Activities
of House Counsel of Liability Insurance Carriers
In
Defending Insureds in Civil Litigation.
Subject:
Activities of house counsel of liability insurance carriers
in defending insureds in civil litigation.
Inquiry:
May house counsel employed on a salaried
basis by a liability insurance carrier represent
the companyís insureds in civil suits alleging
claims covered by the policy without the insurance
carrier thereby engaging in the unauthorized practice
of law?
Opinion:
The answer to this inquiry requires an
examination of the applicable law, and depends
upon the particular circumstances under which
the representation is undertaken.
In a typical liability insurance policy,
the carrier agrees “to pay on behalf of the
insured all sums which the insured shall become
legally obligated to pay as damages” because
of an accident, error, omission or other event
for which coverage is provided.
The policy also typically provides that
“the company shall defend any suit alleging
such [insured event] and seeking damages which
are payable under the terms of this policy, even
if any of the allegations of the suit are groundless,
false or fraudulent . . .”
The first provision is generally referred
to as the “duty to pay;” the second,
as the “duty to defend.”
Normally, the company has a dual motive
in defending a suit against its insured. First, since the company is obligated
by contract to pay any judgment against its insured
up to the policy limits, it has a direct financial
interest in the outcome of the litigation and
wants it properly defended.
Secondly, the company has obligated itself
by contract to provide a proper legal defense
for its insured.
Insurance carriers have traditionally employed
private lawyers on a case by case basis to fulfill
their obligation to defend.
More recently there has been a trend among
some carriers to employ full-time staff or house
counsel to defend their insureds. Typically, staff counsel are paid a direct
salary and are provided office space, equipment,
supplies and secretarial support by the insurance
carrier. It is this practice we will analyze herein.
It is now well settled that a lay corporation may not ordinarily employ an
attorney to provide legal services to customers
or clients of the corporation. See, e.g., Richmond
Ass’n of Credit Men v. Bar Ass’n of
City of Richmond, 167 Va. 327, 189 S.E. 153
(1937).
The underlying basis of this rule was explained
by the Virginia Supreme Court in Richmond Association
of Credit Men
as follows:
[The
practice of law] is not a lawful business except
for members of the Bar who have complied with
all the conditions required by statute and the
rules of the Courts.
As these conditions cannot be performed
by a corporation, it follows that the practice
of law is not a lawful business for a corporation
to engage in.
******
The
relation of attorney and client is that of master
and servant in a limited and dignified sense,
and it involves the highest trust and confidence. It cannot be delegated without consent,
and it cannot exist between an attorney employed
by a corporation to practice law for it, and a
client of the corporation, for he would be subject
to the directions of the corporation, and not
to the directions of the client. [Citation omitted.]
Independent
of statute, it is contrary to public policy for
a corporation to practice law, directly or indirectly.
[Citations omitted.]
The general principles applicable to staff
counsel have been summarized in the Unauthorized
Practice Considerations adopted by the Virginia
Supreme Court.
UPC 1-4 guarantees staff counsel for a
corporation the same privileges as a lawyer in
private practice so long as the staff counsel
is representing the corporation which employs
him:
UPC
1-4. A lawyer who is duly authorized or licensed to practice
law in Virginia and who is also regularly employed
on a salary basis by a corporation may represent
such corporation before a tribunal as lawyer for
the corporation, with the same privileges of a
lawyer in private practice (including confidential
communications with his employer when he is acting
as a lawyer in connection with such communication).
226 Va.‚ (1983).
However, UPC 1-5 provides that house counsel’s
representation before a tribunal is normally limited
to representing his employer a subsidiary or affiliated
corporation:
UPC
1-5. A lawyer who is duly authorized or licensed to practice
law in Virginia and who is regularly employed
on a salary basis by a corporation may also represent
before a tribunal the interest of a subsidiary
or affiliated corporation when requested to do
so by his employer and when not otherwise in conflict
with the Virginia Code of Professional Responsibility.
Such lawyer (unless a regular employee
of a duly registered law corporation) in the course
of his employment may not normally
represent before a tribunal customers or patrons
of his employer. [Emphasis added] 226 Va. ‚ (1983)
Courts have recognized that a suit against
an insurance carrier’s insured may in some
instances be tantamount to a suit directly against
the carrier. In many suits against insured defendants,
the
carrier’s obligation to fully satisfy any
judgment is fixed by contract and is unquestioned
by the insurer.
Such cases, while brought against the insured,
are sometimes said to be de facto suites against the insurance carrier. Some states permit the insurer to be sued
directly by the injured party, and the carrier
has been regarded as the “real party in interest”
in federal courts interpreting the laws of those
states.
