Can a liability insurer's salaried staff lawyer represent the insurer's insureds in Alabama, and what must the lawyer disclose?

Plain-English summary

The Disciplinary Commission revisited its 1981 opinion (RO-1981-533) on whether and how a liability insurer may use salaried staff lawyers to defend its insureds, updating the analysis to the current Alabama Rules of Professional Conduct. The opinion concludes that a full-time staff lawyer may represent the insurer's insured where the interests of the insured and insurer are fully aligned and the insurer has a direct financial interest in the outcome.

The opinion first addresses whether using staff counsel is the unauthorized practice of law. Reviewing Ala. Code § 34-3-6 and case law, and noting that the Rules define "firm" to include "lawyers employed in the legal department of a corporation," the opinion concludes it is not: the insurer uses staff counsel to limit losses on its core insurance business, not to sell legal services, and in Alabama the insurer is traditionally a co-client with the insured (citing the Comment to Rule 1.8, RO 1994-08, and Mitchum v. Hudgens). On conflicts, the opinion sees no reason to distinguish staff counsel from outside counsel; the potential for actual conflicts is the same, and where the interests are fully aligned there is no inherent conflict.

The opinion then sets disclosure and structural safeguards. Staff counsel must disclose any limitations on the representation under Rule 1.2(c) (for example, policy provisions letting the insurer control the defense or settle within limits) and must disclose, in writing at the outset, that the lawyer is a full-time salaried employee of the insurer; it is impermissible to state or imply practice in a separate independent firm. Under Rule 5.4(c), the lawyer may not let the insurer direct the lawyer's professional judgment. To protect Rule 1.6 confidentiality, staff-counsel offices should be physically and organizationally distinct, with access to insured files limited to staff counsel and their personnel. Where staff counsel operate under a "firm name," Rules 7.1 and 7.5 require clear disclosure on letterhead, business cards, at office entrances, in phone listings, and when answering the phone that the office is the insurer's and its lawyers are the insurer's employees. Finally, staff counsel must advise the insured about potential counterclaims; ordinarily staff counsel may not pursue a counterclaim for the insured (the insurer lacks a direct financial interest and the conflict potential is greater) and should refer the insured to private counsel.

In practice

The opinion holds that, under the Alabama rules as they stood at the time of the opinion, an insurer's staff lawyer may defend insureds when interests are fully aligned and the insurer has a direct financial stake, and that the arrangement is neither the unauthorized practice of law nor an inherent conflict. It applies Rule 1.2(c) and a written disclosure requirement to the staff lawyer's salaried status and any defense limitations, Rule 5.4(c) to bar insurer control of professional judgment, Rule 1.6 to require organizationally distinct offices and restricted file access, and Rules 7.1 and 7.5 to require that any "firm name" disclose the insurer connection. The opinion treats counterclaims as outside staff counsel's role, directing referral to private counsel.

Common questions

Q: Can an insurance company's in-house lawyer defend a policyholder in Alabama?

A: Yes, within limits. The opinion concludes a full-time staff lawyer may defend the insurer's insured where the interests of the insured and insurer are fully aligned and the insurer has a direct financial interest, and that this is not the unauthorized practice of law.

Q: Does staff counsel have to tell the insured they work for the insurer?

A: Yes. The opinion requires staff counsel to disclose, in writing at the outset, that the lawyer is a full-time salaried employee of the insurer, and bars implying that the lawyer practices in a separate independent firm.

Q: Can the insurer direct how staff counsel handles the defense?

A: No, not the lawyer's professional judgment. The opinion applies Rule 5.4(c) to prohibit the insurer from directing or regulating the staff lawyer's professional judgment, and requires disclosure of policy limitations (such as control of the defense or settlement authority) under Rule 1.2(c).

Q: Can staff counsel use a "firm name" that doesn't mention the insurer?

