May Texas staff counsel employed by an insurance carrier represent an insured when the carrier weighs post-representation client and adjuster performance surveys in setting the lawyer's compensation and continued employment?

Plain-English summary

The opinion addresses an insurance company's use of post-representation surveys to evaluate its staff counsel ("captive counsel"). Both the claims adjuster and the insured rate the lawyer; survey results affect promotions, raises, internal discipline, and potentially termination. The Committee notes the structural tension: candid advice unwelcome to the adjuster or insured may yield unfavorable surveys.

The Committee anchors the analysis in the Tilley duty of loyalty (Employer's Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex. 1973)), reaffirmed in American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992), and Unauthorized Practice of Law Comm. v. American Home Assurance Co., 261 S.W.3d 24 (Tex. 2008). Staff counsel owes the insured the same unqualified loyalty as if the insured had retained the lawyer directly. The Court in American Home Assurance cited Rule 5.04(c) (no permitting a non-client payer to direct or regulate the lawyer's professional judgment).

The Committee distinguishes this case from its prior Opinion 687 (April 2020), which addressed direct litigation-guideline restrictions on the lawyer's conduct. Performance surveys do not directly restrict the lawyer; they create an indirect, employment-based incentive. The Committee characterizes that indirect pressure as inherent to any client-service profession.

The Committee imposes three operative duties: (1) Rule 2.01 (independent professional judgment and candid advice) is not diminished by the indirect pressure; (2) Rule 5.04(c) (and Comment 5) require the lawyer to "guard constantly against erosion" of professional judgment when a non-client funds the representation; and (3) Rule 1.06(b)(2) requires that the lawyer not represent the insured if the representation reasonably appears to be or become adversely limited by the lawyer's own interests. If the lawyer cannot satisfy those duties, withdrawal is required, and the lawyer may need to leave the position altogether.

In practice

Under this opinion, conduct involving Texas insurance staff counsel operating under a performance-survey system that affects compensation or continued employment is permitted but constrained. Per the opinion, the analysis turns on whether the survey system, in operation, materially limits the lawyer's exercise of independent professional judgment or candid advice. If it does, Rule 1.06(b)(2) requires withdrawal from the representation.

Common questions

Q: Does the opinion ban insurance-company performance surveys of staff counsel?

A: No. Per the opinion, the survey practice is not categorically prohibited. The duty is on the lawyer to ensure that survey-based incentives do not erode independent professional judgment.

Q: How is this different from Opinion 687?

A: Per the opinion, Opinion 687 (April 2020) addressed direct litigation-guideline restrictions on the staff lawyer's actions, citing Rule 5.04(c) and Rule 1.08(e)(2). Performance surveys are indirect incentives. The Committee treats them as constraints to manage, not categorical bars.

Q: What if the lawyer cannot reconcile candid advice with the survey system?

A: Per the opinion, Rule 1.06(b)(2) requires the lawyer to decline or withdraw from the representation, and per the opinion the lawyer "perhaps" must leave the position altogether.

Q: Whose loyalty does staff counsel owe?

A: The insured's. The Committee cites Tilley (1973), American Centennial (1992), and American Home Assurance (2008) for the proposition that staff counsel owes the insured the same unqualified loyalty as if retained directly.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.06(b)(2) (general conflicts; lawyer's own interests), Rule 1.08(e)(2) (third-party payer), Rule 2.01 (independent professional judgment and candid advice), and Rule 5.04(c) (no permitting non-client to direct lawyer's judgment). Texas Rules correspond to ABA Model Rules 1.7, 1.8, 2.1, and 5.4 respectively. The Committee builds on Opinion 687 (April 2020) and the Tilley line of Texas Supreme Court cases.

Citations and references

Rules of Professional Conduct:

• Texas Disciplinary Rule 1.06(b)(2) (conflicts; lawyer's own interests)
• Texas Disciplinary Rule 1.08(e)(2) (third-party payer)
• Texas Disciplinary Rule 2.01 (independent professional judgment, candid advice)
• Texas Disciplinary Rule 5.04(c) (non-client interference with professional judgment)

Cases:

• American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992)
• Employer's Casualty Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973)
• Unauthorized Practice of Law Comm. v. American Home Assurance Co., 261 S.W.3d 24 (Tex. 2008)

Other opinions cited:

• Texas Op. 687 (April 2020) - insurance litigation guidelines and staff counsel

See also

• TX Ethics Op. 707: In-House Counsel for Company Customers - related American Home Assurance UPL analysis
• TX Ethics Op. 695: Legal-Aid Funder Confidentiality - same Rule 1.05/non-client influence framework

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-696/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_696.pdf

Original opinion text

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

QUESTION PRESENTED

Do the Texas Disciplinary Rules of Professional Conduct prohibit staff counsel employed by an insurance company from representing insured clients if the insurance company considers the results of performance surveys in deciding the lawyer's compensation or continued employment?