Lumbermen’s Casualty Company v. Elbert, 348 U.S. 48, 51
(1954) (diversity of citizenship existed between
Louisiana plaintiff and Illinois insurer, even
though insured was also a Louisiana resident,
since insurance carrier was “real party in
interest”).
We conclude that staff counsel for a liability
insurance carrier may properly defend the insured
when the amount sought does not exceed the coverage
limits of the policy, and
the company is not asserting any coverage defenses,
and
any judgment against the insured will be fully
satisfied by the insurer. In such cases we find that insurance
carriers are protecting their exclusive financial
interests, and are not engaged in the unauthorized
practice of law. Compare Cosica v. Cunningham, 250 Ga. 521, 299 S.E.2d
880 (1983) (House counselís defense of suit covered
by policy constitute activities “in and about”
the companyís “own immediate affairs”
within meaning of statute authorizing such activities
by corporate house counsel).
A second situation which frequently arises
involves suits which claim amounts in excess of
the insured’s policy limits.
In such cases staff counsel would be protecting
not only the insurance carrier’s financial
stake in the outcome of its suit, but would also
be responsible for protecting the financial interests
of the insured. In this situation, where there are no
potential coverage defenses, the decided cases
in the limited number of jurisdictions which have
dealt with the issue suggest that the carrier
may still employ staff counsel to defend the insured
without engaging in the unauthorized practice
of law.
The rationale for these holdings is that
the company’s direct financial interest in
the outcome of the litigation justifies the incidental
provision of legal services to the insured by
staff counsel.
See In Re Rules Concerning the Conduct
of Attorneys in Florida, 220 So.2d 6 (1969); Opinion
of the Committee of Unauthorized Practice of Law,
State Bar of Michigan (September 22, 1959); Coscia
v. Cunningham, 250 Ga. 521, 299 S.E.2d 880
(1983).
Based upon the decided cases, we conclude
that when an insurance carrier is obligated by
contract to pay a judgment against its insured
up to the policy limits, and neither reserves
nor subsequently asserts any defenses to such
contractual obligation, it may defend such suits
with staff counsel without engaging in the unauthorized
practice of law.
In many cases the liability insurance carrier’s
duty to pay is not absolute. The contractual obligation to defend its
insured is separate from the obligation to pay,
and the carrier’s duty to defend under most
policy provisions is not conditioned upon the
duty to pay:
[A]n
insurer’s obligation to defend is broader
than its obligation to pay, and arises whenever
the complaint alleges facts and circumstances,
some of which would, if proved, fall within the
risk covered by the policy. Lerner v. Safeco, 219 Va. 101, 245 S.E.2d 249 (1978).
Thus, insurance carriers are frequently
called upon to defend suits for which there is
or may be no coverage for any judgment against
the insured. For example, coverage may be questioned
because of the alleged breach of some material
policy conditions, such as failure to give the
carrier timely notice of the accident, e.g., State
Farm v. Porter, 221 Va. 592, 272 S.E.2d 196
(1980); failure to turn over suit papers to the
carrier, e.g., Harmon v. Farm Bureau Auto Ins.
Co., 172 Va. 61, 200 S.E. 616 (1939); or failure
to cooperate in the defense of the suit, e.g.,
Cooper v. Employers Mutual, 199 Va. 908,
103 S.E.2d 210 (1958). Coverage may be in doubt because of the nature of the claim
asserted.
See, e.g., Lerner v Safeco,
supra, (punitive damages); Parker v.
Hartford, 222 Va. 33, 278 S.E.2d 803 (1981)
(intentional acts). The company many no longer have an obligation
to pay because its coverage has been exhausted
by prior payments, yet it may still have an obligation
to defend. Compare American Employers Ins. Co. v. Goble Aircraft Specialities,
Inc., 205 Misc. 1066, 131 N.Y.S.2d 393 (1954),
and American Casualty v. Howard, 187 F2d
332 (4th Cir. 1951) with Denham
v. La Salle-Madison Hotel Co., 168 F.2d (7th
Cir. 1948). In some instances the policy may provide
only for a legal defense, such as a suit seeking
injunctive or other non-monetary relief.
In some cases it will be determinable at
the outset that the company’s only obligation
is to provide a legal defense, and not to pay
a judgment against the insured.
See, e.g., American Employers
Ins. Co. v. Goble Aircraft Specialities, Inc.,
supra, (coverage exhausted by prior settlements). In other cases the issue of whether there
is a duty to pay will be resolved by the outcome
of the tort litigation against the insured.
See, e.g., Norman v. I.N.A.,
218 Va. 718, 239 S.E.2d 902 (1978) (tort litigation
established that shooting was intentional). In still other cases the question of the insurer’s duty to pay does not turn on facts which are relevant
in the tort litigation, and the question of coverage
may not be resolved until concurrent, or subsequent
litigation is concluded.
See, e.g., State Farm
v. Porter,
supra.