A: Only with clear disclosure. The opinion concludes that using a firm name like "XYZ Law Offices" may be misleading under Rules 7.1 and 7.5 unless letterhead, business cards, office entrances, phone listings, and phone greetings disclose that the office is the insurer's and its lawyers are its employees.

Q: Can staff counsel pursue a counterclaim for the insured?

A: Ordinarily no. The opinion concludes staff counsel must advise the insured of potential counterclaims but generally may not pursue them (the insurer lacks a direct financial interest and the conflict potential is greater), and should refer the insured to private counsel.

Background and rules framework

The opinion interprets several Alabama Rules of Professional Conduct, which track the Model Rules: Rule 5.5 (unauthorized practice of law, Model Rule 5.5); Rule 1.7 (conflict of interest, Model Rule 1.7), read against the insurer-insured co-client relationship reflected in the Comment to Rule 1.8; Rule 1.2(c) (limited-scope disclosure, Model Rule 1.2); Rule 5.4(c) (professional independence, Model Rule 5.4); Rule 1.6 (confidentiality, Model Rule 1.6); and Rules 7.1 and 7.5 (communications and firm names, Model Rules 7.1 and 7.5). It also relies on Ala. Code § 34-3-6 (definition of the practice of law) and on ABA Formal Opinion 03-430.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.5 / Ala. R. Prof. C. 5.5 (unauthorized practice of law)
• Model Rule 1.7 / Ala. R. Prof. C. 1.7 (conflict of interest)
• Model Rule 1.2 / Ala. R. Prof. C. 1.2(c) (limited-scope disclosure)
• Model Rule 5.4 / Ala. R. Prof. C. 5.4(c) (professional independence of a lawyer)
• Model Rule 1.6 / Ala. R. Prof. C. 1.6 (confidentiality)
• Model Rules 7.1 and 7.5 / Ala. R. Prof. C. 7.1, 7.5(a) (communications; firm names and letterheads)

Statutes:

• Ala. Code § 34-3-6 (1975) (definition of the practice of law)

Cases:

• Mitchum v. Hudgens, 533 So. 2d 194 (Ala. 1988), insurer-retained counsel represents both insured and insurer
• Coffee Cty. Abstract and Title Co. v. State ex rel. Norwood, 445 So. 2d 852 (Ala. 1983), unauthorized practice determined case by case
• Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151 (Ind. 1999), majority view permitting staff counsel

Other opinions cited:

• ABA Formal Opinion 03-430: salaried in-house insurance lawyers may not hold themselves out as outside counsel
• Alabama RO-1981-533 (revisited), RO 1994-08, and RO 1990-99

See also

• ABA Ethics Op. 03-430: Insurance Staff Counsel Representation and Naming
• ABA Ethics Op. 01-421: Lawyer Acting Under Insurance Company Guidelines
• TX Ethics Op. 696: Insurance Staff Counsel Performance Surveys
• RI EAP Op. 2008-02: Insurer-Retained Defense Counsel's Duty to Withdraw When the Insured Client's Account Is Contradicted by the Evidence

Source

• Landing page: https://www.alabar.org/office-of-general-counsel/formal-opinions/2007-01/
• Original PDF: https://www.alabar.org/assets/2019/02/2007-01-1.pdf

Original opinion text

ETHICS OPINION RO-2007-01

OFFICE OF GENERAL COUNSEL

INSURANCE STAFF COUNSEL

QUESTION:

The Disciplinary Commission has determined that it would be appropriate to give further consideration to the conclusions reached in RO-1981-533 which addresses the issue of whether and/or to what extent liability insurers may employ staff counsel to represent insureds.

ANSWER:

A lawyer who is a full-time employee of a liability insurer may represent his employer's insured where the interests of the insured and the insurer are fully aligned and where the insurer has a direct financial interest in the outcome of the litigation. At the outset of representation, staff counsel must disclose that he/she is a full-time employee of the insurer and disclose any limitations upon the representation. In representing an insured, a staff attorney should ensure that the insurer does not interfere with the lawyer's independence of professional judgment, and must otherwise comply with the Rules of Professional Conduct.

