Parsons v. Continental National American Group
550 P.2d 94, 113 Ariz. 223, 1976 Ariz. LEXIS 269 (1976)
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Rule of Law:
An insurance carrier is estopped from denying coverage under its policy when its defense is based upon confidential information obtained by the carrier’s attorney from the insured, as a result of representing the insured in the original tort action, because such conduct violates the attorney's fiduciary duty and ethical obligations.
Facts:
- On March 26, 1967, 14-year-old Michael Smithey brutally assaulted his neighbors, Ruth, Dawn, and Gail Parsons.
- In April 1967, Frank Candelaria, a CNA claims representative, began investigating the incident and corresponded with Howard Watt, the Smitheys' private counsel.
- Candelaria wrote to CNA on August 11, 1967, stating he was reasonably convinced Michael was "not in control of his senses" at the time of the incident based on his investigation and discussions.
- On October 13, 1967, the Parsons filed a complaint alleging Michael Smithey assaulted them and that his parents were negligent.
- CNA's retained counsel undertook Michael Smithey's defense in the tort action.
- CNA's retained counsel secured a "complete and confidential file" on Michael, who was in a maximum-security institution, and advised CNA on November 10, 1967, that Michael was "fully aware of his acts" and the assault was "deliberate."
- After receiving this information, CNA sent a reservation of rights letter only to Michael's parents, stating that the policy specifically excluded liability for bodily injury caused by an intentional act.
- CNA's attorney preparing for trial interviewed Michael and reported to CNA, "His own story makes it obvious that his acts were willful and criminal."
Procedural Posture:
- Ruth, Dawn, and Gail Parsons filed a complaint in state trial court alleging Michael Smithey assaulted them and his parents were negligent.
- The trial court directed a verdict for Michael's parents on the negligence claim.
- The Arizona Supreme Court affirmed the directed verdict for Michael's parents. (Parsons v. Smithey, 109 Ariz. 49, 504 P.2d 1272 (1973)).
- The trial court granted the Parsons' motion for a directed verdict against Michael on liability, and judgment was entered against Michael for $50,000.
- The Parsons (appellants in subsequent proceedings) then garnished Continental National American Group (CNA) (appellee) in the Superior Court of Pima County.
- The trial court appointed a guardian ad litem for Michael in the garnishment action.
- The Superior Court of Pima County entered judgment in favor of the garnishee, CNA, finding the intentional act exclusion applied.
- The Parsons appealed the Superior Court's judgment to the Court of Appeals, Division Two.
- The Court of Appeals, Division Two, reversed the judgment of the Superior Court. (23 Ariz.App. 597, 535 P.2d 17 (1975)).
- CNA filed a petition for review with the Arizona Supreme Court.
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Issue:
Is an insurance carrier estopped from denying coverage under its policy when its defense in a garnishment action is based upon confidential information obtained by the carrier’s attorney from the insured as a result of representing him in the original tort action?
Opinions:
Majority - Gordon, Justice
Yes, an insurance carrier is estopped from denying coverage under its policy when its defense in a garnishment action is based upon confidential information obtained by the carrier’s attorney from an insured as a result of representing him in the original tort action. The attorney, retained by CNA to represent Michael Smithey in the personal liability trial, obtained privileged and confidential information from Michael, including his confidential file and through the attorney-client relationship. Both the A.B.A. Committee on Ethics and Professional Responsibility and the State Bar of Arizona Committee on Rules of Professional Conduct assert that an attorney representing an insured at the insurer's request owes undivided fidelity to the insured. Such an attorney may not reveal information detrimental to the insured in subsequent actions, as doing so would violate Canons regarding client confidences and create an impermissible conflict of interest. The attorney in this case should have notified CNA that he could no longer represent them when he obtained information detrimental to Michael’s interests. When an insurance company’s agent-attorney uses the confidential attorney-client relationship to gather information to deny the insured coverage, such conduct constitutes a waiver of any policy defense and is so contrary to public policy that the insurance company is estopped from disclaiming liability under an exclusionary clause. A reservation of rights agreement does not cure this conflict of interest, nor does Arizona's statute (A.R.S. § 20-1130) grant a carrier the right to engage an attorney to defend an insured while simultaneously building a defense against the insured for the insurer. Furthermore, CNA failed to enter into good faith settlement negotiations by refusing the Parsons' settlement offer within policy limits, despite its own counsel advising the claim was worth the policy amount.
Analysis:
This case significantly strengthens the attorney-client privilege in the context of insurance defense, establishing that an attorney hired by an insurer primarily represents the insured, not the insurer. It highlights the serious ethical breaches that occur when an attorney uses confidential information obtained from an insured to aid the insurer in denying coverage. The ruling serves as a strong deterrent against such conflicts of interest and emphasizes that an insurer cannot use its contractual right to select counsel as a means to undermine its insured's coverage. This precedent impacts future cases by holding insurers strictly accountable for the ethical conduct of their appointed counsel and by affirming the paramount duty of loyalty owed by defense attorneys to their insured clients.
