Texas Supreme Court Holds Liability Insurers May Use Staff Counsel To Defend Liability Claims Against Insureds If Interests Are "Congruent"

Posted on March 31, 2008 by Chris Martin

Last Friday, a divided Texas Supreme Court held liability insurers are permitted to use staff attorneys to defend claims against insureds if the insurer’s interests and the insured’s interests are "congruent," but not otherwise.  In Unauthorized Practice of Law Committee v. Am. Home Assurance Co., Inc., No. 04-0138 (Tex. March 20, 2008), the high court addressed whether a liability insurer that uses staff attorneys to defend claims against its insureds is representing its own interests in handing the defense (which is permitted), or whether it is engaging in the unauthorized practice of law (which is obviously not permitted).  Finding the practice to involve the protection of the insurer's own interests, it permitted the practice of using staff counsel to defend liability claims if the interests of the insurer and insured were "congruent."

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. 

 
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Texas Supreme Court Limits Reimbursement Rights

Posted on February 4, 2008 by Chris Martin

Last Friday, the Texas Supreme Court issued its opinion on rehearing in Excess Underwriters v. Frank’s Casing, __ S.W.3d __ (Tex. 2008).  The Court withdrew its three-year old opinion that initially created a firestorm in the Texas insurance industry (and also lead to great consternation with commercial insureds) regarding the rights of reimbursement that a liability carrier possesses under Texas law when it pays a potentially non-covered claim.  But, after keeping the industry waiting for more than two years for clarification since it granted the rehearing, last Friday a deeply divided Court reversed course by withdrawing and disregarding its earlier decision and refused to recognize an exception to the Texas rule that an insurer is only entitled to reimbursement for settling a claim against its insured if (1) the policy provides for it, or (2) the insured has given “clear and unequivocal consent to the settlement and the insurer’s right’s to reimbursement.”  After stating that liability insurers were better equipped to “carry the risk” associated with a coverage dispute, the majority suggested that insurers facing settlement demands on disputed claims have several options: refuse to settle and pursue a declaratory judgment action, leverage a declaratory judgment action to settle the third-party lawsuit, or rewrite the policy to include reimbursement rights.  The two dissenting opinions recognized the problems with the majority approach - the windfall to insureds for coverage that was not underwritten when the policy was issued, and the burden other insureds must carry in increased premium costs due to the insurers’ increased risks of settling uncovered claims.  The dissent by Justice Hecht correctly observed that liability carriers in Texas will now have little choice but to bring a DJ action every time a liability claim raises potential coverage issues.  

Friday’s decision in Frank’s Casing is one of the most significant decisions issued by the Texas Supreme Court in recent years. It raises a host of new issues for liability carriers facing potential coverage problems on both defense and indemnity claims.  A liability carrier’s ability to wait until the underlying tort case gets closer to trial before seeking to address and resolve the coverage issues seems to have been eliminated by last week’s decision.  The ironic aspect of the majority’s decision (which was clearly intended to help commercial insureds in Texas) is that Friday’s decision will hurt Texas insureds in the long run because they will be subject to more litigation rather than less.  Friday’s decision leaves Texas liability insurers with few options other than bringing DJ actions against their insureds every time an underlying tort suit raises coverage questions.

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