Opinion ID: 853748
Heading Depth: 2
Heading Rank: 2

Heading: House Counsel's Ability to Represent Policyholders

Text: Three distinct issues are presented by the use of house counsel to defend liability claims against policyholders. First, some courts have seen the issue, as the trial court did here, as whether use of house counsel constitutes the unauthorized practice of law by the employer-insurer. See, e.g., Gardner v. North Carolina State Bar, 316 N.C. 285, 341 S.E.2d 517 (1986). Second, other courts have viewed this problem as turning on whether there is an inherent conflict in the representation such that it is a violation of the Rules of Professional Conduct for the house lawyer to proceed. See, e.g., In re Rules Governing the Conduct of Attorneys, 220 So.2d 6 (Fla.1969). Finally, even if such an arrangement may be consistent with the Admission and Discipline Rules, the Rules of Professional Conduct and any applicable statutes, there remains the question whether the representation was properly entered into in the specific case. Whether an insurance company may properly employ salaried attorneys to represent insureds in claims litigation has been addressed by ten states through court decisions and by the American Bar Association [3] and ten other jurisdictions in ethics opinions. [4] Eight of the ten state courts and one federal circuit have concluded that it is permissible for an attorney employed by an insurance company to represent the company's insureds, but have reached that result through a variety of paths. [5] Two states have disapproved of the arrangement, one focusing on the potential conflict in interest between the insurer and the insured and the second on a statutory bar against the practice of law by a corporation. American Ins. Ass'n v. Kentucky Bar Ass'n. 917 S.W.2d 568 (Ky. 1996); Gardner, 341 S.E.2d at 517. For the reasons stated below, we now hold, consistent with the majority of state courts that have addressed the issue, that (1) insurance companies do not necessarily engage in the unauthorized practice of law when house counsel represent their insureds in claims litigation and (2) attorneys who are employees of insurance companies do not necessarily trigger an impermissible conflict in violation of the Rules of Professional Conduct when they appear as counsel to defend claims against the companies' policyholders.
As a preliminary matter we address the Wills' contention that Faber's representation of Suter was improper because Suter was not given notice that Celina could appoint house counsel to represent her rather than an outside attorney. Suter's policy provided: If a claim is made or suit is brought against `insured' ... we [Celina] will: ... [p]rovide a defense at our expense by counsel of our choice ..., clearly disclosing the insurance company's prerogative to choose an attorney for the insured. Only by failing to comment on the issue at all does this language deal with the point raised by the Wills that the counsel of our choice may be an employee of the insurer. As a general proposition, adequate disclosure is a matter in the first instance properly addressed through administrative regulation. The insurance commissioner may choose to require more explicit notice to the insured at the time the policy is taken out that counsel of our choice could or will include house counsel. And a policyholder aggrieved by nondisclosure of this arrangement at the time of issuance is free to assert whatever claim is thought to arise from that circumstance. But this issue provides no basis for disqualification in this case. Suter did not complain of Celina's assignment of Faber to her case and stated that she was satisfied with Faber's representation. Accordingly, the quality of Suter's notice presents no issue here.
The trial court reasoned that: (1) the attorney-agents of Celina are engaged in the practice of law; (2) Celina, a corporation, can act only through agents; (3) the acts of the attorneys are those of Celina; therefore (4) Celina is engaged in the practice of law. The trial court went on to conclude that Celina's practice of law was unauthorized because Indiana's professional corporation statute implicitly prohibits general business corporations and insurance companies from practicing law. A variant on this theme was adopted by the Kentucky Supreme Court in American Insurance Association v. Kentucky Bar Association, where it reasoned that a corporation cannot lawfully engage in the practice of law.... Moreover, a corporation[] cannot obtain license to practice law, since it is wholly incapable of acquiring the educational qualifications necessary to obtain such license, nor can it possess in its corporate name the necessary moral character required therefore. 917 S.W.2d 568, 571 (Ky.1996) (citations omitted). Unlike some other states, Indiana has no express statutory prohibition against a corporation's practicing law. [6] There are, however, many restrictions either explicitly or implicitly imposed by the Rules of Professional Conduct on the forms of business entities available to an attorney for the practice of law. Thus, neither an insurance company nor a general business corporation can simply employ lawyers and hold them out to the public as offering legal services. Whether or not such an activity would involve the entity in the unauthorized practice of law, the Rules of Professional Conduct provide explicit limitations on the persons with whom a lawyer may share fees and form partnerships. [7] Ind. Prof. Cond. R. 5.4(a) & (b). Additionally, the Rules prohibit a lawyer from practicing law in a professional corporation or other association if a nonlawyer owns any interest, is a director or officer or otherwise has the right to direct or control the lawyer's professional judgment. Prof. Cond. R. 5.4(d). [8] Justice Dickson suggests that there would be no recourse against a corporation that simply employed licensed attorneys and sold their services to the general public. 