Can an insurance company use its own salaried in-house lawyers to represent and defend the company's individual insureds?

Plain-English summary

The Board considered whether an attorney could become an in-house employee-attorney of an insurer to represent and defend the insurer's insureds. It began from the settled premise (ABA Informal Opinions 728, 822, and 783) that when an insurer retains an attorney to represent an insured, the insured is the attorney's client, and from Tennessee Opinion 83-F-52, which required the attorney to devote complete loyalty to the client and not let the person who pays the fee direct or interfere with professional judgment.

The opinion drew heavily on Canon 5 and its Ethical Considerations (EC 5-1, 5-21, 5-22, and 5-23), which warn that a person or organization that pays a lawyer to represent others holds potential power to pressure the lawyer's independent judgment, and on DR 5-107(B), which bars a lawyer from letting one who pays or employs the lawyer direct the lawyer's professional judgment. It observed that a lawyer employed by an insurer to represent an insured is in a precarious position with a potential, if not actual, conflict, owing the insured zealous representation (DR 7-101(A)) and confidentiality (DR 4-101), and that all doubts should be resolved against the propriety of the representation after full disclosure. It contrasted the salaried employee-attorney, dependent on a single employer, with independent retained counsel who has other clients and is less subject to such pressure, and noted the recurring possibility that confidential conferences would surface matters (such as coverage questions) that could pit the insured's interests against the carrier's.

The opinion then reasoned that the arrangement was close to a lay corporation practicing law: an insurer that collects premiums factoring in the cost of providing defense, then uses salaried employees to provide that defense, comes close to fee-splitting between a professional and a layman, and the logical extension would let a lay corporation run a "tort recovery clinic" staffed by salaried employee-attorneys. It answered the three submitted questions by concluding that (1) it is improper for in-house attorney employees of an insurance company to represent individual insureds in matters arising under that company's policies, (2) the arrangement constitutes a lay corporation practicing law and holding out an in-house employee attorney as a separate, independent law firm is an unethical and deceptive practice, and (3) the opinion would become effective January 1, 1994.

Currency note

Vacated. The Board of Professional Responsibility vacated Formal Ethics Opinion 93-F-132 on September 11, 2015, "due to changes in the laws or rules." A vacated opinion has no continuing force and is not the Board's current guidance. The position it took has also been widely reconsidered elsewhere (see, for example, ABA Formal Opinion 03-430, which permits insurers to use staff counsel to defend insureds subject to disclosure and conflict rules). It is reproduced and summarized here only as a historical research record. Do not rely on it as current; verify the current Tennessee Rules of Professional Conduct before acting.

Common questions

Q: Under this opinion, could an insurer's salaried in-house lawyers defend the company's insureds?

A: As originally issued, no. The opinion concluded it was improper for in-house attorney employees of an insurance company to represent individual insureds in matters arising under that company's policies.

Q: Why did the Board treat that as a problem?

A: The opinion reasoned that the insured is the lawyer's client, that the salaried-employee relationship threatened the lawyer's independent judgment (DR 5-107(B); Canon 5), and that the arrangement was close to a lay corporation practicing law and to fee-splitting with a non-lawyer.

Q: Is this still Tennessee's position?

A: No. The Board vacated the opinion on September 11, 2015, and the broader approach to insurer staff counsel has since changed (compare ABA Formal Opinion 03-430). It is preserved here only as a historical research record.

Background and rules framework

The opinion interpreted former DR 5-107(B) (no third party directing professional judgment), DR 7-101(A) (zealous representation), DR 4-101 (confidences and secrets), and Canon 5 with EC 5-1 through 5-23 (independent professional judgment), together with the unauthorized-practice and lay-corporation concerns. The modern analogs are Model Rule 5.4(c) / Tennessee RPC 5.4(c) (a third party who pays may not direct the lawyer's judgment), Model Rule 1.8(f) / Tennessee RPC 1.8(f) (compensation from one other than the client), Model Rule 1.7 / Tennessee RPC 1.7 (conflicts), and Model Rule 5.5 / Tennessee RPC 5.5 (unauthorized practice).

Citations and references

Rules of Professional Conduct (former Code):

• DR 5-107(B) (third party directing professional judgment); Canon 5, EC 5-1, EC 5-23 (independent judgment). Modern analog: Model Rule 5.4(c) and 1.8(f) / Tennessee RPC 5.4(c), 1.8(f)
• DR 7-101(A) (zealous representation). Modern analog: Model Rule 1.3 / Tennessee RPC 1.3
• DR 4-101 (confidences and secrets). Modern analog: Model Rule 1.6 / Tennessee RPC 1.6

Other opinions cited:

• ABA Informal Opinions 728 (1963), 822 (1965), and 783 (1965) (the insured is the lawyer's client)
• Tennessee Formal Ethics Opinion 83-F-52 (complete loyalty to the client)

See also

• ABA Formal Op. 03-430: Insurance Staff Counsel
• ABA Formal Op. 01-421: Insurer Litigation Guidelines
• ABA Formal Op. 96-403: Insured Objecting to Settlement

Source

• Landing page: https://www.tbpr.org/ethic_opinions/93-f-132

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

93-F-132 - Vacated*

*Vacated by the Board of Professional Responsibility on September 11, 2015 due to changes in the laws or rules.

