Unauthorized Prac. Law v. American Home

• Decision Date: 28 March 2008
• Docket Number: No. 04-0138.,04-0138.
• Parties: UNAUTHORIZED PRACTICE OF LAW COMMITTEE, Petitioner, v. AMERICAN HOME ASSURANCE COMPANY, INC. and The Travelers Indemnity Company, Respondents.
• Court: Texas Supreme Court

261 S.W.3d 24

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

No. 04-0138.

Supreme Court of Texas.

Argued September 28, 2005.

Decided March 28, 2008.

Rehearing Denied September 26, 2008.

Mark A. Ticer, Roger M. Tafel, Law Office of Mark Ticer, Dallas, David E. Keltner, Kelly Hart & Hallman LLP, Fort Worth, TX, for Petitioner.

Thomas C. Wright, Lucy H. Forbes, Wright Brown & Close, LLP, Houston, Jim E. Cowles, R. Michael Northrup, Cowles & Thompson, P.C., Mark S. Whitburn, Theodore J. Boutrous Jr., Suellen Ratliff, Gibson, Dunn & Crutcher, LLP, Dallas, TX, William T. Barker, Sonnenschein, Nath & Rosenthal LLP, Chicago, IL, William V. Dorsaneo III, Richard A. Smith, Lynn Tillotson & Pinker, L.L.P., Dallas, Thomas T. Rogers, Jackson & Walker, L.L.P., Austin, TX, for Respondent.

J. Dennis Chambers, Atchley, Russell, Waldrop & Hlavinka, Texarkana, Stephen E. McConnico, Scott Douglass & McConnico, L.L.P., Patricia Anne Moore, Donald P. Wilcox, Fred C. Bosse, Austin, Thomas S. Leatherbury, Robert C. Walters, Vinson & Elkins L.L.P., Calvin R. "Rod" Phelan II, Baker Botts LLP, Dallas, Jerry P. Campbell, Naman Howell Smith & Lee, Waco, John L. Hill Jr., Winstead Scchrist & Minick, P.C., Maurice Joseph Meynier IV, Law Office of M. Joseph Meynier, IV, Houston, Julia F. Pendery, Attorney At Law, Dallas, Peter M. Kelly, Law Office of Peter M. Kelly, P.C., Houston, Guy D. Choate, Webb, Stokes & Sparks, L.L.P., San Angelo, TX, for Amicus Curiae.

Justice HECHT delivered the opinion of the Court, in which Chief Justice JEFFERSON, Justice O'NEILL, Justice WAINWRIGHT, Justice BRISTER, Justice MEDINA, and Justice WILLETT joined.

Liability insurance policies commonly provide that the insurer must indemnify the insured from liability for covered claims and give the insurer the duty, and also the right, to defend such claims. The right to defend in many policies gives the insurer complete, exclusive control of the defense. Insurance companies retain attorneys in private practice to represent insureds in defending claims against them, but for decades, in Texas and other states, insurers have also used staff attorneys — salaried company employees — to save costs.

Generally, a corporation can employ attorneys in-house to represent its own interests but cannot engage in the practice of law by providing legal representation to others with different interests. Because of its potential indemnity obligation, an insurer has a direct, substantial financial interest in defending claims against its insured, and often an insurer and an insured's interests are aligned toward simply defeating such claims. But their interests can diverge, as for example when all or part of the claim may not be covered. The issue in this case is whether a liability insurer that uses staff attorneys to defend claims against its insureds is representing its own interests, which is permitted, or engaging in the unauthorized practice of law, which is not. Two states, North Carolina and Kentucky, do not permit such use of staff attorneys, but several other states do.

We hold that an insurer may use staff attorneys to defend a claim against an insured if the insurer's interest and the insured's interest are congruent, but not otherwise. Their interests are congruent when they are aligned in defeating the claim and there is no conflict of interest between the insurer and the insured. We also hold that a staff attorney must fully disclose to an insured his or her affiliation with the insurer. We modify the judgment of the court of appeals and as modified, affirm.¹

I

Liability insurance policies that obligate the insurer to defend claims against the insured typically give the insurer "complete and exclusive control" of that defense.² There are exceptions and variations, but we focus here on policies in which the insurer's right to control the defense is "full and absolute."³ Insurers often retain attorneys in private practice to represent insureds, overseeing and directing their work and paying their fees. Sometimes an insurer uses a "captive" firm of attorneys who, though not the insurer's employees, have no other clients. Insurers also use lawyers employed as salaried corporate staff to represent insureds. In every instance, the insured's lawyer "owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured"⁴ and "must at all times protect the interests of the insured if those interests would be compromised by the insurer's instructions."⁵

Staff lawyers perform all the legal services that private attorneys do, filing pleadings and motions, taking discovery, engaging in settlement discussions, appearing in court, and trying cases. Insurers contend that staff attorneys are significantly more efficient and economical than private attorneys and thereby reduce defense costs and premiums.⁶ Insurers also claim that the availability of staff attorneys is a useful advertising tool for selling policies. But critics of the use of staff attorneys argue that when an insurer controls the insured's attorney as thoroughly as an employer controls an employee, the attorney-client relationship can be impaired to the insured's detriment.⁷ This disagreement has been the subject of lingering national debate.