717 N.E.2d 169 (Ind.1999). If this form of business organization violated, for example, the prohibition against sharing the profits of the practice, the attorneys would be subject to discipline up to and including having their licenses suspended or revoked. And if unlicensed persons did the same thing, those people, and presumably their accomplices and the organization employing them, would be subject to the same sanctions as any other person practicing without a license, including criminal prosecution. Indiana Code § 33-1-5-1 criminalizes the practice of law by a person who is not an attorney. Person includes corporations, partnerships and other legal entities. See id. §§ 35-41-1-22 (defining person) & 35-41-1-3 (applying definition to all statutes relating to penal offenses). See also id. § 33-21-2-1 (the practice of law by a person who is not an attorney is prohibited). Despite the absence of a statute addressing a corporation's practicing law, for decades courts and commentators alike have agreed that it is unlawful for a corporation to practice law in Indiana. [9] Over sixty years ago we were told that [t]he general rule that a corporation cannot practice law seems to be well settled in the United States today. David Gleber, Attorney and ClientUnauthorized Practice of Law, 13 NOTRE DAME LAWYER 289 (1938). Addressing the State Bar Association, one Indiana commentator stated: Of course, it is unlawful for a corporation to practice law. It is now unlawful, and it has always been unlawful for a corporation to practice law. The very statement of the proposition is its answer. It is just as sensible, it seems to me, to repeal the law of gravitation or to pass a law making it unlawful for objects to fall to the ground. Glen D. Peters, Bootleggers in Law, 7 IND. L.J. 46, 53 (1931). This rule was apparently so well settled that those asserting it felt no need to provide any basis for it other than the common law prohibition of the practice of law by a corporation. Gleber, supra at 290. And in more recent times this Court has stated, although in a quite different context, that [a] corporation is a creature of statute and can neither practice law nor act in person. Department of Pub. Welfare v. Chair Lance Serv., Inc., 523 N.E.2d 1373, 1377 (Ind. 1988). It is not obvious, however, precisely what it means to say a corporation may not practice law, or why that is true in every potential sense of that phrase. [10] The modern statements of the rule that a corporation may not practice law typically reflect no more than the point that only a natural person can be admitted to the bar. This is of course correct. The admission provisions requiring a lawyer to graduate from law school and to sit for the bar exam do not contemplate a legal entity as a bar candidate. [11] As the Supreme Court of Georgia put it, [i]t is manifest from these [admission] provisions of the law that no corporation can be licensed to practice law in this state. No corporation can comply with the requirements which are imposed upon applicants as prerequisites to enable them to obtain license to practice law. Boykin v. Hopkins, 174 Ga. 511, 162 S.E. 796, 800 (1932). Similarly, it is clear that only licensed attorneys may lawfully practice law. Indeed, as already noted, the unlicensed practice of law by any person is criminal. From these general propositions in concert with conventional agency principles the Wills and the trial court concluded that the insurer-employer of a licensed attorney is unlawfully practicing law. However, it is clear that some provisions of our Rules and statutes assume or contemplate that entities that cannot sit for the bar may nonetheless employ lawyers who practice law and in that sense practice law themselves. All agree that a group of attorneys may lawfully organize as a partnership, limited liability partnership or professional corporation. Each of these legal entities has individuals who are shareholders, partners or employees of the organization and who, as licensed lawyers, also practice law. Despite the obvious fact that neither the partnership nor the professional corporation graduated from law school, etc., there is no claim raised that any of these entities is engaged in the unauthorized practice of law. Moreover, our Rules of Professional Conduct at least implicitly confirm that a partnership's activities may consist of the practice of law by, for example, Rule 5.4(b)'s prohibition against formation of such a partnership with a non-lawyer partner. The statutory provisions for professional corporations are also relevant. The trial court pointed to Indiana Code § 23-1.5-2-3 in support of its conclusion that Celina, an insurance company, engaged in the unauthorized practice of law. This section authorizes professional corporations to be formed to render professional services. Specifically, it provides for a legal entity that is authorized to render services that may legally be performed only by an attorney. IND.CODE § 23-1.5-2-3(3) (1998). This provision seems to assume that the professional corporation, by rendering services will itself be practicing law, just as Rule 5.4(b) describes a partnership as practicing law. The practice is not unauthorized, however. The professional corporation statute goes on to provide that [a] professional corporation may render professional services only through individuals permitted to render such services in Indiana. Id. § 23-1.5-2-5. This