American Home v. Uplc

• Decision Date: 06 November 2003
• Docket Number: No. 11-02-00212-CV.,11-02-00212-CV.
• Citation: 121 S.W.3d 831
• Parties: AMERICAN HOME ASSURANCE COMPANY, INC. and The Travelers Indemnity Company, Appellants, v. UNAUTHORIZED PRACTICE OF LAW COMMITTEE, Appellee.
• Court: Texas Court of Appeals

121 S.W.3d 831

AMERICAN HOME ASSURANCE COMPANY, INC. and The Travelers Indemnity Company, Appellants, v. UNAUTHORIZED PRACTICE OF LAW COMMITTEE, Appellee.

No. 11-02-00212-CV.

Court of Appeals of Texas, Eastland.

November 6, 2003.

Rehearing Overruled January 8, 2004.

Jim Cowles, R. Michael Northrup, Cowles & Thompson, Rey Rodriguez, Richard A. Smith, William Dorsaneo, Gibson, Dunn & Crutcher, Dallas, Mark Walters,

Thomas Rogers, Jackson Walker, L.L.P., Austin, Thomas C. Wright, Lucy Haroutunian, Wright Law Firm, Houston, William Barker, Sonnenschein, Nath & Rosenthal, Chicago, IL, for appellants.

Mark Ticer, Law Office of Mark A. Ticer, Dallas, David Keltner, Jose, Henry, Brantley & Keltner, Fort Worth, for appellee.

Panel consists of: ARNOT, C.J., and WRIGHT, J., and McCALL, J.

Opinion

TERRY McCALL, Justice.

American Home Assurance Company, Inc. (American Home) and The Travelers Indemnity Company (Travelers) sought a declaratory judgment against the Unauthorized Practice of Law Committee (UPLC) that using lawyers who are employees of an insurance company to defend insureds under liability policies was not the unauthorized practice of law by the insurer. They also sought attorney's fees from the UPLC. The UPLC, an entity created by the Texas Legislature and appointed by the Texas Supreme Court,¹ counterclaimed for a declaratory judgment and for an injunction enjoining American Home and Travelers from continuing to use staff attorneys to represent their insureds. Both sides moved for summary judgment. The trial court entered a final judgment for the UPLC, holding that the insurance companies were engaged in the unauthorized practice of law, but staying its injunction pending this appeal. We reverse and render judgment for the insurance companies. We reverse and remand for a determination of the attorney's fees owed by the UPLC.

Principal Purpose Behind Prohibiting the Unauthorized Practice of Law

Courts generally have prohibited the unauthorized practice of law because of a perceived need to protect individuals and the public from the mistakes of the untrained and the schemes of the unscrupulous, who are not subject to the judicially imposed disciplinary standards of competence, responsibility, and accountability. TEX. DISCIPLINARY R. PROF'L CODUCT 5.05 cmt. 1.² The UPLC does not dispute the fact that staff counsel of American Home and Travelers are properly trained and licensed to practice law. The UPLC also concedes that "there is no evidence in the record regarding complaints by insureds" despite the long period during which insurance companies have used staff counsel.

Background

Insureds purchase liability insurance to protect against the risk of defending a lawsuit and to protect against the risk of having to pay a money judgment as a result of that lawsuit. The defense of a lawsuit covered by liability insurance involves a "tripartite" relationship consisting of the insured, the insurer, and the defense counsel. Because this tripartite relationship may involve conflicts,³ there has been an ongoing national debate concerning the ethical obligations of defense counsel and the role of the insurer in providing defense counsel.⁴ Use of staff counsel by insurance companies has raised the issue of whether such use constitutes the unauthorized practice of law by corporations.

Typical policies of insurance issued by American Home and Travelers were introduced as part of the summary judgment evidence. Under the policies, the insurer promises to defend and to indemnify the insured against certain risks up to stated limits of liability. The insurer has the right and duty to provide a legal defense to a lawsuit against the insured if the petition alleges a covered claim. The Texas Supreme Court has recognized that a liability policy may grant to the insurer the right to take complete and exclusive control of the insured's defense; American Home and Travelers are granted that control under the policies. State Farm Mutual Automobile Insurance Company v. Trover, 980 S.W.2d 625, 627 (Tex.1998), citing Douglas R. Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured, and Insurance Defense Counsel, 73 NEB. L. REV. 265, 269 (1994)("Because of its financial interest in the effective resolution of a claim, the insurer has a contractual right to control its insured's defense.").