Formal Ethics Opinion 93-F-132

Inquiry is made concerning the ethical propriety of an attorney becoming an in-house employeeattorney to represent and defend the insureds of the employer-insurer.

ABA Informal Opinions 728 (1963) 822 (1965) and 783 (1965) provides that when an insurer retains an attorney to represent an insured, the insured is the attorney's client.

Tennessee Formal Ethics Opinion 83-F-52 states that the attorney should devote his complete loyalty to the client and not allow the person or entity who pays his fee, or anyone else, to regulate, direct, control or interfere with his professional judgment.

Canon 5 of the Code requires an attorney to exercise independent professional judgment on behalf of a client. It provides as follows:

EC 5-1. The professional judgment of a lawyer should be exercised - - - solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client.

EC 5-21. The obligation of a lawyer to exercise professional judgment solely on behalf of his client requires that he disregard the desires of others that might impair his free judgment. The desires of a third person will seldom adversely affect a lawyer unless that person is in a position to exert strong economic, political or social pressures upon the lawyer. These influences are often subtle, and a lawyer must be alert to their existence ---

EC 5-22. Economic, political or social pressures by third persons are less likely to impinge upon the independent judgment of a lawyer in a matter in which he is compensated directly by his client and his professional work is exclusively with his client. On the other hand if a lawyer is compensated from a source other than his client, he may feel a sense of responsibility to someone other than his client.

EC 5-23. A person or organization that pays or furnishes lawyers to represent others possess a potential power to exert strong pressures against the independent judgment of those lawyers. Some employers may be interested in furthering their own economic, political or social goals without regard to the professional responsibility of the lawyer to his individual client - - - an employer may seek, consciously or unconsciously, to further its own economic interest through the action of the lawyers employed by it. Since a lawyer must always be free to exercise his professional judgment without regard to the interests or motives of a third person, the lawyer who is employed by one to represent another must constantly guard against erosion of his professional freedom.

Disciplinary Rule 5-107(B) of the Code provides:

DR 5-107(B). A lawyer shall not permit a person who recommends, employs, or pays him to render legal services for another to direct or regulate his professional judgment in rendering such legal services.

In instances where an attorney is employed by an insurer to represent an insured the attorney is in the precarious position of having a potential, if not actual, conflict of interest. The attorney is bound by Disciplinary Rule 7-101(A) to represent client-insured zealously, and by DR 4-101 to preserve the confidences and secrets of the client-insured. There should be a full and complete disclosure of the possible effect of his representation on the exercise of independent professional judgment and the client-insured should be given an opportunity to evaluate the need for representation free of any potential conflict and all doubts should be resolved against the propriety of representation.

The attorney's continuing ethical obligations to the client-insured following the termination of the attorney-client relationship are (i) to continue to preserve the confidences and secrets of the former client; (ii) to abstain from attacking the resolution of the legal matter accomplished on behalf of the former client; and (iii) to abstain from representing another in an action involving the former client in a matter arising out of or closely related to the previous matter.

In the practice of law dealing with insurance defense it is difficult at times for the practitioner to forget about loyalty to the insurance carrier client who employs him/her on a regular basis as opposed to the loyalty to be devoted to the individual insured who may never be seen again during his/her entire practice. However, independent counsel means just that and in a general practice the independent counsel has other clients and is not solely dependent upon one client to provide his/her livelihood. The independent practitioner, therefore, would not be subject to the same pressure that an employee attorney would feel from the employer.

There are few cases where some question does not arise during the confidential conferences between the attorney and the clientinsured that might provide a conflict between the insured and the insurance carrier. Those situations can involve things such as the use of the vehicle or questions unrelated to the particular case at hand but which might affect whether or not the carrier would want to continue to carry that particular insured on its policy.

Such an arrangement is close to a lay corporation practicing law. The insurance industry collects premiums from insureds and in return provides various services including providing an attorney to protect the insureds interest. The premium dollar charged factors in the cost of doing business. For a lay corporation to charge a premium based upon legal services but to then turn around and use company employees on a salary to provide these services is close if not akin to fee splitting between professional and layman. If this were permitted, the other side of the coin would permit a lay corporation to hold itself out as a tort recovery clinic and then hire employee attorneys to do the work, pocketing the attorney fees and paying the lawyers a salary.

The three issues submitted for consideration are answered as follows:

• It is improper for in-house attorney employees of an insurance company to represent individual insureds in legal matters arising under that company's policy.

• Such an arrangement constitutes a lay corporation practicing law.The holding out of an in-house attorney employee as a separate and independent law firm constitutes an unethical and deceptive practice.

• This opinion shall become effective on January 1, 1994.

This 10th day of September, 1993.

ETHICS COMMITTEE:

Thomas H. Rainey

Herman Morris, Jr.

Walker T. Tipton

APPROVED AND ADOPTED BY THE BOARD