statute reinforces the conclusion that entities may lawfully render legal services if the activities are conducted by a licensed attorney. It also authorizes professional corporations to conduct a general practice of law. We do not agree, however, that it impliedly prohibits employees of a general business corporation or an insurance company from practicing law. Rather, it simply leaves them where it found them, subject to the confinements of other rules but not inherently incapable of practicing law. Finally, the Rules also explicitly recognize that corporations may have house counsel. The definition of a law firm includes lawyers employed in the legal department of a corporation or other organization. Prof. Cond. R. preamble. Rule 1.13 by its terms applies to attorneys employed or retained by a corporation or other organization. As a result, employee-attorneys are subject to the same obligations, including supervision, etc., that apply to attorneys in other forms of practice. There is no dispute that properly admitted employee-attorneys practice law in representing their employer and as such are subject to the Rules of Professional Conduct. [12] Moreover, as elaborated in Part II.C., it is not uncommon for house counsel to represent both the corporation and its officers, directors or other employees in matters where the potential for conflict does not preclude common representation. [13] There, as in the insurer situation found in this case, the attorney's obligations run to both clients. Both situations present the possibility of a conflict between the interests of the two clients. Despite that possibility, in many cases the matter is resolved without any significant divergence of those interests, and the interests of economy and simplicity clearly justify the practice. Notwithstanding the continuing ban, indeed criminalization of practicing law by any person not an attorney, the Rules of Professional Conduct, statutes and well accepted forms of practice clearly imply that the entity itself is not unlawfully practicing law as long as the activity is conducted through licensed attorneys. [14] It is of course true that a legal entity can be responsible for the professional actions of its partners, employees and agents under standard doctrines of respondeat superior, and in that sense is viewed as engaged in the activity. But that does not mean the entity unlawfully practices law any more than Federal Express unlawfully pilots airplanes. Rather the practice of law, the piloting of airplanes and many other activities are required to be performed by licensed professionals. And, as a general proposition, where the law requires a license, agency doctrine permits an unlicensed legal entity to employ licensed agents to perform those acts requiring a license. RESTATEMENT (SECOND) OF AGENCY § 19 cmt. d (1958). In each case the lawfulness of the entity's activities turns on whether the individual is properly licensed. Regardless of whether a partnership, a professional corporation, an insurance company, or any other legal entity may be said to be practicing law in some sense, we believe the proper focus of the unauthorized practice inquiry is whether the challenged activity results in the unauthorized practice by the individuals involved. [15] Rather than turning on a syllogism based on a series of propositions of dubious general validity, the unauthorized practice issue boils down to whether a non-lawyer is performing tasks requiring a lawyer, or a lawyer not admitted in this State is practicing in Indiana. See 2 GEOFFREY C. HAZARD, JR. & W. WILLIAM HODES, THE LAW OF LAWYERING: A HANDBOOK ON THE MODEL RULES OF PROFESSIONAL CONDUCT § 5.5:102 (1985 & Supp.1998) (Most of the law on unauthorized practice has been developed by the courts in criminal prosecutions and injunction proceedings against [nonlawyers] for practicing without a license and in civil cases attempting to hold such persons liable for malpractice where they held themselves out as lawyers.). There is no dispute that the attorney-employee who represents the organization that employs the attorney is practicing law. There is also no dispute that the attorney in this case can properly represent his employer in connection with the Wills' claim. The only issue is whether the concurrent representation of the insured renders the representation unauthorized or makes it somehow the practice of law by someone other than the attorney. Given that the attorney's representation of the insurer-employer is lawful, the representation of a policyholder whose interests are essentially aligned with the insurer's does not inherently result in unauthorized practice by either the insurer or the attorney. Nor, in our view, is this tantamount to offering legal services to the general public. Suter undoubtedly perceived herself as buying insurance coverage and only incidentally acquiring the prospect of legal services. Indeed, if outside counsel were employed to defend her claim, Celina would have been offering her the same package of services from her point of view. In sum, as explained in Part II.C., there may be many other reasons why an employee-attorney may not concurrently represent both the employer and someone else, but the attorney's status as an employee of an insurance company or any other legal entity is in and of itself no bar. We conclude that Celina does not necessarily engage in the unauthorized practice of law when its employed attorney represents its insureds. Accordingly, Faber does not assist Celina in the unauthorized practice of law when he represents insureds. Our conclusion is the same with respect to Cincinnati and its employed attorneys on the issue of the unauthorized practice of law.