Prior to American Home and Travelers filing this case, the UPLC brought suit in Dallas County against Allstate Insurance Company and its staff counsel, alleging that Allstate was engaged in the unauthorized practice of law.⁵ That suit by the UPLC provided the impetus for both this case and for Nationwide Mutual Insurance Company v. Unauthorized Practice of Law Committee, 283 F.3d 650 (5th Cir. 2002). Nationwide sought a declaration by the federal district court that the Texas State Bar Act,⁶ as interpreted by the UPLC, violates the federal constitution and that Texas law does not prohibit it from employing salaried staff attorneys to represent its insureds. Affirming the district court's abstention ruling, the Fifth Circuit held that abstention under the Pullman Doctrine⁷ was proper and that Natiomvide's case should have been dismissed without prejudice. For Pullman abstention to be appropriate, the Fifth Circuit explained that the case must involve (1) a federal constitutional challenge to state action and (2) an unclear issue of state law that, if resolved, would make it unnecessary for the federal court to rule on the federal constitutional question. To satisfy the second prong, there must be an uncertain issue of state law that is "fairly susceptible" to an interpretation that would render it unnecessary for the federal court to decide the federal constitutional question. After reviewing the Texas statutes and case law, the Fifth Circuit concluded that Texas "law is fairly susceptible to a reading that would permit Nationwide to employ staff counsel on behalf of its insureds." Id. at 655.

In 2001, two bills were introduced in the Texas House of Representatives to prevent staff counsel from representing insureds. TEX. H.B. 1383, 77th Leg., R.S. (2001), and TEX. H.B. 3563, 77th Leg., R.S. (2001). Insurance companies introduced testimony that the use of staff counsel has resulted in lower costs to the insurance companies and lower premiums to the insureds. Many of the arguments made here, especially the UPLC's ethical arguments, were also made before the Texas Legislature. The bills were not enacted into law.

The insurance companies argue that the use of staff attorneys is permissible because the attorneys, in addition to their primary duty to the insured, are also defending the financial interest of the insurance company because it is the entity that will pay any adverse judgment against the insured, at least up to the policy amount.⁸ The UPLC contends that the use of staff attorneys violates the Texas Disciplinary Rules of Professional Ethics.⁹ The UPLC argues that (1) no attorney can serve two masters; (2) the insurance companies' right to control and direct staff counsel violates the lawyer's professional code of ethics because he cannot exercise his independent judgment; and (3) therefore, use of staff counsel should be prohibited because the employee-lawyer is subject to an irreconcilable conflict between his employer and the insured. The UPLC's statutory and case-law argument is based on the syllogism: (1) a corporation cannot practice law; (2) staff attorneys, whose sole client is the insured, are agents of the insurance corporation; and (3) therefore, the insurance company is practicing law.¹⁰

The standards for reviewing summary judgments are well-settled. Nixon v. Mr. Property Management Company, Inc., 690 S.W.2d 546 (Tex.1985); City of Houston v. Clear Creek Basin Authority, 589 S.W.2d 671 (Tex. 1979). When both sides move for summary judgment and the trial court grants one motion and denies the other, the reviewing court should review both sides' summary judgment evidence, determine all questions presented, and render the judgment that the trial court should have rendered. Lubbock County, Texas v. Trammel's Lubbock Bail Bonds, 80 S.W.3d 580, 583 (Tex.2002); Jones v. Strauss, 745 S.W.2d 898, 900 (Tex.1988).

The UPLC's Argument Based on Ethics Rules

A. A Corporation's Right to Control Employees

Citing Darensburg v. Tobey, 887 S.W.2d 84, 88 (Tex.App.-Dallas 1994, writ den'd), the UPLC argues that employers have the right to direct the details of the work of their employees. From this premise, the UPLC concludes that the insurance company's right to control the details of the work of staff attorneys creates an irreconcilable conflict with the interests of the insured because insurance companies will interfere with their staff attorney's exercise of professional judgment.

The UPLC argument begins with a false premise. In Darensburg, the court recognized that the employer "did not have the right to direct and control" the employee physician's exercise of professional judgment. Darensburg v. Tobey, supra at 89. An employee attorney does not owe an absolute duty of loyalty to his or her employer. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 201 (Tex.2002). In Johnson, an associate employed at the Brewer & Pritchard law firm referred a potential client to an attorney, Johnson, who was not in the firm. After the associate left the firm, the law firm sued the associate and Johnson, claiming that the associate owed an absolute fiduciary duty to abstain from referring potential clients to any firm except the associate's employer. Id. at 202-03. The Johnson court held that the associate's ethical duty to the client outweighed the firm's interest in demanding loyalty from its associates. Id. at 203.

The insurance staff attorney, like the outside attorney, may face conflicts; however, his status as an employee is not an irreconcilable conflict. There is no evidence in the record that staff...