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

 § 16-22-211 of the Arkansas Code states, in relevant part:

It shall be unlawful for any corporation… to practice or appear as an attorney at law for any person in any court in this state or before any judicial body, … to tender or furnish legal services or advice, to furnish attorneys or counsel, to render legal services of any kind in actions or proceedings of any nature….

The Arkansas Supreme Court held that the statute prohibited Brown from representing the defendants.  It also found, "upon consideration of public policy and recognizing the inability of any person to faithfully serve two masters," that the statute was constitutional.  Three concurring justices expounded on the concept that an attorney may not serve two masters:

If an attorney is an employee of the insurance carrier responsible for paying the legal fees, costs, and any settlement or judgment of an insured is a lawsuit, then that attorney may not represent the insured in that lawsuit. The reason is simple.  Such an attorney’s loyalties are divided between the insured, who does not pay the attorney, and the insurance carrier employer which does. This conflict is inherent in every case where a company lawyer attempts to represent the legal interests of his or her employer’s clients or customers. 

The concurring justices noted that the insurance company’s interests are profits, which translates into a desire to pay as little in fees, costs and judgments as possible. The insured’s interests are different; it may be concerned about the effect a settlement may have on his or her business reputation. The insured may want the case to proceed to trial, whereas the insurer may want to settle.

Unlike Arkansas, some states have statutes that specifically allow an insurance company to employ attorneys to represent its policyholders. See, e.g,  Illinois Corporation Practice of Law Prohibition Act, 705 ILCS 220/5.  In addition, the American Bar Association Committee on Ethics and Professional Responsibility has previously concluded that an insurer’s use of staff attorneys to represent its insureds is not unethical. See, ABA Comm. On Ethics and Prof.’l Responsibility, Formal Op. 282 – “A lawyer, employed and compensated by an automobile insurance company, which holds a standard contract of insurance with an insured, may with propriety: A. Defend the insured in an action brought by a third party without making any charge to the insured….”  In 2003, the ABA Committee reaffirmed that view. See, ABA Comm. On Ethics and Prof.’l Responsibility, Formal Opinion 03-430—“The Committee reaffirms its prior opinions and concludes that insurance staff counsel may undertake such representations so long as the lawyers (1) inform all insureds whom they represent that the lawyers are employees of the insurance company, and (2) exercise independent professional judgment in advising or otherwise representing the insureds.” 

The majority of state supreme courts that have addressed this issue are in accord with the ABA Committee’s position. See, In re Amendment to Rules Regulating the Florida Bar re Rules of Professional Conduct, 838 So.2d 1140 (Fla. 2003), Coscia v. Cunningham, 299 S.E.2d 880 (Ga. 1983); Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151 (Ind. 1999); In re Allstate Ins. Co., 722 S.W.2d 947 (Mo. 1987); In re Youngblood, 895 S.W.2d 322 (Tenn. 1995); and Unauthorized Practice of Law Committee v. American Home Assurance Co., No. 04-1038 (Tx. 2008). Other courts have also found that use of panel counsel by an insurer does not constitute the unauthorized practice of law. See, e.g., Gafcon, Inc. v. Ponsor & Assocs., 120 Cal. Rptr. 2d 392 (Cal. 2002); King v. Guiliani, 1993 WL 284462 (Conn. 1993); Strother v. Ohio Cas. Ins. Co., 14 Ohio Op. 139 (Ohio 1939); and Schoffstall v. Nationwide Mut. Ins. Co., 844 A.2d 1297 (Penn. 2003).

Ethics committees in many states have also issued opinions finding that insurers’ use of staff counsel does not constitute the unauthorized practice of law. See, e.g., Alabama Office of Gen. Counsel, Ethics Op. RO-2007-01 (2001); Alaska Bar Ass’n. Ethics Comm., Op. 99-3 (1999); State Bar of California Standing Comm. on Prof.’l Responsibility and Conduct, Formal Op. 1987-91 (1987); Colorado Bar Ass’n, Formal Ethics Op. 91 (1993); Illinois State Bar Ass’n., Advisory Op. on Prof.’l Conduct 89-17 (1990); Iowa Sup. Ct. Bd. of Prof.’l Ethics and Conduct, Op. 88-14 (1989); Michigan Bar Comm. on Prof.’l & Judicial Ethics, Op. CI-1146 (1986); New Jersey Sup. Ct. Comm. on Unauthorized Practice, Op. 23 (1996);  and Wisconsin State Bar Comm. on Prof.’l Ethics, Formal Op. E-95-2 (1998).   In addition ethics committees have also found that it is not unethical for staff attorneys to represent insureds.  See, e.g., New York Bar Ass’n Prof.’1 Ethics Comm., Op. 109 (1969); Oklahoma Bar Assn., Ethics Op. 309 (1998); and Pennsylvania Bar Assn. Comm. on Legal Ethics and Prof.’l Responsibility, Formal Op. 96-106 (1997).

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.