DISCUSSION:

In RO-1981-533, the Disciplinary Commission determined that it was ethically permissible for a liability insurer carrier to prosecute subrogation actions on behalf of the carrier and the insureds' deductible, to handle worker's compensation claims against the carrier's insureds, and to represent the insured wherein the carrier is made a direct party to the civil action. At the time RO-1981-533 was released, Alabama was operating under the former Alabama Code of Professional Responsibility. Alabama has since adopted a new code based primarily on the ABA's Model Rules of Professional Conduct. As such, the Disciplinary Commission feels that it is appropriate at this time to revisit the holding of RO-1981-533 in light of the current Alabama Rules of Professional Conduct and evolving standards of ethical conduct.

In doing so, the Disciplinary Commission believes it is first necessary to answer a question that was not addressed in RO-1981-533, whether the utilization of staff counsel by an insurance carrier constitutes the unauthorized practice of law. Rule 5.5, Ala. R. Prof. C., prohibits attorneys from assisting a non-lawyer entity in the "performance of activity that constitutes the unauthorized practice of law." The Supreme Court of Alabama has not addressed the issue of whether the utilization of staff counsel by an insurance carrier constitutes the unauthorized practice of law. Therefore, the Disciplinary Commission relies on its own interpretation of relevant case law and statutory authority.

The Supreme Court of Alabama has stated that "the specific acts which constitute the unauthorized practice of law are and must be determined on a case-by-case basis." Coffee Cty. Abstract and Title Co. v. State, ex rel. Norwood, 445 So. 2d 852, 856 (Ala. 1983). As a starting point, § 34-3-6, Ala. Code 1975, which defines the practice of law, provides, in pertinent part, that only persons regularly licensed have authority to practice law, and defines the practice of law to include appearing in a representative capacity as an advocate or drawing papers in connection with proceedings before a court or other body, advising another as to secular law for consideration, or doing any act in a representative capacity to obtain redress of a wrong or enforcement of a right.

The Supreme Court of Alabama has repeatedly held that the purpose of § 34-3-6 is to ensure that laymen do not serve others in a representative capacity in areas that require the skill and judgment of a licensed attorney. Porter v. Alabama Ass'n of Credit Executives, 338 So.2d 812 (Ala. 1976). Moreover, the Alabama Rules of Professional Conduct expressly recognize that corporations may employ in-house counsel to represent their own interests in litigation. The term "firm" is defined in the Alabama Rules of Professional Conduct to include "lawyers employed in the legal department of a corporation." Rule 1.13, Ala. R. Prof. C., specifically applies to attorneys employed or retained by a corporation or other organization. As a result, staff attorneys are subject to the same ethical obligations that apply to attorneys in other forms of practice. There is no dispute that properly admitted staff attorneys may practice law in representing their employer and, as such, are subject to the Rules of Professional Conduct. The question then becomes whether the staff attorney for an insurance company may also represent an insured.

The Disciplinary Commission notes that the insurer is not employing staff counsel as a means of generating revenue, but as a means of limiting the financial liability of its insureds. Staff counsel are employed to limit costs and losses associated with the employer's primary business of issuing insurance policies. In Alabama, the insurer, absent an actual conflict of interest, is traditionally viewed as a co-client with the insured. The Comment to Rule 1.8, Ala. R. Prof. C., states that, "[i]n the normal insurance defense relationship where, for example, there are no coverage issues, appointed counsel has two clients, the insured and the insurer. Hence, the insurer is not a third party." This position was endorsed by the Disciplinary Commission in RO 1994-08. Moreover, in Mitchum v. Hudgens, 533 So.2d 194 (Ala. 1988), the Alabama Supreme Court implied the same thing stating: "When an insurance company retains an attorney to defend an action against an insured, the attorney represents the insured as well as the insurance company in furthering the interests of each." Id. at 198. In most instances, the insured and not the insurer, is the one whose financial interest is at risk. As such, the Disciplinary Commission finds that the utilization of staff counsel to represent insureds, where the interests of the insured and the insurer are fully aligned and where the insurer has a direct financial interest in the outcome of the litigation, does not constitute the unauthorized practice of law.

