Sonnenschein Nath & Rosenthal, LLP on Unauthorized Practice of Law Committee v. American Home Assurance Co.: How Many Clients Does Insurance Defense Counsel Have, and How Can You Tell?
The central question in Unauthorized Practice of Law Committee v. American Home Assurance Co., 261 S.W.3d 24 (Tex. 2008) (“UPLC”), was whether insurer use of its own employee lawyers (“staff counsel”) to defend insureds pursuant to liability insurance policies violated the prohibition on unauthorized corporate practice of law. The Texas Supreme Court joined the overwhelming majority of other states in concluding that there is no violation so long as the insurer’s interests are aligned with those of the insured. In the process, it addressed a broader and more controversial question: does an insurance counsel represent the insurer, as well as the insured. It did not answer that question, but it approved an analytic approach that can be used to find the answer, in other jurisdictions as well as Texas. This commentary describes what the court did, comments briefly on the unauthorized practice issue, and then addresses at length the “how many clients” issue.
On the unauthorized practice issue, the key was that the insurance company is directly interested in the outcome of the litigation against the insured, because its policy will or may obligate it to pay any judgment in that action (up to the policy limit). The commentary summarizes the court’s conclusion, consistent with the overwhelming weight of authority outside Texas: The authors write: “For a corporation to be able to use staff counsel on behalf of a third party, (1) it must be serving its own interest, (2) it must have a direct, substantial financial interest in the matters for which it provides legal services, and (3) its interests must be aligned with those of the third party who receives those services.” As to the last point, the court observed that “in the vast majority of cases, a liability insurer and an insured have the same interest in defeating a liability claim, and their interests differ only when there are coverage questions or when the consequences of the manner in which the defense is rendered affect them differently.” The commentary examines the arguments made to the contrary and concludes that the court correctly rejected those arguments.
Turning to the “how many clients” question, the commentary examines prior Texas Supreme Court cases and shows that their approach has been implicitly premised on the assumption that insurer and insured are ordinarily co-clients. UPLC points out that the court has never held otherwise and then states that “[w]hether defense counsel also represents the insurer is a matter of contract between them,” citing to a law review article that analyzes the issue under the generally accepted common-law test for formation of an attorney-client relationship.
The commentary examines that test, as concisely summarized in the Restatement (Third) of the Law Governing Lawyers, showing how it turns on the intent of the putative client and attorney. Here, the putative client is the insurance company, which (as the commentary explains) would normally wish to be a client:
In the normal course of events, the attorney-client relationships are formed as a result of the insured tendering the defense to the insurer and the insurer retaining counsel pursuant to that tender. The insured’s tender authorizes the insurer to retain counsel on behalf of the insured. Of course, the insurer could ask the lawyer to provide legal services only for the insured, in which case it would not be a client. But the insurer’s own interests are at stake in litigation of a claim where it may be called upon to indemnify, so it has reason to want the lawyer to perform legal services for itself as well. Insurers whose policies entitle them to control the defense generally wish to exercise that right, and that exercise is facilitated if the insurer is also a client. In particular, there would at least be a question whether communications between insurer and attorney would be privileged if the insurer were not a client, while there would be no doubt if the insurer is a client.
Unless the lawyer expressly excludes representation of the insurer or there is a conflict of interest precluding joint representation, the commentary concludes that this leads to the conclusion that the insurer is a co-client. It examines and rejects the argument that the insured must give a special informed consent for such a joint representation to be undertaken. It then examines the circumstances that can create conflicts that would preclude joint representation. These can be dealt with, as the overwhelming majority of jurisdictions that have considered the question have concluded, by giving the insured a right to independent counsel in cases where such a conflict is present. In particular, the commentary considers and rejects the conclusion of the Montana Supreme Court that conflicts are so pervasive as to preclude the insurer from ever being a co-client:
The Montana court also necessarily rejected the normal rifle shot, case-by-case handling of conflicts in favor of a blunderbuss prohibition on insurer direction even when there was no conflict and only the insurer’s money was at stake. The Montana court sought to justify this by asserting that insurer/insured relationships are so “permeated with potential conflicts” that case-by-case solutions are inadequate. The supposed pervasiveness of conflicts is a factual statement. This, however, was an original proceeding responding to a question unilaterally framed by the lawyers who sought the court’s intervention. There was no factual record and the court refused the respondent insurance companies the opportunity to present evidence on issues including the infrequency of conflicts and the nonexistence of harm to insureds resulting from such conflicts. Anyone familiar with insurance defense practice knows that conflicts are both far less common and far more easily managed than the Montana court assumed. Other courts ought not to follow the Montana opinion, and certainly not without allowing presentation of evidence on the factual assertion which is the necessary premise for that decision.