Adopted March 27, 1998

TOPIC: REPRESENTATION OF INSUREDS BY LAWYERS WHO ARE EMPLOYEES OF A LIABILITY INSURER

ABSTRACT: A lawyer who is employed by a liability insurer may represent his employer’s insured, provided the lawyer discloses all limitations upon the representation, the insurer does not interfere with the lawyer’s independence of professional judgment, the lawyer fulfills his duty of confidentiality to his client, and the lawyer otherwise complies with the Rules of Professional Conduct, except that no opinion is expressed concerning possible unauthorized practice of law, because that issue is not settled in Oklahoma.

INQUIRY: In a case in which a liability insurer provides a defense to its insured, may a lawyer who is an employee of the insurer represent the insured?

OPINION

Some insurance companies have an employer/employee relationship with lawyers who are assigned to represent insureds (hereinafter clients) in litigation. These lawyers have been designated house counsel, captive law firms, trial division or law offices. The term staff attorney is used throughout this opinion to designate such lawyers.

The Oklahoma Rules of Professional Conduct (Rules) do not expressly address representation of an insured by a staff attorney. However, the dual relationship which exists when a lawyer is paid by one other than a client creates a potential for conflicts of interest.

The obligation to defend an insured under a contract of insurance contemplates representation by counsel who can exercise independent professional judgment on behalf of the client and devote complete loyalty to the client. See Rules 1.7, 2.1 and 5.4(c). Clearly, a conflict will occur in circumstances where a staff attorney is obligated by the terms or circumstances of his or her employment to protect the interests of the insurance company to the detriment of the client. Any policy, arrangement or practice of the insurer which effectively limits a staff attorney’s professional judgment on behalf of the client or loyalty to the client is prohibited by the Rules. Id.

The position of staff attorney does not alter the duty of confidentiality owed to the client. Except for disclosures impliedly authorized by the client, confidential information obtained from the client may not be divulged to the insurer, without express authorization from the client. Rule 1.6. For example, a staff attorney generally may not disclose to the insurer confidential information obtained from the client which might provide the insurance company with grounds to terminate the insurance contract or to deny coverage.

The staff attorney should, soon after commencing representation of a client, disclose to the client all limitations upon the representation. Rule 1.2. The limitations should be disclosed in a manner calculated to permit an informed decision to consent or not consent by the client. While not required by the Rules or any other standard, it is recommended that such disclosures be made in writing. Examples of such limitations include any provision in the insurance policy that authorizes the insurer to control the defense and to settle within policy limits; the nature and scope of the representation; whether there are any claims or damages asserted which are not covered by the policy; and, if applicable, whether the staff attorney will assert counterclaims, and, if so, any limitations with respect thereto; and that an employer/employee relationship exists between the insurance company and the staff attorney. If the insured is clearly apprised of the limitations, the client has sufficient information to determine whether to proceed. No formal acceptance or written consent is necessary, and the staff attorney can treat the insured as manifesting consent to the limited representation by accepting the defense offered by the insurer upon the terms of the representation being offered.

After appropriate disclosure to the insured of all limitations and subject to informed consent by the client and compliance with all of the Rules, a staff attorney may proceed with representation of the client.

If the client and the insurer disagree on any material matter, the lawyer shall consult with the client as to the likely consequences of a proposed course of conduct or advise the client to seek independent counsel. Rule 1.2(a). For example, the lawyer may remind the client that the policy gives the insurer the right to control the defense and settle the claims without the client § consent or that rejecting the proposed settlement might result in a forfeiture of rights under the policy. Ultimately, however, the client retains the power to reject the defense offered by the insurer and to assume the risk and expense of defense. Rules 1.2 and 1.16.

This opinion is limited to instances in which the insurer has provided liability coverage and is providing a defense to its insured with respect to alleged liability. In such cases, the interests of the insurer and the insured are largely co-extensive and both have an interest in avoiding or minimizing liability.

The Rules and not the employment relationship or the insurance contract control the staff attorney § obligations to the client in all respects as in the case of any other representation. The applicable rules include, but are not necessarily limited to, the following:

1. A lawyer shall not accept compensation for representing a client from one other than the client unless: 1) the client consents after consultation; 2) there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6. Rule 1.8(f).

2. A lawyer shall not represent a client if the representation of that client will be directly adverse to another client unless (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and (2) each client consents after consultation. Rule 1.7(a). In instances in which the insurance company and the insured are both clients, this Rule applies, and the staff attorney must comply with it.

3. A lawyer shall not represent 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, or by the lawyer’s own interests, unless: 1) the lawyer reasonably believes the representation will not be adversely affected; and 2) the client consents after consultation. Rule 1.7(b). A staff attorney should evaluate whether his responsibilities to the insurance company create such a limitation. This determination will normally turn on an evaluation of the insurance company’s policies and practices to determine whether the policies and practices are such that a staff attorney can give a client undivided loyalty and otherwise comply with the Rules in all respects.

4. 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.

5. Within the limitations of the scope of the representation to which a lawyer and a client have agreed, a lawyer shall abide by a client’s decisions concerning the objectives of the representation. Rule 1.2.

6. A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. Rule 1.4(b).

7. A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, subject to certain exceptions which are not applicable here. Rule 1.6.

8. A lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. Rules 7.1 and 7.5. Even though the relationship between an insurer-employer and a staff attorney does not necessarily prevent the staff attorney from devoting to the client the loyalty and independent judgment required by the Rules, a staff attorney is not a separate and independent law firm. The LEC believes that any express or implied representation that a staff attorney is separate and independent from the insurer is, at least, false, misleading and deceptive. Thus, the employee status of the staff attorney must clearly be disclosed to the client at the outset of the relationship.

9. A lawyer shall not assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law. Rule 5.5. Staff attorneys practicing law in Oklahoma must be a member of the Oklahoma Bar or be admitted pro hac vice in individual cases. 5 O.S. 1991 2 and Rules Creating and Controlling the Oklahoma Bar Association, 5 O.S. Ch. 1, App. 1, Art. 2 Section 5. Moreover, the terms of employment of staff attorneys who represent clients must be such as to not involve practice of law by the insurance company or the sharing of fees with the insurance company. Rule 5.4(a). The LEC notes that the majority rule is that, when properly structured to insure compliance with all applicable Rules, an insurance company may use staff attorneys to represent their insureds, without engaging in the unauthorized practice of law. However, the LEC notes that this is not a unanimous rule. At least two jurisdictions have reached a contrary result (i.e. Kentucky and North Carolina). The LEC is unaware of any Oklahoma authority which is on point. Moreover, the LEC has no jurisdiction to determine whether specific activity constitutes the unauthorized practice of law. Thus, the Committee expresses no opinion as to whether an insurance company which provides defenses to its insureds through staff attorneys is engaged in the unauthorized practice of law or whether a staff attorney, in such a situation, is assisting in the unauthorized practice of law in violation of Rule 5.5(b).1

10. A lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client, if the representation will result in violation of the Rules of Professional Conduct or other law. Rule 1.16(a)(1).

1 As noted in paragraph 9, infra, the LEC expresses no opinion as to whether Rule 5.5(b) would be violated.