The Delaware State Bar Association

Ethically Speaking

In-House and In From the Cold

by Charles Slanina, Esquire

I have previously written on the issue of in-house or salaried attorneys working for insurance carriers operating as a law firm. This arrangement has long raised ethics and professional responsibility questions which appear now to have been resolved.

Liability coverage provides for the payment of claims and legal counsel at the expense of the carrier to defend those claims. Most policies give the carrier the right to select defense counsel. That attorney represents both the interests of the insured as well as those of the carrier, giving rise to the tripartite relationship of which much has been written. Although the carrier pays the attorney’s fee (or in some instances, the entire salary), the professional conduct rules make it clear that the insured is the client. Prohibitions against conflicts of interest, the duty to maintain confidentiality, and other rights and duties apply to the attorney-client relationship. However, the attorney clearly has substantial loyalties to the carrier and the insured has a contractual obligation to cooperate in that arrangement.

Complicating this arrangement has been an experiment, if not a trend, toward insurance companies using either in-house counsel or salaried attorneys to represent their insureds. It may look like a law firm. There are “partner” names on the door. The offices may be located apart from those of the carrier. However, the attorneys often derive their entire salary from the insurance company or they may be contractually limited to only handling the defense work of a single carrier.

This arrangement has given rise to the question as to whether the carriers that are employing such counsel are engaged in the unauthorized practice of law and whether there is an inherent and impermissible conflict of interest for the lawyer. To date, there have been a couple of UPL challenges to the practice, but that question is largely unresolved. The issue as to whether or not there is a conflict of interest has been resolved by a recent, Formal Opinion of the American Bar Association which found that it is not a conflict. ABA Formal Opinion 03-430 (7/9/03).

The ABA first dealt with the issue in 1950 when it issued Formal Opinion 282 which stated that “A lawyer employed and compensated by an... insurance company, which holds a standard contract of insurance with an insured, may with propriety...[d]efend the insured in action brought by a third party...” In reaching this decision, the Committee found that there was a community of interest between the company and the insured and that the company and the insured were virtually one in their common interest. That Opinion was revisited in 1976 by Informal Opinion 1370 which concluded that the changes to the Code of Professional Responsibility did not alter their conclusion. A year later in Informal Opinion 1482, the Committee again reaffirmed that the essential point of ethics involved in the tripartite relationship was that the lawyer so employed, represents the insured as his client with undivided fidelity.

Due to the increased practice of providing insurance defense by in-house or salaried attorneys, the Committee was persuaded to revisit the issue in the context of today’s Model Rules. The Committee concluded that the employment status of insurance staff counsel does not, itself, create a conflict between the insurance company and the insured. In fact, they pointed out that the Model Rules dealing with conflicts of interest between co-clients specifically contemplates lawyers representing multiple clients. The Committee noted the argument of some critics of this arrangement that the opportunity for undue influence by the insurance company on its salaried attorneys was too great. The Committee responded by a recommendation that insurance staff counsel be more vigilant as to the application of Rule 5.4(c) which requires a lawyer to exercise independent professional judgment in advising or otherwise representing clients, regardless of who may be paying for the lawyer’s services.

The Committee reaffirmed its 1996 advice given in Formal Opinion 96-403 which opined that the Model Rules require the lawyer to communicate with the client and convey information sufficient to permit the client to appreciate the significance of the matter in question. That requirement was interpreted by the Committee to suggest that the attorney inform the client of the nature of the representation, the insurer’s right to control the defense and settlement under the insurance contract. In Formal Opinion 03-430, the Committee went further to interpret Rule 1.8(f) as requiring that insurance staff counsel also disclose their employment status and their affiliation with the insurance company to all insureds- clients. They recommended the disclosure at the earliest opportunity practicable, such as during the initial meeting with the client or through appropriate language in the initial letter to the client.

However, the Committee noted that the Model Rules do not place a similar duty of affirmative disclosure on insurance staff counsel with respect to their communications with the Courts or persons other than the insured. “As an ethical consideration, whether a lawyer is a member of an outside law firm or an employee of an insurance company is rarely material to persons other than insureds-clients.”

Finally, the Committee dealt with the issue of how insurance in-house or salaried counsel may identify themselves. The specific question was whether insurance staff counsel are permitted to refer to themselves as a “firm,” “law firm,” or other terms. They concluded that they may do so as long as it does not mislead the insureds-clients. The ABA suggested that the potential for misleading was eliminated when counsel disclosed their employment status in the manner described previously.

Until recently, the Delaware Professional Conduct Rules prohibited attorneys from practicing under a trade name. That practice is no longer banned as long as it is not misleading. However, the Delaware rules still prohibit attorneys from stating or implying that they practice in a partnership or other organization when that is not the fact. Professional Conduct Rule 7.5(d). The inclusion of “or other organization” coupled with the disclosure recommended by the ABA Formal Opinion and the Formal Opinion itself, are likely to make the use of in-house or salaried counsel for insurance defense a permissible practice in Delaware should the question arise.