Background
Michael Vandivere was injured while climbing at Vertical World, an indoor climbing gym. He sued and named C3 Manufacturing LLC as a defendant, alleging that C3 manufactured a defective auto belay device that failed to arrest his fall. C3 had two applicable liability policies: a $1 million primary policy with Great American E & S Insurance Company and a $4 million excess umbrella policy with Houston Casualty Company. Great American defended C3 under a full reservation of rights to deny coverage and retained attorney J. Scott Wood, then with Foley & Mansfield PLLP, as defense counsel.
Multiple problems emerged during the defense. Wood and his colleague Christopher Furman, after moving to Sinars Slowikowski Tomasaka LLC, visited the climbing gym where Vandivere was injured “more than two dozen times” between April 2022 and April 2023 but failed to disclose these visits in discovery responses. Additionally, when Houston Casualty attempted to rescind its $4 million umbrella policy, defense counsel failed to update C3’s discovery responses with this information. Most significantly, when Wood joined Gordon Rees Scully Mansukhani LLP, the firm simultaneously represented both Houston Casualty in its coverage dispute with C3 and represented C3 in the underlying lawsuit—a clear conflict of interest. After the conflict was disclosed and Gordon Rees withdrew merely weeks before trial, Great American was forced to retain new counsel. Vandivere successfully moved for sanctions against C3 for discovery misconduct.
The case settled for $5 million, with Great American funding the entire amount. As part of the settlement, C3 assigned its legal malpractice claims against the defense counsel to Great American, which then sued for malpractice and breach of fiduciary duty. Defense counsel moved for judgment on the pleadings, arguing that Washington public policy prohibits such assignment.
The Court’s Holding
The Washington Court of Appeals held that Washington public policy prohibits an insured from assigning legal malpractice claims against retained defense counsel to their liability insurer where there is potential conflict between the insurer and the insured. The court reversed the trial court’s denial of defense counsel’s motion for judgment on the pleadings, effectively dismissing Great American’s claims.
The court grounded its decision in the principle of “unitary representation” under Washington law: in the tripartite relationship between insurer, insured, and defense counsel, only the insured is the client. Defense counsel owes a fiduciary duty solely to the insured without competing loyalties. When an insurer defends under a reservation of rights to deny coverage—as Great American did here—the insurer owes an “enhanced obligation” to the insured that includes ensuring counsel represents only the insured’s interests. Permitting the assignment would create precisely the divided loyalty that Washington law prohibits. If defense counsel faced potential malpractice liability from the insurer based on defense decisions, counsel would be incentivized to satisfy the insurer’s interests rather than the insured’s, particularly in situations where they conflict.
The court acknowledged that conflicts between insurers and insureds routinely arise—when claims exceed coverage limits, when coverage availability depends on litigation outcomes, or when the insurer disagrees with settlement strategy. In all such cases, counsel must serve only the insured. The court applied Washington precedent limiting adversarial assignments of malpractice claims and found that all relevant public policy concerns applied here, particularly the concern that assignment would make defense counsel’s assets a potential recovery fund for settling underlying cases, potentially deterring competent counsel from accepting representations where defendant’s liability exceeds available assets or coverage.
Key Takeaways
- Washington public policy prohibits assignment of legal malpractice claims from an insured to their liability insurer when potential conflict exists between them
- The prohibition applies regardless of whether the insurer and insured are litigation adversaries
- When a liability insurer defends under a reservation of rights to deny coverage, potential conflict between insurer and insured is inherent in the relationship
- Defense counsel’s ethical duty runs solely to the insured client, and allowing assignment would create improper competing loyalties
- Insurers retain other remedies, including their control over defense counsel selection, monitoring, and termination
Why It Matters
This decision significantly impacts liability insurance practice and the attorney-client relationship in defense work. By blocking assignment, the court prevented insurers from shifting to defense counsel the costs of inadequate oversight or poor selection decisions. More fundamentally, the ruling preserves the integrity of the insurance defense relationship by ensuring that defense counsel’s only loyalty is to the insured, not to the financial interests of the insurer that pays the bills. This is critical where insurer and insured interests diverge—such as when a settlement within limits favors the insured while the insurer believes aggressive litigation could reduce exposure.
The decision also protects against perverse incentives that could harm defendants. If insurers could sue defense counsel through assignment of malpractice claims, counsel would face pressure to pursue strategies benefiting the insurer’s coverage position rather than the insured’s litigation interests, potentially leading to inadequate representation. By rejecting assignment, Washington law ensures that a defendant’s own insurance carrier cannot use litigation strategy as a basis to undermine or replace defense counsel for pursuing the defendant’s interests over the insurer’s preferred approach.