Use of staff attorneys in defending insurance cases: can an attorney serve two masters?

Robertson, Joey ; Sullivan, Laura

INTRODUCTION

In examining the tripartite relationship between an insurer, counsel provided by that insurer, and the insured to whom counsel is provided, it has long been accepted that insurers can provide legal counsel for their customers to aid in defending suits covered by the contractual agreement between the insured and the insurance company. Since the insurer has the duty to indemnify their insureds from losses covered by these insurance contracts, the insurance company is allowed to exert some level of control over retained defense attorneys. Much less settled is the idea that an insurance company can use staff attorneys, actual employees of the insurance firm, to defend these cases.

Currently only two states, Kentucky and North Carolina, prohibit staff attorneys from defending insures, while many other states do allow the practice. The concern of critics of this practice is primarily that through the control exerted by nonattorney officers and shareholders of the insurance company, the company itself is practicing law. In 2008 through their decision in the case of Unauthorized Practice of Law Committee v. American Home Assur. Co., Inc., the Supreme Court of Texas addressed the issue of whether or not the use of staff attorneys constituted the unauthorized practice of law. Unfortunately as is often the case with decisions of the upper courts, the Court addressed only very specific questions, and left the major issues to be decided another time. Although the Court in this case determined that insurances companies engaged in the use of staff attorneys were not engaged in the unauthorized practice of law, they left on the table some much bigger issues. We will be looking at three of these issues. First we will look at whether or not the acts of a staff attorney constitute the acts of a corporation itself, and if they do--is this an unauthorized practice of law. We will go on to break this larger issue down into two sub issues: whether or not the interest of the insurance company and their insured are ever truly the same, and the proposition that by the nature of his employment, a staff attorney's legal judgment may be influenced to the point that he cannot fully live up to his duty to his insured client.

DO THE ACTS OF A STAFF ATTORNEY CONSTITUTE THE ACTS OF A CORPORATION ITSELF

In order to assist with the monitoring of the unauthorized practice of law in the State of Texas, the Unauthorized Practice of Law Committee (the Committee) was developed. The committee is responsible for the investigation and prosecution of individuals and entities involved in the unauthorized practice of law. Since its creation the Committee has sought to prevent insurance providers from using staff attorneys to defend cases against insured clients (insureds). The Committee has long argued that based on the level of control exerted over staff attorneys by nonattorney influences of the corporations, the acts of these staff attorneys amounts to no less than the acts of the corporations itself. The Committee has brought several suits related to this issue, but we will focus on the American Home case where the Committee sought to prevent American Home Assurance Company, Inc., and The Traveler's Indemnity Company, from using staff attorneys in the defense of suits against their insureds. After the trial court found in favor of the Committee the decision was reversed by the Court of Appeals before finding its way to the Texas Supreme Court (the Court). The Court ruled in part that the use of staff attorneys did not constitute the unauthorized practice of law.

In addressing American Home the Court attacks the issue by trying to determine if the insurance company is representing its own interest. The Court held that insurance corporations may use staff attorneys as long as the interests of the insurer and the insured are congruent. The Court believed that these interests would be congruent as long as there was no conflict of interest between the two. The Court in American Home found that there was nothing in the law which prevents insurers from contracting with private counsel to represent insureds. The Court also felt that the Penal Code provisions restricting the unauthorized practice of law did not apply to liability insurers' defense of their insureds. Liability insurance providers often have the right to exert total control over the defense of insureds based on contractual agreements. The Court held that there is little difference in the use of outside counsel and use of staff counsel. Based on this ruling insurance corporations may use staff attorneys to defend claims against insureds provided that the insurer's and insured's interests in the situation are congruent, and that staff attorneys must completely disclose to their insured clients their ties to the insurance provider.

As early as the 1930's the law has allowed liability insurance providers to provide staff attorneys to defend suits brought against their insured clients. As our unfortunate national history has shown us through slavery laws, past treatment of women and lack of employee rights, old laws are not always correct laws. Although the Court in American Home, ruled on behalf of the liability insurance providers we need to examine that decision and see if the Court got it right. As the Court in American Home was quick to point out, any analysis of this issue must begin by answering the question of whether or not the insurance counsel represents the insurer as well as the insured. The Court was hesitant to answer that question directly, but did provide some insight into determining the answer. The Court also made itself clear that it would not address the issue of what the law should be, only what the law is.

