Use of staff attorneys in defending insurance cases: can an attorney serve two masters?(Instructor's Note)

Robertson, Joey ; Sullivan, Laura

CASE DESCRIPTION

This case deals with the issue of whether or not staff attorneys, employed by an insurance corporation, can legally or effectively represent an insured client in an insurance defense case. This case study will examine the practical and ethical issues involved in the case: Unauthorized Practice of Law Committee v. American Home Assur. Co., Inc., 261 S.W.3d 24 Tex.Sup. Ct. J. 590 (Tex. Mar 28, 2008)(American Home). The primary area of concern for this case is whether or not the interest of the insurance company and their insured are ever truly the same. Secondary issues in this case study will include an examination of 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. An additional secondary issue is the idea that by the nature of his employment, a staff attorney's legal judgment may be influenced in that his employer controls the scope and depth of investigations, fees made available for discovery, expert testimony, and general guidelines the attorney must follow in pursuing the defense in trial.

This case is designed for use in an undergraduate business law/business ethics course, or graduate level course in management law. The various legal aspects emphasized in this case could be taught in one fifty-minute class. The assignment is expected to require approximately 1 to 2 hours of outside preparation time by the student.

CASE SYNOPSIS

Like many states, Texas has long struggled with the question of how many clients does an attorney, who has been hired by an insurer to defend an insured, have. Courts have tended to rule that these attorneys have two clients in the insurer and the insured, yet they owe an unqualified loyalty to the insured who has been sued. The Unauthorized Practice of Law Committee has sought to end or limit this practice based on concerns that a staff attorney, whose actions can be strictly controlled by his employer, will have an irreconcilable conflict of interest and be unable to give full allegiance to the insured.

In 2008 the Supreme Court of Texas reviewed a prior decision of the Court of Appeals for the Eleventh District of Texas. In American Home, the court was asked to determine if an insurance company's use of staff attorneys to defend cases filed against their insured resulted in the insurance company practicing law. If this did constitute the practice of law it would be a violation of Texas law. The Court ruled in part that the use of staff attorneys did not constitute unauthorized practice of law on the part of the insurance corporations. This case study will discuss that decision and attempt to determine if a staff attorney can avoid being improperly influenced by their nonattorney supervisors and those supervisors' duties of maximizing profit.

INSTRUCTORS' NOTES

QUESTIONS

1. In defending an insured, who is the defense attorney's "client"?

Although the Court declined to directly answer this question the ruling indicates that both the insured and the insurer may be clients.

2. Can a conflict of interest arise in having staff attorneys represent insured customers and if so, when?

Conflicts can, and do, arise. The insured is interested in the best defense possible. Any defendant in a lawsuit would like to see a "no holds barred" approach including thorough depositions, experts at the top of their fields, and sufficient time dedicated to the case to all but guarantee a victory at trial.

While the insurer would like to prevail at trial to avoid paying large awards, their ultimate interest differs from the insured defendant. The insured would like the best defense possible, while the insurer is looking for the best value in a defense.

3. Do the acts of a staff attorney constitute the acts of the corporation?

Here the court says no, however, many attorneys may differ. Especially in the tough economic times we find ourselves in it is hard to believe that a staff attorney would not be influenced by his nonattorney executives pressing him to watch the bottom line. While attorneys always try to be careful with their client's money, the issue rises to a whole new level when that attorney considers that he may be out of a job if he fails to follow the directives of his corporate officers. Since it is these officers, agents of the corporation, who are directing the defense it is hard to argue that the corporation is not practicing law.

4. Is it realistic to believe that a staff attorney will not factor in his obligations to his employer in the course of representing an insured?

While we would like to believe that attorneys could set aside concern for their job and well being in order to represent their insured clients to the best of their ability, it simply is not realistic. If a CEO directs an attorney to keep costs below a certain amount, most likely that attorney is not going to exceed that limit just to retain a better expert, conduct additional depositions, or have evidence analyzed just one more time.

5. When are the interests of an insurance company and their insured customers not "congruent"?

Many would argue they almost never are. The only time the interests of the parties could ever truly be congruent is when the insured's interest exactly equals the interest of the insurer. To meet this standard the "Best Defense" would have to be exactly the same as the "Best Value". The interest of the insured is limiting their own liability; the interest of the insurer is the bottom line.

6. Can the interests of an insurance company and their insured customers ever be truly "congruent" where the insured's interest is to receive the best possible defense and the insurer's interest is to provide the most economical defense?

Possibly. You would have to ask yourself how often in life is the best product the most economical option. It certainly may happen, but it is not the norm.

7. Did the court rule correctly (or consistently) in Unauthorized Practice of Law Committee v. American Home Assurance. Co.?

The court's ruling is consistent with the majority of states. Whether or not attorneys, who are human themselves in spite of popular jokes to the contrary, can set aside pressure from their non-attorney supervisors to stay loyal to their employer rather than their client remains to be seen.

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