There are plainly many situations where representation of both an insured and the insurer is inconsistent with the Rules of Professional Conduct. However, the issue in this case is whether these potential conflicts are so inherent in the representation that it is a violation of the Rules of Professional Conduct to enter into the arrangement in the first place. We think not.
As a related matter, there is extensive debate in the literature as to whom the attorney represents in this situation. [16] Specifically, whether the attorney is an employee or an outside lawyer, the debate focuses on whether only the insured or both the insured and the insurer should be viewed as the client. We think it unrealistic to ignore the client relationship with both. Joint representation may become problematic, particularly if issues of disclosure of confidences arise. For example the attorney may gain information from the policyholder-client that may affect the insurer-client's coverage obligation. But that is no basis for prohibiting the arrangement in all cases. Whatever issues joint representation raises appear to be wholly independent of the attorney's status as an employee of the insurer or a member of a law firm. Second, there is nothing inherently wrong in common representation of two parties where their interests are aligned. Professional Conduct Rule 1.7 provides direction [w]hen representation of multiple clients in a single matter is undertaken.... In this respect, the insured and insurer present no qualitatively different situation from any other pair of commonly represented clients. If a conflict arises, it will have to be handled, and there are a variety of means to do that. But a vast number of claims have been and presumably will be handled with no significant issue between the insurer and the policyholder. Interests of economy and simplicity dictate that this be permitted to continue. Any abuses can be handled on a case-by-case basis rather than by adoption of the broad prohibition the Wills seek. Although issues may arise in dual representation, none are apparent in this case. In any event, Celina has by contract subordinated its interests as a client to those of Suter. Presumably, this resolves by agreement the priority of counsel's obligations if, for example, counsel learns of information that affects the insurer's and the policyholder's interests differently.
The Rules of Professional Conduct prohibit an attorney from representing a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person. Prof. Cond. R. 1.7(b). In addition, the professional independence of a lawyer is not impaired so long as the lawyer does not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment. Prof. Cond. R. 5.4(c). Where someone other than the client pays the lawyer's fee or salary, or recommends employment of the lawyer, that arrangement does not modify the lawyer's obligation to the client. Prof. Cond. R. 5.4 cmt. The Wills contend that Faber violated each of these as well as Rules 1.8(f) (no compensation from those who interfere with the lawyer's independence); 7.3(f) (lawyer shall not compensate those who recommend employment); 5.4(a) (no sharing of legal fees with nonlawyer); and 5.4(d)(2) and (d)(3) (no practice in an association or a professional corporation if nonlawyer holds interest). All of these contentions relate to the inherent inappropriateness of the arrangement. The trial court's order includes detailed discussions of the Wills' claims and the evidence they offered to support those claims. [17] None of the evidence was specific to Faber's relationship to Celina. Rather it focused on the general issue of house counsel as counsel for policyholders. Specifically, as the trial court noted, the Wills presented nothing beyond mere allegation that Celina directs or regulates Mr. Faber's professional judgment based upon the employment relationship. The trial court found that Faber's employment by Celina did not inherently result in any unethical practice or conflict of interest. Amicus Curiae, the Defense Trial Counsel of Indiana, argued before this Court that house counsel are less aware of the Rules of Professional Conduct and the discipline matters decided by this Court than attorneys who practice in traditional firms. They point to no evidence in support of this assumption and we decline to adopt it. All members of the Bar accept their obligations to their clients and the Court under the Admission and Discipline Rules and the Rules of Professional Conduct. The vast majority of practicing attorneys discharge their obligations without complaint over an entire career. As to the remainder, this state, like all others, has in place disciplinary procedures to protect the public. In Groninger v. Fletcher Trust , we rejected the plaintiff's claims that one who is the regular attorney for a trust company will be more loyal to his employer than to the trust for which he is rendering legal services.... 220 Ind. 202, 208, 41 N.E.2d 140, 142 (1942). Over half a century later we still agree with the trial court's conclusion that [t]here is nothing to suggest that attorneys who are house counsel for insurance corporations are ignorant or numb to the expectations of the Rules of Professional Conduct. In this respect we join the several states that reject the contention that house counsel representation of insureds presents an inherent conflict in violation of the Rules of Professional Conduct. Compliance with the Code in all cases will be measured against the Code itself, rather than some variation of the `outside counsel' practice, which, depending upon the circumstances of the particular situation, may not conform to the requirements of the Code. Petition of Youngblood, 895 S.W.2d 322, 328 (Tenn.1995); see also In Re Allstate Ins. Co., 722 S.W.2d 947, 953 (Mo.1987) (en banc) (There is no basis for a conclusion that employed lawyers have less regard for