The practice of law in the State of Texas is governed in part by the State Bar Act (the Act), and the Texas Penal Code (The Code). The Act has since been recodified in the Government Code. The Act and The Code, as well as other aspects of the current law clearly allow a corporation to employ staff attorneys to represent the corporation itself, the corporation's officers, directors, employees, or shareholders. What is not allowed under current law is for a corporation to use staff attorneys in actions where it does not have a direct interest.

In the past insurers have used outside counsel or "captive firms". The members of these firms are not employees of the insurance corporation, but they work exclusively for the insurer having no outside clients. In American Home the Committee did not claim that an insurer engaged in the practice of law by hiring a private attorney to defend its insureds. Insurers clearly have a financial interest in covered suits against their insureds, but the issue we address here is whether or not the acts of a staff attorney constitute the acts of the corporation itself. Texas Law does allow corporations set up expressly for the purpose of offering legal services to do so, but it is clearly not the purpose of an insurance corporation. If it were determined that the actions of staff attorneys constituted the actions of the corporation, this would constitute an unauthorized practice of law in that it violates the requirements of the Act and sections of the Code restricting the unauthorized practice of law by corporations not set up expressly for the purpose of offering legal services.

As previously discussed these provisions do not prohibit all corporations from practicing law. There are certain corporations set up expressly for this purpose and they are in compliance. It is only when a corporation is set up for a different purpose, such as providing insurance, engages in the practice of law that unauthorized practice becomes an issue. In making its ruling in American Home the Court seemed to diverge from its own precedent. As the persuasive dissent by Justice Johnson points out, the Court has dealt with these issues before. In the earlier decision of Hexter Title & Abstract Co. v. Grievance Committee, 179 S.W.2d946 (Tex. 1944) (Hexter), the Court ruled that an insurance company had engaged in the unauthorized practice of law through the use of staff attorneys. The facts of that case were very different, but the Court's ruling and observations would seem to be applicable to American Home. As Justice Johnson noted in referring to Hexster, the only reason the insurers pursue this issue is because they want the economic benefit of having their staff attorneys represent individuals that are not corporate officers, employee, or shareholders--the purposes for which a corporation has historically been allowed to use staff attorneys.

Justice Johnson also noted that in the corporate environment, nonattorney officers often direct the work of the staff attorneys. He goes on to note that even if that direction were absent the result of using staff attorneys would still be the same. The staff attorney is acting as the agent of the corporation, and indeed his first loyalty is to the corporation. The Court in Hexter noted that due to these loyalties the actions of the staff attorney are the acts of the corporation. If one believes that the acts of an agent are the acts of his employer than it would stand to reason that the corporation using staff attorneys to defend insureds is engaged in the unauthorized practice of law. The staff attorneys are performing the tasks they were hired to perform on behalf of their employers. They take their direction from their corporate officers just as a junior attorney would take direction from a partner. The primary difference is that in an independent law firm, both parties are attorneys.

The regulations regarding the representation of a client do not concern themselves with profit. When a corporate entity is allowed to insert that criteria into the legal decision making process, we have moved from an attorney exercising his best legal judgment into an area of corporate decision making not bound by the rules of legal ethics. In can be argued that we have moved to a position where a corporation is allowed to practice law by proxy.

ARE THE INTERESTS OF THE INSURANCE COMPANY AND THEIR INSUREDS EVER TRULY THE SAME

The court in American home held that a liability insurer was not engaging in the practice of law by providing staff attorneys to defend claims against insureds if the interests of the insureds and the liability insurance company are congruent. The Court felt that in these instances a staff attorney's representation of the insured and representation of the insurer is indistinguishable. There are several issues which might cause the interests of the two parties to not be congruent. The most obvious occurrence is when there is a question as to the existence or limitations of coverage. This issue is well settled in the law. It was not a point of contention in American Home. The more compelling question is whether or not there is a lack of congruent interests based on the cost of a complete defense.

Supporters of the Court's decision in American Home point to the use of "captive firms", and argue that staff attorneys will serve the same purpose, but at an even lower cost. There are two errors with this argument. The first is that there is an inherent difference between the relationship of retained counsel bound by a contractual agreement and the relationship of a true employer and employee. Basic agency law tells us that the primary difference in a person being considered an independent contactor or an employee is the amount of control exerted over that individual by the employer. It is exactly the amount of control that makes the use of staff attorney employees troubling. Management decisions of large corporations are not driven by the same duties as attorneys.

