UNAUTHORIZED PRACTICE OF LAW COMMITTEE, Petitioner, v. AMERICAN HOME ASSURANCE COMPANY, INC. and The Travelers Indemnity Company, Respondents.
No. 04-0138.
Supreme Court of Texas.
March 28, 2008.
Rehearing Denied Sept. 26, 2008.
261 S.W.3d 24
Thomas C. Wright, Lucy H. Forbes, Wright Brown & Close, LLP, Houston, Jim E. Cowles, R. Michael Northrup, Cowles & Thompson, P.C., Mark S. Whitburn, Theodore J. Boutrous Jr., Suellen Ratliff, Gibson, Dunn & Crutcher, LLP, Dallas, TX, William T. Barker, Sonnenschein, Nath & Rosenthal LLP, Chicago, IL, William V. Dorsaneo III, Richard A. Smith, Lynn Tillotson & Pinker, L.L.P., Dallas, Thomas T. Rogers, Jackson & Walker, L.L.P., Austin, TX, for Respondent.
J. Dennis Chambers, Atchley, Russell, Waldrop & Hlavinka, Texarkana, Stephen E. McConnico, Scott Douglass & McConnico, L.L.P., Patricia Anne Moore, Donald P. Wilcox, Fred C. Bosse, Austin, Thomas S. Leatherbury, Robert C. Walters, Vinson & Elkins L.L.P., Calvin R. “Rod” Phelan II, Baker Botts LLP, Dallas, Jerry P. Campbell, Naman Howell Smith & Lee, Waco, John L. Hill Jr., Winstead Sechrest & Minick, P.C., Maurice Joseph Meynier IV, Law Office of M. Joseph Meynier, IV, Houston, Julia F. Pendery, Attorney At Law, Dallas, Peter M. Kelly, Law Office of Peter M. Kelly, P.C., Houston, Guy D. Choate, Webb, Stokes & Sparks, L.L.P., San Angelo, TX, for Amicus Curiae.
Liability insurance policies commonly provide that the insurer must indemnify the insured from liability for covered claims and give the insurer the duty, and also the right, to defend such claims. The right to defend in many policies gives the insurer complete, exclusive control of the defense. Insurance companies retain attorneys in private practice to represent insureds in defending claims against them, but for decades, in Texas and other states, insurers have also used staff attorneys—salaried company employees—to save costs.
Generally, a corporation can employ attorneys in-house to represent its own interests but cannot engage in the practice of law by providing legal representation to others with different interests. Because of its potential indemnity obligation, an insurer has a direct, substantial financial interest in defending claims against its insured, and often an insurer and an insured‘s interests are aligned toward simply defeating such claims. But their interests can diverge, as for example when all or part of the claim may not be covered. The issue in this case is whether a liability insurer that uses staff attorneys to defend claims against its insureds is representing its own interests, which is permitted, or engaging in the unauthorized practice of law, which is not. Two states, North Carolina and Kentucky, do not permit such use of staff attorneys, but several other states do.
We hold that an insurer may use staff attorneys to defend a claim against an insured if the insurer‘s interest and the insured‘s interest are congruent, but not otherwise. Their interests are congruent when they are aligned in defeating the claim and there is no conflict of interest between the insurer and the insured. We also hold that a staff attorney must fully disclose to an insured his or her affiliation with the insurer. We modify the judgment of the court of appeals and as modified, affirm.1
I
Liability insurance policies that obligate the insurer to defend claims against the insured typically give the insurer “complete and exclusive control” of that defense.2 There are exceptions and variations, but we focus here on policies in which the insurer‘s right to control the defense is “full and absolute.”3 Insurers often retain attorneys in private practice to represent insureds, overseeing and directing their work and paying their fees.