Having determined that the use of staff counsel by an insurance carrier to defend its insureds does not constitute the unlawful practice of law, the Disciplinary Commission must now determine whether the use of staff counsel violates other provisions of the Alabama Rules of Professional Conduct. The primary question, as it was in RO-1981-533, is whether an inherent conflict of interest exists when an insurer's staff attorney represents an insured. In RO-1981-533, the Commission found no reason to differentiate, under the former code of professional responsibility, between staff counsel and outside counsel when determining whether an inherent conflict of interest exists. Moreover, the American Bar Association and the majority of states who have issued an opinion on the use of staff counsel, have held that it is ethically permissible. Cincinnati Ins. C. v. Wills, 717 N.E. 2d 151, 154 (Ind. 1999).

Under the Alabama Rules of Professional Conduct, the Disciplinary Commission sees no reason to distinguish between staff counsel and outside counsel. The potential for actual conflicts of interest remains the same in either arrangement as it was under the former code. An insurer's use of staff counsel to represent an insured against a third party's lawsuit does not create an inherent conflict of interest in violation of the Rules of Professional Conduct. As discussed earlier, the Alabama Rules of Professional Conduct have previously defined the relationship between insurer and insured as one in which the parties are co-clients. There are plainly many situations where representation of both an insured and the insurer is inconsistent with the Rules of Professional Conduct. However, where the interests of the insured and the insurer are fully aligned and where the insurer has a direct financial interest in the outcome of the litigation, there is not a conflict of interest that would prevent staff counsel for the insured from representing the insurer.

Staff counsel, however, should be mindful of their unique status when undertaking representation of insureds. The Rules of Professional Conduct apply to staff counsel to the same extent as any other attorney. As such, the following measures should be taken by staff counsel when undertaking representation of insureds.

1) The staff attorney should, soon after commencing representation of an insured, disclose any and all limitations upon the representation. Rule 1.2(c), Ala. R. Prof. C. Examples of such limitations may include provisions in the insurance policy that authorize the insurer to control the defense and/or to settle within policy limits.

2) The staff attorney must disclose that he/she is a full-time salaried employee of the insurer. It is impermissible for in-house attorneys who are employed to represent insureds to state or imply that they practice in a separate independent law firm. The relationship between the attorney and the insurer should be disclosed, in writing, to the client at the outset of representation.

3) A staff attorney may not permit the insurance company to direct or regulate the staff attorney's professional judgment in rendering legal services to the client. Rule 5.4(c), Ala. R. Prof. C.

Rule 5.4(c), Ala. R. Prof. C., provides as follows: RULE 5.4: PROFESSIONAL INDEPENDENCE OF A LAWYER. (c) A lawyer shall 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 in rendering such legal services.

4) To comply with the confidentiality requirements of Rule 1.6, Ala. R. Prof. C., staff attorney offices should be maintained in a manner that is physically and organizationally distinct from other offices of the insurer. Where staff attorney offices are housed in the same building as other offices of the insurer, care should be taken to ensure that only staff attorneys and their administrative personnel have access to an insured's files and confidential information.

5) Where staff attorneys operate under a separate "firm name", the nature of the relationship between the attorneys and the insurer must be clearly disclosed on the letterhead and/or business card of the attorney. The relationship should also be disclosed at office entrances, phone book listings, and when answering the phone.

