American Ins. Ass'n v. Kentucky Bar Ass'n

• Decision Date: 21 March 1996
• Docket Number: Nos. 95-SC-190-K,95-SC-191-KB,s. 95-SC-190-K
• Citation: 917 S.W.2d 568
• Parties: AMERICAN INSURANCE ASSOCIATION; National Association of Independent Insurers; and J. Joseph Cohen, Complainants, v. KENTUCKY BAR ASSOCIATION, Respondent. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and State Farm Fire and Casualty Company, Complainants, v. KENTUCKY BAR ASSOCIATION, Respondent.
• Court: United States State Supreme Court — District of Kentucky

Page 568

917 S.W.2d 568

AMERICAN INSURANCE ASSOCIATION; National Association of

Independent Insurers; and J. Joseph Cohen, Complainants, v. KENTUCKY BAR ASSOCIATION, Respondent.

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and State

Farm Fire and Casualty Company, Complainants, v. KENTUCKY BAR ASSOCIATION, Respondent.

Nos. 95-SC-190-KB, 95-SC-191-KB.

Supreme Court of Kentucky.

March 21, 1996.

Steven G. Bolton, Squire N. Williams, Jr., Frankfort, for American Insurance Association; National Association of Independent Insurers; and J. Joseph Cohen.

Mark R. Overstreet, Stites & Harbison, Frankfort, for State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Company.

Bruce K. Davis, Executive Director, Kentucky Bar Association, Frankfort, John G. Prather, Jr., Somerset, for Kentucky Bar Association.

STUMBO, Justice.

In this consolidated action, Complainants--American Insurance Association ["American"], National Association of Independent Insurers ["National"], and State Farm Mutual Automobile Insurance Company and State Farm Fire and Casualty Company ["State Farm"]--timely filed, pursuant to SCR 3.530, a motion seeking review by this Court of Advisory Ethics Opinion E-368 which was issued by the Board of Governors of Respondent, Kentucky Bar Association, and which appeared in the Fall 1994 issue of Kentucky Bench & Bar. In addition, State Farm requests that this Court review that portion of Unauthorized Practice of Law Opinion U-36 which proscribes the use, by insurance companies, of salaried attorneys to provide defense services under the insurers' policies of insurance. Although, as U-36 was issued in November 1981, the thirty-day window of review upon publication articulated in SCR 3.530(5) has long been closed, State Farm argues that because that opinion lays the foundation for E-368, this Court may exercise its general supervisory authority per § 116 of the Kentucky Constitution in order to review U-36.

After carefully evaluating the opinions at issue, and the briefs filed and arguments advanced by both Complainants and Respondent, we hereby approve and adopt E-368 as written, and choose not to disturb U-36.

At issue in this action is the following question presented in E-368:

(1) May a lawyer enter into a contract with a liability insurer in which the lawyer or his firm agrees to do all of the insurer's defense work for a set fee?

The Board of Governors answered "no" to this question, and stated that the arrangement at issue would violate Kentucky Rules of Professional Conduct 1.7(b) ¹ and 1.8(f)(2) ², stating therein "[t]o some extent the lawyer becomes the insurer; and [the] lawyer stands to gain by limiting the services rendered to the client." Kentucky Bench & Bar, Fall 1994, at 52. The Board, indicating that the lawyer's duty to the insured client was a function of the attorney-client relationship and not governed by or limited by the terms of the insurance contract, expressed concern that this set fee arrangement would result in the loss of control of the insured client vis-a-vis actions taken by counsel in the course of representation. The Board also noted that the insurer would take on a dual role in such a situation, in that "the insurer wants to continue to promise the insured a defense in the contract of insurance, while limiting the extent of its undertaking in a side contract between the insured's lawyer and the insurer to which the insured is not a party." Id. The Board characterized the circumstance presented in E-368 as but the latest issue to arise from attempts by insurers to cut costs. One such cost-cutting measure, referenced in the "Background" section of E-368 and more fully discussed in U-36, involved the practice of insurers to attempt to provide defense services directly through salaried attorney employees--a practice, the Board concluded, that "is not permitted in Kentucky, for in addition to the obvious conflicts of interest that would be presented by such an arrangement, the practice would violate the law governing unauthorized practice." Id.

More specifically, this issue was addressed in U-36 through the following question:

May an insurance company employ in-house counsel (salaried employees) to represent their insured after a lawsuit has been filed?

