What ethics rules govern the office of an insurance company's in-house legal department that defends the company's policyholders?

Plain-English summary

The inquirer was a salaried lawyer in an insurance company whose department defends the company's policyholders. The lawyers were building an office inside the insurer's building and asked what ethical requirements govern its layout and function.

The opinion starts from settled ground: a lawyer may be employed as house counsel to defend an insurer's insureds, and when the insurer designates counsel, the lawyer's client is the insured, not the insurer (¶ 3). Under N.Y. State 726, such a salaried group may hold itself out as a law firm if it acts consistently with a firm's responsibilities and discloses that the lawyers are employees of the insurer; in any event, Rule 1.0(h) makes a corporate legal department a "firm," so all the Rules apply (¶ 4).

The driver for the office design is confidentiality. Rule 1.6(a) bars knowingly revealing confidential information, and Rule 1.6(c) requires reasonable care to prevent the lawyer's employees and "others whose services are utilized" from disclosing it; here the "others" include insurer management and claims investigators outside the department (¶ 5). Drawing on N.Y. State 939 and N.Y. State 643, the committee concluded the department's workspace must be separated so conversations about clients cannot be overheard, client papers must be secured against access by people outside the department, and the lawyers must determine whether using the insurer's shared computer system adequately safeguards the insureds' files (¶ 6-9). If the insurer's IT administrators can access and share the department's files, the lawyers will be violating their confidentiality duty (¶ 9). Finally, Rules 1.6(c) and 5.3 require the lawyers to supervise nonlawyers in the department (¶ 10).

In practice

The opinion holds that, under the New York rules, an insurer's in-house defense department is a law firm whose client is the insured, so it must build confidentiality into the office: separate workspace so client conversations are not overheard, secured client files, and a computer arrangement that keeps insurer personnel outside the department from accessing the insureds' information. The committee applied Rule 1.6(c) and Rule 5.3 to require supervision of the department's nonlawyer staff on confidentiality.

Common questions

Q: Who is the client of an insurance company's staff counsel defending an insured?

A: The insured, not the insurance company. The opinion reiterates that when the insurer designates counsel for the assured, inside or outside, the client is the policyholder (¶ 3).

Q: Can insurer claims staff or IT administrators see the defense department's client files?

A: No, not without the insured's informed consent. The opinion treats insurer management, claims investigators, and IT administrators as "others" who must be kept from the confidential files under Rule 1.6(c) (¶ 5, ¶ 9).

Q: Does sharing the insurer's computer system create a problem?

A: It can. The lawyers must determine whether the shared system adequately safeguards the insureds' information; if technical administrators can access and share the files, the confidentiality duty is breached (¶ 8-9).

Background and rules framework

The opinion applies New York Rules 1.6 (confidentiality; ABA Model Rule 1.6) and 5.3 (supervision of nonlawyers; ABA Model Rule 5.3), with Rule 1.0(h) defining a corporate legal department as a "firm" and Rule 1.8(f) addressing compensation by someone other than the client. Rule 1.6(c) requires reasonable care to prevent the lawyer's employees and others whose services the lawyer uses from disclosing client confidential information.

Citations and references

Rules of Professional Conduct:

• MR 1.6 / NY RPC 1.6(a), 1.6(c) (confidentiality)
• MR 5.3 / NY RPC 5.3 (supervision of nonlawyers)
• NY RPC 1.0(h) (legal department is a firm); NY RPC 1.8(f) (third-party compensation); NY RPC 1.1 (competence, including technology)

Cases:

• American Employers Insurance Co. v. Goble Aircraft Specialties, Inc., 205 Misc. 1066, 131 N.Y.S.2d 393 (1954), client is the policyholder

Other opinions cited:

• N.Y. State 726 (2000): insurer staff counsel may hold out as a firm with disclosure
• N.Y. State 939 (2012), N.Y. State 643 (1993): confidentiality where lawyers share space or systems

See also

• ABA Formal Op. 03-430: Insurance staff counsel representation and naming
• ABA Formal Op. 507: Office sharing arrangements

Source

• Landing page: https://nysba.org/ethics-opinion-1102/