forsberg & Umlauf, P.S.

Supreme Court of Washington, En Banc

September 14, 2017

ROFF ARDEN and BOBBI ARDEN, adult husband and wife, Petitioners,
FORSBERG & UMLAUF, P.S., a Washington State professional services corporation; JOHN HAYES and "JANE DOE" HAYES, adult Washington State residents including any marital community; WILLIAM "CHRIS" GIBSON and "JANE DOE" GIBSON, adult Washington State residents including any marital community; and DOE DEFENDANTS I through V, Respondents.

          JOHNSON, J.

         This case involves claims of breaches of fiduciary duty and legal malpractice against lawyers hired to defend insureds in a civil action where the insurance company provided the defense.[1] The insureds claim the lawyers violated their professional responsibilities by failing to disclose a potential conflict based on a long-standing relationship the law firm had with the insurance company in not only accepting cases representing insureds in civil cases, but also at some time representing the insurance company in coverage disputes. The insureds also claim the attorneys violated their professional responsibilities by failing to advise them of settlement negotiations and by taking settlement directions from the insurer.

         The Court of Appeals affirmed the trial court's summary judgment dismissal and held that under the facts of this case, the Ardens failed to establish an actionable breach. Arden v. Forsberg & Umlauf, PS, 193 Wn.App. 731, 373 P.3d 320, review granted, 186 Wn.2d 1009, 380 P.3d 484 (2016). While we disagree with portions of the Court of Appeals' analysis, we affirm in result.

         Facts and Procedural History

         Roff and Bobbi Arden had homeowners insurance with Property and Casualty Insurance Company of Hartford (Hartford). In December 2011, Roff Arden, allegedly suffering a posttraumatic stress disorder attack, shot and killed a, six-month-old Labrador puppy owned by his neighbors Wade and Ann Duffy. In June 2012, the Duffys sued the Ardens, alleging willful conversion, malicious injury, intentional infliction of emotional distress, and gross negligence. The Ardens sought liability coverage with their insurer, Hartford. Initially, Hartford denied a defense and coverage based on the policy's intentional act exclusion. The Ardens thereafter retained private counsel, Jon Cushman, to seek coverage and to assert counterclaims against the Duffys. In November 2012, after communications from Cushman, Hartford agreed to defend and provide representation to the Ardens. Hartford appointed attorneys John Hayes and William "Chris" Gibson of the firm Forsberg & Umlauf PS to defend against the Duffys' claims. It was made clear that the appointed attorneys would not represent the Ardens in the counterclaims. Cushman remained as counsel in the lawsuit for those purposes.

         Although no evidence exists nor do the Ardens claim in the record that Hayes, Gibson, or the Forsberg firm simultaneously represented the Ardens and Hartford, deposition testimony shows that both Hayes and Gibson (hereinafter referred to collectively along with Forsberg & Umlauf PS as "Forsberg") had a "long-standing relationship" with Hartford. Arden, 193 Wn.App. at 745. Forsberg had an established relationship with Hartford that included representing Hartford on coverage matters as well as representing Hartford's insureds. The record indicates Forsberg did not disclose its relationship with Hartford to the Ardens.

         Procedurally, matters progressed relatively quickly. A few weeks after being appointed, the Ardens met with Forsberg and Cushman to discuss the case. It was agreed that a settlement plan would be developed by Forsberg, and it was understood that the Ardens' position was that Hartford pay any settlement and that the Ardens contribute nothing.

         Thereafter, discovery interrogatories were sent to the Duffys. On January 18, 2013, the Duffys presented a settlement demand of $55, 000. Concerned about potential criminal exposure, the Ardens wished to resolve the case quickly. On behalf of the Ardens, Cushman informed Forsberg that the Ardens wished to accept the settlement offer and demanded that Hartford fully fund the settlement. Hartford refused and requested that an extension on the settlement offer be sought in order to obtain discovery from the Duffys. On January 30, 2013, Hartford issued a reservation of rights (ROR) letter.

         On February 25, 2013, after discovery was completed, a phase litigation report was prepared by Forsberg, valuing the Duffys' claim up to $35, 000. This report was communicated to Hartford and to Cushman, and was approved by Cushman. No objection to the plan was made.

         On March 5, 2013, Hartford, after issuing the ROR, authorized a settlement offer of $18, 000. The offer was rejected by the Duffys. Cushman then contacted the Duffys and requested a counteroffer. The Duffys responded with a $40, 000 demand and indicated it was their final offer. Consistent with the Ardens' directions, Cushman again demanded that Hartford fund the settlement. On March 14, 2013, Hartford notified Forsberg that it would not fund a $40, 000 settlement but authorized a counteroffer at $25, 000, which Hartford would pay. While the settlement offers were communicated to Cushman and the Ardens, the Ardens assert that Forsberg did not obtain approval by them before they were presented to the Duffys. No settlement was reached at that time.

         On March 15, 2013, the Ardens, still represented by Cushman, filed the instant suit against Hartford, asserting bad faith and other claims. Forsberg was later added as a defendant.[2] This suit is the subject of our review.

         On March 19, 2013, the State filed criminal charges against Roff Arden, which prompted an agreement to suspend temporarily any work on the Duffy civil case. Based on being added as a defendant to the suit, Forsberg withdrew as the Ardens' attorneys from the Duffy lawsuit.

         In August 2013, all parties participated in a "global mediation" affecting both cases. Hartford agreed to pay a settlement of $75, 000 to the Duffys in the Duffy lawsuit.[3] The Duffy lawsuit, including the counterclaims, was dismissed. In the case before us, all bad faith and other claims against Hartford were resolved and dismissed.

         The claims not resolved in the mediation were the Ardens' claims against Forsberg. The Ardens continue to pursue those claims based on the assertions that Forsberg breached its fiduciary duties of disclosure and loyalty by failing to disclose its relationship with Hartford, and by failing to communicate and seek consent from the Ardens during settlement negotiations. Both parties made cross-motions for summary judgment. The trial court granted Forsberg's motions, denied the Ardens' motion, and dismissed the remainder of the Ardens' claims. The court held that there was no disqualifying conflict of interest and therefore no breach of fiduciary duty. In addition, it found no support for recovery of damages for either emotional distress or attorney fees, which were the remedies sought. The Ardens appealed.

         On appeal, the Court of Appeals, Division Two, affirmed dismissal of the Ardens' claims. In its opinion, the court outlined defense counsel's duties under the Rules of Professional Conduct (RPC) and Tank v. State Farm Fire and Casualty Co., 105 Wn.2d 381, 715 P.2d 1133 (1986). Arden, 193 Wn.App. at 744-45. The opinion reasoned that retained counsel in an ROR case who has a longstanding relationship with the insurer has no duty to disclose the relationship to its insured. Regarding settlement negotiation, the court held that while there may be disputed facts as to whether Forsberg breached its duty to consult with the Ardens, there was no evidence that any breach caused injury and it affirmed the trial court's holding.

         In the briefing before us, the Ardens request that this court clarify the duties of insurance defense counsel and the remedies available when those duties are breached. While we disagree somewhat with the Court of Appeals' discussion of the reasoning from Tank and the disclosure requirements under the RPCs, we reach the same conclusion.[4] Under the ...

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