Insurers may use salaried staff attorneys to defend insureds only if interests are “congruent” a

In an opinion delivered today in Unauthorized Practice of Law Committee v. American Home Assurance Company Inc. and The Travelers Indemnity Co., (No. 04-0138, Texas Supreme Court.), the Texas Supreme Court held that an insurer may use salaried, employee staff attorneys to defend a claim against an insured if the insurer’s interests and the insured’s interests are “congruent.”  This practice does not constitute the unauthorized practice of law by the insurer.  Additionally, a staff attorney must fully disclose to a represented insured that the insurer is his or her employer, consistent with Rule 7.02 of the Texas Disciplinary Rules of Professional Conduct prohibiting a lawyer from making false or misleading representations about his or her services.

 

The Court recognized that an insurer’s interests could differ from its insured’s when there are coverage questions or when the consequences of the manner in which the defense is rendered affect them differently.  Although an insurer’s reservation of rights letter recognizes the possibility of a conflict between an insurer and insured, it does not, by itself, create a conflict.  “Declining representation is the safer course” to avoid conflicts that “destroy the congruence of interest” between the insurer and insured, the Court advised.  However, noting that adjusters sometimes issue reservation letters as a matter of routine, the Court “cannot say as a blanket rule that a staff attorney can never represent an insured under a routine reservation of rights.”  Additionally, a staff attorney’s acquisition of information that an insured could expect not to be disclosed to the insurer “may necessitate withdrawal from the representation,” as could an insurer restricting the attorney from advising an insured of the insurer’s Stowers obligation, or an insurer imposing litigation guidelines that direct or regulate the attorney’s legal judgment.  Although the Unauthorized Practice of Law Committee and amici briefs argued that the insurer-insured relationship is fraught with potential for conflict, the Court noted that insurers have used staff attorneys across the country for decades, and no evidence was presented of harm to a private or public interest by a staff attorney’s representation of an insured. 

 

In reaching its result, the Court observed the basic premise that a corporation is not authorized to engage in the practice of law.  However, a company does not engage in the practice of law by employing attorneys on its salaried staff to represent its own interests, because, implicit in the “practice of law” is the rendering of legal services for someone else.  Texas statutes and the ethics rules alike allow house counsel to provide legal advice regarding a corporation’s own affairs or appear in court on behalf of the corporation itself, and likewise for its directors, officers, employees, or shareholders, as long as there is not a conflict of interest that precludes such representation.  Important to the Court’s later reasoning, a 1968 ethics opinion stated that a corporation does not aid in the unauthorized practice of law by representing its parent or subsidiary because “[t]here is obviously a common interest and there is for all practical purposes only one client involved.”

 

The court reasoned that when a company and a person to whom the company is providing legal services have common interests, a staff attorney can represent them both, because “there is for all practical purposes only one client involved.”  In the vast majority of cases, the Court observed, a liability insurer and an insured have a common interest in defeating the claim.  Thus, 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 dissent asserted that staff attorneys are assigned the task of defending an insured by their corporate employer, and the employer benefits financially by the staff attorney’s practice of law.  As such, the attorneys’ actions are as agents of the corporation, and constitute practicing law in the representation of someone separate from the corporation, which is barred by the State Bar Act.  The dissent also notes “cost-cutting” measures that inevitably occur in the corporate business community, and that staff attorneys are not immune from these measures.

 

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This communication is for general guidance only and does not contain definitive legal advice.
© 2008 Wilson Elser Moskowitz Edelman & Dicker LLP.  All rights reserved.

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