Opinion 1214

I. Issues Presented: A. Whether an attorney who represents a receiver rehabilitating an insurance company has a conflict of interest if appointed by the receiver to defend individual insureds against third-party claims B. If a conflict exists, whether the attorney may represent both parties if disclosure and consent requirements are met.
II. Facts
Insurance Company is in receivership pursuant to RCW 48.31.060 and .120. The receiver is appointed to act on behalf of the Washington State Insurance Commissioner for the purpose of rehabilitating Insurance Company, which is insolvent. The receiver's duty is to conduct the business of the insurer and to administer the affairs and assets of the insurer. A significant part of the receiver's duty is to fulfill Insurance Company's duty to defend insureds in liability cases brought by third parties against insureds.
Two attorneys have been appointed special assistant attorney generals (AAG) to represent the receiver. One of the attorneys also expects to be hired by the receiver to represent insureds in third-party claims cases to fulfill the insurer's duty to defend under the policies.
The attorney has asked for an informal opinion concerning potential conflict of interest arising out of these representations. He has submitted a memorandum which concludes that no impermissible conflicts exist unless and until the receivership's purpose changes from rehabilitation to liquidation.
III. Proposed Opinion
A. An attorney who represents a receiver rehabilitating an insurer has a conflict of interest if appointed by the receiver to defend individual insureds against third-party claims.
It is assumed, for purposes of this memorandum, that the receiver appointed on behalf of the Insurance Commissioner, has the same authority and duties of the Insurance Commissioner. When the Insurance Commissioner acts under an order of rehabilitation, he or she essentially takes over management of the insolvent insurer and has the duty to remove the causes and conditions that have made the insurer insolvent. Kueckelhan v. Federal Old Line Ins. Co., 74 Wn.2d 304, 444 P.2d 667 (1968) (Kueckelhan II"); Kueckelhan v. Federal Old Line Ins. Co., 69 Wn.2d 392, 418 P.2d 443 (1966) (Kueckelhan I"). The only significant relevant differences between a receiver's duties and any insurer's duties are that the receiver owes a duty to all insureds as a group and owes a general duty to the public. Kueckelhan I and Kueckelhan II, supra; Herrmann v. Cissna, 82 Wn.2d 1, 507 P.2d 144 (1973).
The insureds' interests in third-party liability claims remain the same regardless of whether the insurer is in receivership for purposes of rehabilitation or whether the insurer is solvent and operating independently. The insured is interested in competent and vigorous defense of the third-party's claim, resulting in settlement or verdict below the amount of the policy limits, and in the insurer's payment of the full amount of liability owed under the policy, if any. The insured has no interest in preserving the financial integrity of his insurer if it interferes with the insurer's ability to fully respond to the claim being prosecuted against him.
The inquiring attorney maintains that a typical third-party defense case is only "superficially similar" to his position in the present case. His basis for this contention is unclear. As noted above, the insured's position remains unchanged. The receiver, however, owes a fiduciary duty to all insureds as a group to maximize assets available to pay claims. Certainly, this duty provides the receiver with an incentive similar to any insurer's profit incentive, to minimize payments on claims. Therefore, the receiver's duty to insureds generally does not appear to remove the potential conflict of interest.
The inquiring attorney also argues that no conflict can exist because the receiver and AAG are state officials and have a duty to treat all interested parties fairly. That conclusion does not follow from those premises - an AAG may have a conflict just like any other attorney, and, as noted above, a duty to an individual may conflict with duties to the individual's group.
The attorney acknowledges that the specter of liquidation always looms over a rehabilitation proceeding, as noted at page 5 of his memo: "Throughout, the Receiver and the AAG are aware that there may be an insufficient fund from which to pay all resolved claims. Discretion to pay policy limits may not be available to a Receiver in liquidation. The interests of each insured becomes adverse to any other insured due to this inadequate fund."
RPC 1.7, the general rule governing conflict of interest, describes two types of conflicts: (1) when two clients have "directly adverse interests;" and (2) when an attorney's representation of a client "may be materially limited" by the lawyer's responsibility to another person or himself. Conflict of interest rules are premised on the general principle that attorneys owe a duty of undivided loyalty to their clients. This duty of loyalty arises out of the attorney-client relationship, and cannot be dependent upon the status of another client as a receiver or officer of the State.
Certainly, so long as it reasonably appears that there will be sufficient assets to pay all claims, the conflict is potential, and not actual. The inquiring attorney appears to argue that the conflict becomes actual only when the rehabilitation is actually changed to a liquidation. However, it appears that the conflict would ripen earlier than the actual change to liquidation. As counsel for the receiver, the attorney would almost certainly learn that liquidation is seriously contemplated or will become necessary before the actual change to liquidation. At the time liquidation is seriously contemplated, the insured's best interests require prompt settlement of the matter before the change to liquidation to avoid loss of coverage. At this time, the receiver's interests would require minimizing settlements to preserve the maximum available funds for all insureds to minimize the loss to each insured. These interests are obviously in conflict, requiring the attorney to either obtain the receiver's consent to disclosure of the contemplated change to liquidation or not revealing the contemplated change to the insured. Either way, the attorney cannot act in the best interests of one of the clients.
B. The attorney probably cannot represent both parties even if disclosure and consent requirements are met because the attorney probably cannot reasonably believe that his representation of one client will not be materially limited by his responsibilities to the other.
RPC 1.7 allows an attorney to represent clients with conflicting interests if: (1) the lawyer reasonably believes that the representation will not adversely affect the relationships or that the conflict will not materially limit the representation; and (2) each client consents in writing, after consultation and a full disclosure of the material facts.
As noted above, the receiver and insured will have conflicting interests as of the time the receiver determines that liquidation is necessary or when liquidation is seriously contemplated. At that time, the attorney certainly could not reasonably believe that his representation of one client will not be adversely affected by his representation of the other.
The issue, therefore, is whether, knowing that this actual conflict may arise, the attorney may reasonably believe at any time that his representation may not be "materially limited" or adversely affected by the potential conflict. The attorney could reasonably believe this only if he assumes that the rehabilitation proceeding will not be changed to liquidation. As noted above, the possibility of liquidation must be considered very real whenever an insurance company goes into receivership. Indeed, it seems that the attorney for the receiver would necessarily be involved throughout the course of the receivership in discussions about the desirability or necessity of changing to a liquidation.
The attorney, in these circumstances, cannot reasonably assume that the proceeding will not be changed to a liquidation. Accordingly, the attorney cannot reasonably believe that his representation of at least one of his clients will not be materially limited by his representation of the other. Therefore, the attorney may not ask the receiver and the insured to further consent to the conflict.
Suggested Conclusion
The receiver's and insured's interests are necessarily in conflict because the receiver owes a duty to all insureds as a group, to maximize assets available for the payment of claims and the insured's interest is to obtain settlement promptly that will be completely paid by the company. Since liquidation must always be reasonably foreseen, and there is always a reasonable possibility that there will be insufficient funds to resolve the claims, the attorney cannot reasonably believe his representation of one client will not be materially limited by his representation of another. Accordingly, the attorney is precluded from representing both clients.