(Article from Insurance Law Alert, June 2020)
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The Washington Supreme Court refused to disqualify insured’s counsel in a bad faith suit against its insurer, notwithstanding that the law firm had represented the insurer in over 165 matters over a ten-year period, including numerous bad faith suits. Plein v. USAA Casualty Ins. Co., 2020 WL 2568541 (Wash. May 21, 2020).
Homeowners retained a law firm to represent them in a bad faith suit against their property insurer. The suit was based on the insurer’s refusal to pay for certain costs arising out of fire damage. Members of the firm had served as the insurer’s defense counsel for many years, and had thus gained access to the insurer’s litigation strategies and claims handling practices, among other things. In addition, the firm acted as the insurer’s defense counsel in several suits alleging bad faith pursuant to Washington statutory law, including a suit based on the insurer’s handling of fire damage claims. As such, the insurer moved to disqualify the law firm pursuant to the Rules of Professional Conduct (“RPC”) 1.9(a), which states:
A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.
A trial court denied the insurer’s motion to disqualify, finding that the instant matter was not substantially related to the firm’s prior representation of the insurer. An appellate court reversed. The appellate court relied on comment 3 to RPC 1.9, which states that matters may be substantially related if there “is a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.” The appellate court reasoned that the law firm learned significant confidential information about the insurer’s strategies for bath faith litigation through its prior representation of the insurer, thus giving rise to a significant risk that the law firm had gained information that would materially advance the homeowners’ suit. The Washington Supreme Court reversed.
Addressing this matter of first impression under Washington law, the Washington Supreme Court ruled that (1) the insurer bears the burden of demonstrating a “substantial relationship” between the present and previous matters, and (2) that no such showing had been made. The court reasoned that “substantially related” requires a factual relationship between the prior and pending matters—e.g., that the matters turn on the same “particular situation or transaction.” The court concluded that no such factual relationship existed here, notwithstanding the firm’s prior representation of the insurer in a fire damage-related bath faith suit. Citing to Fifth Circuit precedent, the court found that an insurer’s business customs, including “confidential claims handling materials” and “litigation philosophies and strategies,” constitute general knowledge of a client’s policies which, under comment 3 to RPC 1.9, “ordinarily will not preclude a subsequent representation.” In addition, the court noted that comment 2 to RPC 1.9 states that “a lawyer who recurrently handled a type of problem for a former client is not precluded from later representing another client in a factually distinct problem of that type even though the subsequent representation involves a position adverse to the prior client.” Finally, the court declined to disqualify the firm based on the “playbook” or “duty of loyalty” approaches, deeming them inconsistent with RPC 1.9.