When the insurer does not have a duty to
pay all or part of an judgment which may be entered
against its insured in the tort litigation, or
if the existence of such duty is conditioned on
the outcome of the tort litigation, the outcome
of collateral litigation, or is otherwise contingent
or indefinite, we conclude that the carrier does
not have a sufficiently direct financial interest
in the outcome of the litigation to permit it
to defend its insured with staff counsel without
thereby engaging in the unauthorized practice
of law.
In Rhode Island Bar Ass’n v. Automobile
Service Ass’n, 55 R.I. 122, 179 A. 139
(1935), the Automobile Service Association sold
contracts to its customers in which the Association
undertook to provide the customers legal services
in connection with the ownership and operation
of automobiles. The services included defending criminal charges arising out
of the operation of automobiles, prosecuting claims
for damages to the customer’s automobile,
and his automobile and defending suits against
the customer arising out of the customer’s
operation of his automobile. There was no obligation to pay any judgment
against the customer.
The Association furnished these services
through staff counsel, who was a member of the
Rhode Island Bar.
It was held that the Association was engaged
in the unauthorized practice of law on the grounds
that the test was “whether [the Association]
could perform the services promised under their
contract without the assistance of a duly licensed
attorney.”
The Court ruled that the services which
the Association contracted to furnish were legal
services, and “what these respondents cannot
legally do directly they may not do indirectly.”
In Richmond Association of Credit Men
v. Bar Association of City of Richmond, supra, the Credit Association solicited collection
cases from its customers, and then hired lawyers
to prosecute the claims. The Court held that the Association was
engaged in the unauthorized practice of law. The Court asked the following rhetorical question, which was
apropos to this inquiry:
If
a lay agency may engage for compensation in the
business of employing lawyers to collect liquidated
debts for others, why could it not run an agency
to supply lawyers to perform other legal services
— that is, to prosecute suits for unliquidated
tort claims, unliquidated contract claims, and
other suits, so long as such suits are prosecuted
by the lawyers in the names of the claimants as
their technical clients?
Our
view is that while technically the relation of
attorney and client is established between the
lawyer and the creditor, in the final analysis
the credit association is the master and real
client, since it selects the lawyer, employs him,
fixes his compensation and shares therein, prescribes
the term of his employment, and controls and directs
his actions, even to the point of discharging
him if it sees fit.
All of which it holds out to its customers
that it does and will do.
In substance, we think, this is the business
of supplying for a consideration to others the
legal services of lawyers, and is the practice
of law by an unlicensed law agency. Such is against the public policy of the
state and violates Code §3422, as amended,
as well. Id. At 189 S.E. 160.
If an insurance carrier were permitted
to use its staff counsel to defend claims in which
its only obligation is or may be to defend the
suit, and not to pay any judgment, why could it
not sell policies which obligated itself, like
the Automobile Services Association in Rhode
Island Bar Ass’n v. Automobile Service Ass’n,
to provide legal services, through its staff counsel,
to its policyholders for a multitude of legal
problems?
The answer is that corporations may use
staff counsel to represent others only when the
corporation itself has a direct and unconditional
interest in the outcome of the litigation.
It is therefore our opinion to a liability
insurance carrier may use staff counsel to defend
suits against its insureds, including suits claiming
damages in excess of the amount of available coverage,
so long as the insurance carrier is obligated
to pay all or part of judgment against its insured. It may not employ staff counsel to represent
its insureds if its only obligation is to furnish
legal representation to the insured, or if its
obligation to pay all or part of any judgment
against the insured is conditioned upon the outcome
of the litigation, the outcome of subsequent litigation,
or is otherwise qualified in any manner.
This opinion is restricted to the unauthorized
practice of law implications of the question presented
and does not attempt to analyze any ethical considerations
which might be raised by the inquiry.
Staff counsel, in undertaking the representation
of the insureds of his or her employer within
the guidelines established herein, is clearly
bound by the same ethical obligations and constraints
imposed on attorneys in private practice.
This includes zealously guarding against
any potential erosion, actual or perceived, of
the duties of undivided loyalty to the client
(the insured), independence and confidentiality,
to mention on the most obvious areas of potential
concern in their relationship.
Finally insurance carriers, in selecting
cases for handling by staff counsel which involve
potential excess exposure to the insured, should
be aware that the employer-employee relationship
between the insurer and the insuredís counsel
carriers with it certain risks.
The opinions of staff counsel in regard
to legal liability, potential verdict ranges,
and settlement value and his or her decisions
concerning trial preparations and trial strategy
will be subjected to unusually close scrutiny
and subsequent litigation following any excess
verdict.
Approved
by the Supreme Court
Of
Virginia March 8, 1985
Effective June 1, 1985
Justices
Stephenson and Russell
would disapprove the opinion