The American Bar Association and other ethics committees have found that it is unethical and deceptive for salaried in-house attorneys, employed by an insurance company, to represent themselves to be outside counsel. See ABA Opinion 03-430. Rule 7.5(a), Ala. R. Prof. C., states, in pertinent part, that a lawyer shall not use a firm name, letterhead, or other professional designation that violates Rule 7.1. Rule 7.1 provides that a lawyer shall not make or cause to be made a false or misleading communication about the lawyer or the lawyer's services, including one that contains a material misrepresentation of fact or law or omits a fact necessary to make the statement considered as a whole not materially misleading.

Many times, staff attorney offices are operated under "firm names" that do not specifically reference the insurer. For example, a staff attorney's office may operate under the name of "XYZ Law Offices". One justification for the practice of using "firm names" for a staff attorney's office is to prevent the issue of insurance from being disclosed to juries or third parties during litigation. However, the use of "firm names" by staff attorneys may constitute a misleading communication about the true nature and independence of the "firm". As such, all letterhead and/or business cards must clearly disclose that the "firm" is an office of the insurer and its attorneys and staff are employees of the insurer. The relationship between the "firm" and the insurer should also be disclosed at office entrances, phone book listings, and when answering the phone.

6) To avoid loss of a counterclaim, insurance defense counsel should inform the insured about potential counterclaims that may be available to the insured.

The Disciplinary Commission finds it difficult to imagine an instance where an insured, represented by staff counsel, would have the legal acumen to consult with a private attorney concerning potential counterclaims. Rather, an insured would most often, and rightfully so, rely on the staff attorney to advise him of his legal rights, including the potential for counterclaims. As such, by undertaking representation of the insured, staff attorneys also acquire a duty to advise insureds about potential counterclaims. If a staff attorney determines that a potentially valid counterclaim exists, he must advise the insured of the potential counterclaim. In most cases, the staff attorney should recommend that the insured consult with another attorney about the possibility of pursuing the counterclaim on the insured's behalf.

The Disciplinary Commission does not believe that an insurer's staff attorney may ethically represent an insured on a counterclaim. First, the potential for conflict of interest between the insured and the insurance company is even greater. For example, if the insurance company desires to settle the case, but the insured wishes to pursue the counterclaim, a conflict would arise. Secondly, the insurer would not have a direct financial interest in the counterclaim. As such, the insurer's use of staff counsel to pursue a counterclaim on behalf of an insured may constitute the unauthorized practice of law.

If the insured retains private counsel for representation on a counterclaim, the staff attorney representing the insured on the original claim should not take any action that is detrimental to the insured's interest in the counterclaim, unless the insured consents. If the insured refuses to consent because of the effect it will have on his counterclaim, then the staff attorney must either withdraw due to the conflict of interest or forgo the proposed course of action.

CONCLUSION

In summation, the Disciplinary Commission finds that the utilization of staff counsel to represent insureds, where the interests of the insured and the insurer are fully aligned and where the insurer has a direct financial interest in the outcome of the litigation, does not constitute the unauthorized practice of law and is not prohibited by the Alabama Rules of Professional Conduct. At the outset of representation, however, a staff attorney must disclose that he is a full-time employee of the insurer and disclose any limitations upon the representation. In representing an insured, a staff attorney should ensure that the insurer does not interfere with the lawyer's independence of professional judgment, and must otherwise comply with the Rules of Professional Conduct.

To comply with the confidentiality requirements of Rule 1.6, Ala. R. Prof. C., staff attorney offices should be maintained in a manner that is physically and organizationally distinct from other offices of the insurer. Where staff attorney offices are housed in the same building as other offices of the insurer, care should be taken to ensure that only staff attorneys and their administrative personnel have access to an insured's files and confidential information. Staff attorney offices that employ a "firm" name must disclose that the "firm" is an office of the insurer and its attorneys and staff are employees of the insurer at office entrances, in phone book listings, when answering the phone, and on all letterhead and business cards. Finally, a staff attorney has an ethical obligation to notify and advise the insured of possible counterclaims that may be available to the insured. Ordinarily, staff counsel may not represent the insured on the counterclaim, but should, instead, advise the insured to consult with a private attorney.

JWM/s 3/14/07