STATEMENT OF FACTS

Insurance companies often employ in-house defense counsel to represent the company's insureds in litigation (sometimes called "captive" counsel or "staff" counsel). Some insurance companies use post-representation surveys to monitor the performance of staff counsel. In these performance surveys, both the insurance claims adjuster to whom the lawyer reported and the insured whom the lawyer represented "grade" the lawyer subjectively after a matter is concluded. At some companies, the results of these performance surveys can directly impact a lawyer's eligibility for a promotion or raise, and unsatisfactory performance ratings can result in internal discipline and even termination.

This survey system potentially places the lawyer in a quandary: a lawyer's candid advice can lead to friction and disagreement with the insured client or the claims adjuster. For example, the client or adjuster may disagree with a lawyer's negative evaluation of the case or the insured's performance as a witness. As a result, exercising independent professional judgment and being honest with the insured client and adjuster may lead to unfavorable performance surveys for the lawyer, jeopardizing the lawyer's chances for a raise or continued employment.

DISCUSSION

Staff counsel may not agree to restrictions that interfere with the lawyer's exercise of independent professional judgment in rendering legal services to the insured/client. In considering the duties owed by a staff lawyer employed by an insurance company, the Texas Supreme Court has held that the lawyer owes the insured the same unqualified loyalty as if he or she had been originally employed by the insured. Employer's Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex. 1973). Since Tilley, the Court has also been unequivocal in holding that an attorney-client relationship exists between an insured and the lawyer retained on that insured's behalf by an insurer. Am. Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 484 (Tex. 1992). More recently, the Supreme Court permitted the practice of allowing staff counsel to defend a company's insureds in litigation, but it reiterated that the in-house counsel's duty of loyalty is to the insured. Unauthorized Practice of Law Comm. v. Am. Home Assur. Co., 261 S.W.3d 24, 27 (Tex. 2008).

In American Home Assurance, the Supreme Court acknowledged that both in-house and outside defense counsel may be subject to certain litigation guidelines and other restrictions requiring approval from a carrier to take certain actions in the defense of an insured, such as conducting investigations or retaining expert witnesses. However, the Court observed that Rule 5.04(c) prohibits a lawyer from "permitting 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." Id. at 41.

This Committee also relied on Rule 5.04(c) in Professional Ethics Committee Opinion 687 (April 2020), which examined restrictions in litigation guidelines for in-house defense counsel and the extent to which those guidelines may seek to direct and control legal services rendered by the lawyer. The Committee also cited Rule 1.08(e)(2), which provides that a lawyer shall not accept compensation for representing the client from someone other than the client unless "there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship." Ultimately, this Committee concluded in Opinion 687 that it is impermissible under the Rules for a lawyer to agree with an insurance company's restrictions that interfere with the lawyer's exercise of independent professional judgment in rendering legal services to the insured/client.

Performance surveys do not necessarily prevent a lawyer from rendering independent professional judgment. Here, in contrast, the in-house defense counsel is not facing direct restrictions on his or her ability to exercise independent professional judgment and render candid legal advice. Instead, the lawyer is facing potential employment consequences as an indirect consequence of rendering such advice (because it may result in negative survey responses). To one degree or another, this is a reality faced by every lawyer who tells a client something the client may not wish to hear. Like the staff counsel whose performance may be measured by metrics such as client or adjuster surveys, any lawyer who conveys candid but unwelcome advice faces the risk that the client may terminate the attorney-client relationship or form an unfavorable opinion of the lawyer. It is a reality of practicing in a service profession. But this reality does not diminish every lawyer's obligation to "exercise independent professional judgment and render candid advice" under Rule 2.01—even when the client's disagreement leads to adverse consequences for the lawyer's employment. See also Comment 5 to Rule 5.04 (lawyer "should guard constantly against erosion of the lawyer's professional judgment" when non-client pays or furnishes lawyers to represent others).

Staff counsel must also be mindful of Rule 1.06(b)(2), which provides that "a lawyer shall not represent a person if the representation of that person . . . reasonably appears to be or become adversely limited by the lawyer's or law firm's responsibilities to another client or to a third person or by the lawyer's or law firm's own interests." Thus, staff counsel—like all other lawyers—must prioritize the exercise of independent professional judgment and the rendering of candid advice over the lawyer's own interest in avoiding negative feedback and its ramifications. If a lawyer cannot do so, the lawyer must withdraw from the representation and, perhaps, from the job altogether.

CONCLUSION

The Texas Disciplinary Rules of Professional Conduct do not prohibit staff counsel employed by an insurance company from representing insured clients merely because the insurance company considers the results of performance surveys in deciding the lawyer's compensation or continued employment. Lawyers may not allow performance surveys to interfere with their exercise of independent professional judgment and the rendering of candid advice during the representation of a client.

Tex. Comm. On Professional Ethics, Op. 696 (2023)