In the world of accountants and attorneys there has always been a fundamental difficulty in the working relationship of legal counsel and auditors. The issues are based on the fundamental difference in the duty of confidentiality owed by attorneys and the duty of transparency of auditor CPA's. Similarly even a modest amount of common sense provides that there will undoubtedly be an ongoing struggle between the staff attorney's duty to provide his client with the best defense and pressure applied by that attorney's nonattorney supervisors to cut costs and maximize profits. It is the nature and very purpose of a corporate officer to pursue these goals and to apply pressure to their subordinates as necessary. As Justice Johnson stated in his dissent to American Home there is no reason to believe that staff attorneys will be immune from these pressures to keep costs low. If anything, one could argue that the declining economy will only increase those pressures. It is here that the second error comes into play from the statement that staff attorneys serve the same purpose as captive firms, but at even lower costs.

As previously mentioned, the rules governing the practice of law do not concern themselves with issues related to the minimizing of defense costs, and neither do the concerns of the insured customer of the corporation. Reducing costs as a means to increase profits are certainly a primary goal of the corporation itself, and it is here that the interests of the insurer make a radical departure from those of the insured. It is here--where we have a fundamental difference in interests related to the legal defense of these actions--that we might argue that the positions of the two entities, insurers and insureds, are never truly congruent. The parties may have similar interest, but their goals will never legitimately be the same. The insured wants to best defense possible; they want to avoid a judgment in excess of their coverage. The legitimate pursuit of the corporation is to minimize costs, and this is an important goal on behalf of the corporation and its shareholders. It is a goal much less comforting to the insured facing a judge and/or jury.

MIGHT A STAFF ATTORNEY'S LEGAL JUDGMENT BE INFLUENCED TO THE POINT THAT HE CANNOT FULLY LIVE UP TO HIS DUTY TO HIS INSURED CLIENT

Despite the ruling in American home there is clearly a fundamental difference in the position of an independent attorney retained by an insurance company and a staff attorney employed by that same company. For true private counsel the insurer is simply a client. While that client is a source of income, that client does not have complete control over the independent attorney. When you look at the situation of a staff attorney the circumstances are much different. The corporation, through its officers and directors, directly controls that attorney's salary, benefits, work environment and indeed their continued employment. Not only does this situation create additional pressures on the staff attorney, but you have to ask which competing interest he will or even should follow: does he provide the best defense he can for his insured client, or does he cut back on depositions, travel, experts and other expenses in order to fulfill his fiduciary duty to his employer? The court in American Home seems to recognize the existence of these problems, but balks at the lack of evidence that these issues have ever resulted in harm to an insured. Anyone who has ever worked in a corporate environment can step outside the legal theory and realize the outcome of these dilemmas. The attorney can subscribe to the highest ethical standards, but what are they to do in these trying economic times when their nonattorney officers are berating the staff for "unnecessary expenses". What may be unnecessary to an the executive is not necessarily unnecessary to an attorney, and in this situation the reality is that ultimately, the executives call the shots --and as an additional representative of the liability insurer, engages in the unauthorized practice of law. Complete control of the attorney's action is not even the bar that should be used to measure when the interests of the parties are not congruent. If a staff attorney is ever subject to pressures, which in any way influence his professional judgment and his relationship or representation of his insured client that staff attorney has failed to meet his duties to that client.

CONCLUSION

In American Home the Court has ruled that a staff attorney will be able to avoid the pressures normally inflicted on personnel of a corporate environment to cut costs. Indeed there are likely many attorneys who can resist these pressures. Common sense and human nature dictate however that not everyone will be able to be so strong when their very employment may be on the line. In light of the current economic environment one has to ask what additional cost-cutting pressures may come to bear. In the theoretical world of law school we would like to believe that attorneys can resist outside pressure and abide by the interest of all clients. In the world of the decreasing value of the dollar, corrupt chief executive officers, and failing corporations, however, we should at least pause to analyze the decisions and reasoning of the court in American Home.

It should be clear that this ruling does little to address the legitimate concerns surrounding the use of staff attorneys to represent insureds. The law is clearly evolving, and only time will tell if the current economic environment will have an effect on how insurance companies balance their clients desire for the best defense with the companies own desires to maximize profits.

RESOURCES

Unauthorized Practice of Law Committee v. American Home Assur. Co., Inc., 261 S.W.3d 24, (2008)

Joey Robertson, Sam Houston State University

Laura Sullivan, Sam Houston State University