the Rules of Professional Conduct than private practitioners do.) In rejecting a proposed conduct rule prohibiting house counsel from representing insured, the Supreme Court of Florida found no basis for distinguishing between house counsel and outside counsel. It observed that all attorneys engaged to represent insureds pursuant to an insurance contract face the same ethical decision: an attorney, whether house counsel or outside counsel, is employed to represent two clients. In Re Rules Governing Conduct of Attorneys, 220 So.2d at 7. The court concluded that the lawyer owes undivided loyalty to the client whom he purports to serve, not to the third party source of his compensation. Id. at 8. The Supreme Court of Georgia observed that both [attorneys employed and compensated on a case by case basis] and staff counsel owe duties to and therefore represent both the insurer and the insured. Coscia v. Cunningham, 250 Ga. 521, 299 S.E.2d 880, 881 (1983). It is of course true that conflicts may arise in the course of representation of an insured by house counsel. The same is true if the insurer pays for a law firm to represent its insured. In either case there may be a conflict based on coverage disputes, the risk of a claim in excess of policy limits, the acquisition of information from the insured that bears on coverage, or a variety of other items. If such a situation arises retention of new counsel to represent the policyholder may be either preferred or necessary. But this potential does not require the abandonment of a mode of doing business that the insurer finds efficient and cost effective, and the insured knowingly accepts. Presumably ultimately the marketplaces of ideas and premium charges will sort this out and strike a balance between claimed cost advantages and perceived desirability of wholly independent counsel. We find nothing in our Rules of Professional Conduct to prevent the parties from continuing to duke this issue out in those marketplaces without interference from the judiciary. If and when abuses are perceived by policyholders they may seek the aid of the courts or the insurance commissioner. Our point is not, as Justice Dickson concludes, that two wrongs make a right. 717 N.E.2d at 183. Rather it is that the potential for conflict is inherent in the insurer-insured relationship regardless of whether the attorney is house counsel or outside counsel, and the employment relationship is not qualitatively different in this respect. Finally, as already noted, apart from the unauthorized practice issue, most of the problems identified by the Wills exist whether house counsel or outside counsel are used. If there is any difference between house and outside lawyers in this respect it is quantitative and not qualitative and varies from situation to situation. Employee-attorneys may be subject to pressures from their employer. But it is also unrealistic to suggest that an outside lawyer is immune from the blandishments of a client, particularly a high volume client that may be the source of a significant portion of the firm's revenues. For a decade the legal press has been full of stories of various cost containment programs implemented by insurers and others to reduce their outside legal expenses. Ultimately all attorneys are bound by their professional obligations to place the interests of their policyholder-client ahead of their own if pressure from an employer or a co-client insurer conflicts with those of the policyholder. We will not assume that an attorney employed by an insurance corporation is in violation of any of the Rules based solely on that employment relationship. The full range of disciplinary sanctions and civil remedies are available to deal with hopefully isolated instances of trouble. This is true whether the attorney is an employee of an insurance company, a partner in a firm significantly dependent on the insurer's business or a lawyer relatively free of direct economic pressure. In sum, we hold that an insurance company does not engage in the unauthorized practice of law when it employs attorneys to represent insureds and that attorneys employed by insurance companies may represent insureds under circumstances and to the extent permitted by their ethical obligations defined in the Admission and Discipline Rules and the Rules of Professional Conduct. This holding does not, as Justice Dickson suggests, turn on the fact that the employer is an insurance company; it depends on the commonality of interests of the jointly represented clients. 717 N.E.2d at 166.
The Court's ability to prohibit the unauthorized practice of law and regulate the conduct of licensed attorneys emanates from the need to protect the public from those not properly licensed or otherwise qualified to act as attorneys. State ex rel. Disciplinary Commission of the Supreme Court of Indiana v. Owen, 486 N.E.2d 1012, 1014 (Ind.1986); see also Hulbert v. Mybeck, 220 Ind. 530, 532, 44 N.E.2d 830, 831 (1942). In addition, the preamble to the Rules of Professional Conduct cautions that [t]he profession has a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of parochial or self-interested concerns of the bar. As demonstrated by this case, free access to the market of legal services and the protection of the public is a delicate balance with results that are not always predictable. As noted in Part II.C.2., in the realm of insurance defense, the public may ultimately reap the benefits of better service at lower cost through the use of house counsel. Although we find no inherent detriment to the general public in the defense of insurance claims by house counsel, we reiterate the fact that the Rules of Professional Conduct, the disciplinary procedures, and other civil remedies exist for the protection of all clients, whether the attorney is house counsel, a sole practitioner, affiliated with a traditional law partnership, or anything else.