There is some indication that insurers' use of staff attorneys to represent insureds dates to the end of the nineteenth century.⁸ In 1950, the American Bar Association Committee on Ethics and Professional Responsibility concluded that such use of staff attorneys was not unethical,⁹ and it reaffirmed that view in 2003.¹⁰ While there appear to be no comprehensive industry studies on the matter,¹¹ it is safe to say that the practice is now, and has long been, widespread.¹² The same is true in Texas. A 1963 opinion of the State Bar of Texas Committee on Interpretation of the Canons of Ethics recognized insurers' use of staff attorneys to defend claims against insureds and found nothing improper in the practice.¹³ An amicus curiae brief in this case, submitted by five insurers who use staff attorneys to defend insureds, states that fifteen insurers employ 220 staff attorneys in Texas in 39 offices.¹⁴ Another amicus curiae brief, received from insurance, corporate counsel, and business interests, estimated that in September 2005, over 10,000 cases in Texas were being defended by staff attorneys.¹⁵

The practice of law in Texas is regulated by this Court and by the Legislature.¹⁶ To practice law in Texas, one must either be licensed by the Court¹⁷ or have special permission.¹⁸ To ensure the quality and integrity of the bar, the Court requires continuing education¹⁹ and imposes strict disciplinary rules,²⁰ enforced through the grievance process.²¹ To further protect the public, we have established and appointed the Unauthorized Practice of Law Committee to be responsible for investigating and prosecuting the unauthorized practice of law.²²

In 1998, the Committee sued Allstate Insurance Co., alleging that its use of staff attorneys to defend insureds against liability claims constituted the unauthorized practice of law.²³ The action prompted Nationwide Mutual Insurance Co. to sue in federal court for a declaration that Texas law did not prohibit its use of staff attorneys to represent insureds, but if it did, it violated the United States Constitution.²⁴ The federal district court decided that abstention was required under the Pullman doctrine²⁵ and dismissed the case, and the Fifth Circuit affirmed in substance.²⁶ After surveying Texas caselaw and the provisions of the State Bar Act on which the Committee relied, the Circuit concluded:

we believe that the law is fairly susceptible to a reading that would permit Nationwide to employ staff counsel on behalf of its insureds. While the Texas courts certainly may decide that Nationwide's staff attorneys are engaged in the unauthorized practice of law, we believe that the law is uncertain enough on this issue that we should abstain from ruling on its federal constitutionality.²⁷

Nationwide then sued the Committee in state court and obtained a favorable judgment, affirmed on appeal, which the Committee petitioned this Court to review while the present case has been pending.²⁸

Meanwhile, in August 1999, a staff attorney for American Home Assurance Co., Katherine D. Woodruff, received a letter from the Committee's Dallas subcommittee stating that it was investigating whether she and her firm, Woodruff & Associates, all staff attorneys employed by American Home, were engaged in the unauthorized practice of law. Shortly thereafter, American Home, Woodruff, Woodruff & Associates, and Travelers Indemnity Co. brought this action against the Committee for a declaration that "neither the insurance companies' employment of staff counsel nor the attorneys' practice as staff counsel constitutes the unauthorized practice of law". The Committee counterclaimed for declaratory and injunctive relief. After all claims by and against Woodruff and Woodruff & Associates were nonsuited, the trial court denied American Home's and Travelers' motions for summary judgment, and granted summary judgment for the Committee, declaring that each company's "use ... of staff counsel who are employees ... to defend insureds (third parties) in Texas is the unauthorized practice of law". The trial court suspended its judgment pending appeal, conditioned on American Home's and Travelers' adoption of the following policy:

If in the course of representing a party insured by [American Home and Travelers] any staff counsel employed in Texas by [such insurer, respectively] seeks advice about a potential conflict of interest between the insured and the insurance company, or any other question of professional ethics, such staff counsel will first consult with the Texas-licensed lawyer who is head of the staff counsel office, and...