A Washington appeals court just told liability insurers they cannot sue their own retained defense counsel using malpractice claims assigned from their insured.
The April 6 decision from the Washington Court of Appeals draws a firm line around a recovery strategy that some insurers have turned to when defense counsel's alleged negligence drives up the cost of a claim. The ruling will likely prompt liability insurers operating in Washington to rethink how they manage risk when the lawyers they hire to defend their policyholders perform poorly.
The dispute traces back to a personal injury at Vertical World, an indoor climbing gym. Michael Vandivere fell and was injured, allegedly because of a defective auto belay device manufactured by C3 Manufacturing LLC. Vandivere sued, and C3 turned to its primary liability insurer, Great American E & S Insurance Company, for a defense. Great American agreed to defend C3 but did so under a full reservation of rights – meaning it preserved the option to later deny coverage depending on how the facts developed.
Great American retained attorney J. Scott Wood to handle C3's defense. Wood initially practiced at Foley & Mansfield PLLP but moved to Sinars Slowikowski Tomasaka LLC in early 2022, and C3 retained Sinars as its new defense firm. At Sinars, Wood worked with attorney Christopher Furman on the Vandivere lawsuit.
That is where things went sideways. Between April 2022 and April 2023, Furman visited two Vertical World gym locations – including the one where Vandivere was hurt – on what the complaint described as dozens of occasions. Neither Furman nor Wood updated C3's discovery responses to disclose those visits, even though discovery obligations required it.
Meanwhile, C3's excess umbrella carrier, Houston Casualty Company, notified C3 that it was rescinding its $4 million policy, alleging that C3 had made material misrepresentations on its insurance application. Wood, who had already disclosed the existence of the Houston Casualty coverage to Vandivere, did not update C3's discovery responses to reflect the rescission.
Then came a conflict of interest. In April 2023, Wood left Sinars and joined Gordon Rees Scully Mansukhani LLP – the same firm that was representing Houston Casualty in its coverage dispute against C3. For about two weeks, Wood continued to represent C3 while his new firm simultaneously represented Houston Casualty on the opposing side. When the conflict was disclosed in May 2023, Wood and Gordon Rees withdrew from representing C3, leaving Great American scrambling to find new defense counsel just weeks before trial.
New counsel quickly disclosed what prior counsel had not. The parties learned about Houston Casualty's attempted policy rescission, and Vertical World informed Vandivere that Furman had visited its facilities more than two dozen times – all without disclosure. Vandivere moved for sanctions, and the trial court obliged, awarding monetary penalties and signaling that it would instruct the jury to draw a negative inference from C3's discovery failures. Vandivere then took the position that the misconduct effectively obligated Great American to cover any judgment in full, regardless of its policy limit.
Facing that pressure, Great American settled the case for $5 million – well above its $1 million primary policy limit – in addition to court-ordered sanctions against C3 and Sinars. As part of the settlement arrangement with C3, the insured assigned all of its legal malpractice and related claims against the defense lawyers and their firms to Great American.
Great American then sued the defense attorneys and firms, asserting malpractice and breach of fiduciary duty both on its own behalf and as the holder of C3's assigned claims. The superior court dismissed Great American's direct claims but allowed the assigned claims to proceed.
The Court of Appeals reversed on the assigned claims. The core of the ruling is that Washington public policy does not permit an insured to hand over its legal malpractice claims against defense counsel to the liability insurer that retained that counsel, at least not where there is a potential conflict between insurer and insured. A reservation of rights defense, the court reasoned, inherently creates that potential for conflict.
The logic is rooted in Washington's longstanding insistence that defense counsel's loyalty belongs exclusively to the insured, not the insurer that hired and paid them. Allowing the insurer to later acquire malpractice claims and use them against defense counsel would, in the court's view, create a chilling effect. Defense lawyers would have to weigh not only their client's interests but also whether the insurer might one day second-guess their decisions and call them malpractice. That kind of dual pressure is exactly what Washington law has long tried to prevent.
The court also pointed to the concern that permitting these assignments could discourage defense attorneys from taking on cases where the insured's potential liability exceeds available coverage. If defense counsel knew that their own assets and malpractice insurance could effectively become part of the settlement pool, the willingness to accept those representations could diminish – a result the court found contrary to public policy.
Great American argued that without the ability to pursue assigned claims, there would be no meaningful check on defense counsel negligence because the insured typically has little incentive to sue. The court was not persuaded, noting that the insured retains the right to bring its own malpractice claims and that the insurer already has significant tools at its disposal – including the power to select counsel, control over the defense, and the ability to terminate the relationship.
Notably, the court stopped short of a blanket prohibition. It left open the possibility that assignment might be permissible in cases where the insurer can show it accepted the defense unconditionally and there was no potential for conflict with the insured at any point during the underlying litigation. But where a reservation of rights is in play, the door is now closed.
The decision sends a clear message to liability insurers in Washington: when you defend under a reservation of rights, the defense lawyers you hire answer to your insured, and you cannot later acquire the insured's malpractice claims to hold those lawyers accountable for how they handled the case. Insurers looking to protect themselves from negligent defense counsel will need to rely on their existing tools – careful selection, control over the defense, and the ability to terminate the relationship – rather than post-hoc assignment arrangements.
The case has been remanded to the superior court with instructions to dismiss the assigned claims, with further proceedings to continue consistent with the opinion.