This question was answered in the negative. The opinion relied upon both Canon 3 of the ABA Code of Professional Responsibility, which governs the areas of unauthorized practice of law, and SCR 3.020, which defines the practice of law in Kentucky and recognizes that "nothing herein shall prevent any natural person not holding himself out as a practicing attorney from drawing any instrument to which he is a party without consideration unto himself therefor...." The opinion also cited to long-standing Kentucky case law which proscribes a corporation from being licensed to practice a learned profession, such as law. See, e.g., Hobson v. Kentucky Trust Co. of Louisville, 303 Ky. 493, 197 S.W.2d 454 (1946); Kendall v. Beiling, 295 Ky. 782, 175 S.W.2d 489 (1943). Ethical rules and legal precedent were merged in the opinion to reach the conclusion that in the typical action on an insurance contract, the insured, and not the insurer, was the party-defendant, and that, therefore, "the insurance company must hire members of the private bar to undertake representation of their insured." Unauthorized Practice Opinions, November 1981, at 11-48.

Complainants contend that not only did the Board paint with too broad a brush in applying U-36 to E-368, but, that the former opinion, of itself, represents only a minority view of the interpretation of the ABA Code of Professional Responsibility, and is, in fact, antithetical to the precedent which attempts to follow the intent of the Code. Complainants seek support from the ethics opinions and case law of other jurisdictions which allow house counsel to provide insurance defense services. See, e.g., In re Petition of Youngblood, Tenn., 895 S.W.2d 322 (1995); In re Rules Governing Conduct of Attorneys in Florida, Fla., 220 So.2d 6 (1969); ABA Comm. on Ethics and Professional Responsibility, Informal Op. 1370 (1976). Additionally, State Farm asserts that Gardner v. North Carolina State Bar, 316 N.C. 285, 341 S.E.2d 517 (1986), which is referenced in E-368 and which this Complainant terms "the sole court decision holding that the use of claim litigation counsel constitutes the unauthorized practice of law," Brief, at 36, lacks substance. State Farm points out that this decision has been rejected by every court to consider it. See, e.g., Youngblood, supra; In re Allstate Ins. Co., Mo., 722 S.W.2d 947, 950 (1987).

In its attack upon U-36, State Farm goes so far as to characterize the opinion as "inconsistent with law and logic." Brief, at 29. The "law," to which State Farm refers, appears to be contained in those decisions of other jurisdictions which allow insurers to provide insurance defense services through salaried attorney employees. Such precedent, as State Farm explains, is based upon "the identity or community of financial interest between the insured and insurer in defending the claim and because of the insurer's contractual obligation to defend the insured at the insurer's expense." Youngblood, supra, at 330-331. The "logic," to which this Complainant refers, appears to lie within this rubric of "community of interest." For example, State Farm indicates that it is contradictory for U-36 to require the insurer to hire outside counsel to represent the insured once a complaint has been filed, and yet to allow an insurer's employees, including attorneys, to take actions necessary to protect the interests of both the insurer and its insured prior to the filing of a complaint, as this latter activity is "inextricably intertwined with any defense of the insured...." Brief, at 35. State Farm also asserts that as the prohibition against the unauthorized practice of law is designed to protect the public "from the incompetent, the untrained and the unscrupulous in the practice of law," Frazee v. Citizens Fidelity Bank & Trust Co., Ky., 393 S.W.2d 778, 782 (1965), who could be more competent, trained and scrupulous therein than claims litigation counsel employed by insurance companies who, because their practice is concentrated in automobile and premises liability law, are able to specialize and become more proficient in the disposition of such matters. State Farm implies that the legal system as a whole would benefit from such house counsel, in that, as the compensation of these attorneys is not tied to billable hours, they may be apt to dispose of these cases more quickly.

Notwithstanding the trends of other jurisdictions, any alleged nonsensical application of the prohibition against the unauthorized practice of law, and the untapped resource of "competent, trained and scrupulous" in-house insurance defense counsel as pipe cleaners for a clogged legal system, we do not feel that U-36 deserves review. The age-old adage of "if it ain't broke, don't fix it" seems appropriate in disposing of Complainants' argument herein, especially in light of the fact that U-36 first surfaced nearly fifteen years ago and there is now no compelling reason to overrule the more than fifty years of legal precedent which recognizes the principles outlined in that opinion. See, e.g., Connell v. Kentucky Bar Ass'n, Ky., 792 S.W.2d 369 (1990); Kentucky Bar Ass'n v. Tiller, Ky., 641 S.W.2d 421 (1982); Manchester Ins. & Indem. Co. v. Grundy, Ky., 531 S.W.2d 493 (1975); Frazee, supra; Kentucky State Bar Ass'n v. Lakes, Ky., 443 S.W.2d 248 (1969); Kentucky State Bar Ass'n v. First Fed. Sav. & Loan Ass'n, Ky., 342 S.W.2d 397 (1961); Hargett v. Lake, Ky., 305 S.W.2d 523 (1957); Hobson, supra; Kendall, supra. "[T]here is scarcely any judicial dissent from the proposition that a corporation cannot lawfully engage in the practice of law...." Kendall, 295 Ky., at 789, 175 S.W.2d 489. Moreover, ...