National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The facts in Nationwide Mut. Ins. Co. v. Karl, No. 33651 (W. Va. February 14, 2008) concerned an auto case in which Nationwide assigned its staff counsel to defend the insured defendant.  During voir dire, the plaintiff proposed that the jury panel be asked whether any of the prospective jurors had a relationship with the members of defense counsel's law firm, which was identified as the "Nationwide Trial Division."  After the judge refused, the defendant sought a continuance so that it could appeal the ruling.  Although plaintiff's counsel offered to withdraw the request to avoid a continuance or delay of the trial, the judge insisted on giving the original proposed question, stating that he felt that this was an important issue to resolve given the large number of cases on his docket in which the Nationwide Trial Division was involved.   Nationwide thereafter filed a Petition for Writ of Prohibition and the trial was continued while the appeal proceeded.

In its opinion, the West Virginia Supreme Court grappled with two conflicting concerns.  On the one hand, identifying potential personal prejudice is an important aspect of voir dire.  On the other hand, rules of court bar the introduction of information about available insurance coverage for fear that it may prejudice juries and result in higher verdicts. 

While attempting to balance these concerns, the Supreme Court refused to find that the rule against introducing evidence of insurance should bar any inquiry into the affiliation of defense counsel, citing similar holdings from Indiana and Missouri. Despite Nationwide’s contention that such a requirement would improperly inject the issue of insurance coverage into the trial, the Supreme Court agreed with the trial judge that inquiry into whether a prospective juror is associated in some manner with the Nationwide Trial Division was a proper subject of voir dire.Nevertheless, in recognition of Nationwide's concerns, the Supreme Ccourt recommended that a different method of inquiry be used whereby jurors would only be asked if they had any interest with respect to the Nationwide Trial Division without specifically identifying its relationship to defense counsel

This case had been pending for several years and was closely watched by both members of the Texas defense bar and the insurance industry.   The Texas Supreme Court began its analysis by citing Tilley and Traver and reaffirming that in every instance, the insured’s lawyer “owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured” and “must at all times protect the interests of the insured if those interests would be compromised by the insurer’s instructions.”

In essence, the appeal presented two issues:

1. In using staff attorneys to discharge their contractual duty to defend insureds against liability claims, are [Insurance Companies] engaging in the unauthorized practice of law?; and
2. If not, must a staff attorney’s affiliation with an insurer be fully disclosed to the insured?

The court began its analysis by noting the American Bar Association Committee on Ethics and Professional Responsibility and the State Bar of Texas Committee on Interpretation of the Canons of Ethics have both concluded the use of staff attorneys was not unethical.  The court then reviewed its analysis from a 1944 opinion in Hexter Title & Abstract Co. v. Grievance Committee, 179 S.W.2d 946 (Tex. 1944), and applied three factors to be considered in determining whether a liability insurer is practicing law by using staff attorneys to defend claims against insureds. 

One factor is whether the company’s interest being served by the rendition of legal services is an existing interest or only a prospective interest.  A second factor is whether the company has a direct, substantial financial interest in the matter for which it provides legal services.  Most important, a third factor is whether the company’s interest is aligned with that of the person to whom the company is providing legal services.  Applying these factors, the high court concluded a liability insurer does not engage in the practice of law by providing staff attorneys to defend claims against insureds, provided that the insurer’s interests and the insured’s interests in the defense in the particular case at bar are “congruent.”  The court indicated the insurer’s interests are congruent with their insured’s interests when they are aligned in defeating the third party claim against the insured and there is no conflict of interest between the insurer and the insured.  The staff attorneys must, however, disclose their relationship (i.e. the identity of their employer) to the insured. 

It is important to note the high court did not hold that a conflict of interest existed automatically just because the liability insurer issued a reservation of rights or non-waiver agreement.  Instead, the court held such conflicts had to be addressed on a case-by-case basis.  The court did caution that the safer course of action was to only use staff counsel where there are no coverage issues raised by the claims against the insured.   

This decision will generate some confusion. For example, the court properly recognized that merely issuing a reservation of rights letter does not create an automatic conflict of interest between the insurer and insured.  The court, however, didn’t use this opinion to explain the factors or standards to evaluate and resolve such potential or alleged conflicts.  Of similar importance, some carriers have been defending UM/UIM value disputes in Texas with staff counsel.  Although not specifically addressed in Friday’s decision, a disputed UM/UIM claim would seem to involve non-congruent interests and would presumably no longer be appropriate for handling by staff counsel in Texas.

After Friday's decision by the Texas Supreme Court, North Carolina and Kentucky remain the only two states whose supreme courts have adopted a per se ban on the use of staff counsel to represent policyholders.