Sometimes an insurer uses a “captive” firm of attorneys who, though not the insurer‘s employees, have no other clients. Insurers also use lawyers employed as salaried corporate staff to represent insureds. In every instance, the insured‘s lawyer “owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured”4 and “must at all times protect the interests of the insured if those interests would be compromised by the insurer‘s instructions.”5
Staff lawyers perform all the legal services that private attorneys do, filing pleadings and motions, taking discovery, engaging in settlement discussions, appearing in court, and trying cases. Insurers contend that staff attorneys are significantly more efficient and economical than private attorneys and thereby reduce defense costs and premiums.6 Insurers also claim that the availability of staff attorneys is a useful advertising tool for selling policies. But critics of the use of staff attorneys argue that when an insurer controls the insured‘s attorney as thoroughly as an employer controls an employee, the attorney-client relationship can be impaired to the insured‘s detriment.7 This disagreement has been the subject of lingering national debate.
There is some indication that insurers’ use of staff attorneys to represent insureds dates to the end of the nineteenth century.8 In 1950, the American Bar Association Committee on Ethics and Professional Responsibility concluded that such use of staff attorneys was not unethical,9 and it reaffirmed that view in 2003.10 While there appear to be no comprehensive industry studies on the matter,11 it is safe to say that the practice is now, and has long been, widespread.12 The same is true in Texas. A 1963 opinion of the State Bar of Texas Committee on Interpretation of the Canons of Ethics recognized insurers’ use of staff attorneys to defend claims against insureds and found nothing improper in the practice.13 An amicus curiae brief in this case, submitted by five insurers who use staff attorneys to defend insureds, states that fifteen insurers employ 220 staff attorneys in Texas in 39 offices.14 Another amicus curiae brief, received from insurance, corporate counsel, and business interests, estimated that in September 2005, over 10,000 cases in Texas were being defended by staff attorneys.15
The practice of law in Texas is regulated by this Court and by the Legislature.16 To practice law in Texas, one must either be licensed by the Court17 or have special permission.18 To ensure the quality and integrity of the bar, the Court requires continuing education19 and imposes strict disciplinary rules,20 enforced through the grievance process.21 To further protect the public, we have established and appointed the Unauthorized Practice of Law Committee to be responsible for investigating and prosecuting the unauthorized practice of law.22
In 1998, the Committee sued Allstate Insurance Co., alleging that its use of staff attorneys to defend insureds against liability claims constituted the unauthorized practice of law.23 The action prompted Nationwide Mutual Insurance Co. to sue in federal court for a declaration that Texas law did not prohibit its use of staff attorneys to represent insureds, but if it did, it violated the United States Constitution.24 The federal district court decided that abstention was required under the Pullman doctrine25 and dismissed the case, and the Fifth Circuit affirmed in substance.26 After surveying Texas caselaw and the provisions of the State Bar Act on which the Committee relied, the Circuit concluded:
we believe that the law is fairly susceptible to a reading that would permit Nationwide to employ staff counsel on behalf of its insureds. While the Texas courts certainly may decide that Nationwide‘s staff attorneys are engaged in the unauthorized practice of law, we believe that the law is uncertain enough on this issue that we should abstain from ruling on its federal constitutionality.27
Nationwide then sued the Committee in state court and obtained a favorable judgment, affirmed on appeal, which the Committee petitioned this Court to review while the present case has been pending.28
Meanwhile, in August 1999, a staff attorney for American Home Assurance Co., Katherine D. Woodruff, received a letter from the Committee‘s Dallas subcommittee stating that it was investigating whether she and her firm, Woodruff & Associates, all staff attorneys employed by American Home, were engaged in the unauthorized practice of law. Shortly thereafter, American Home, Woodruff, Woodruff & Associates, and Travelers Indemnity Co. brought this action against the Committee for a declaration that “neither the insurance companies’ employment of staff counsel nor the attorneys’ practice as staff counsel constitutes the unauthorized practice of law“. The Committee counterclaimed for declaratory and injunctive relief. After all claims by and against Woodruff and Woodruff & Associates were nonsuited, the trial court denied American Home‘s and Travelers’ motions for summary judgment, and granted summary judgment for the Committee, declaring that each company‘s “use of staff counsel who are employees . . . to defend insureds (third parties) in Texas is the unauthorized practice of law“. The trial court suspended its judgment pending appeal, conditioned on American Home‘s and Travelers’ adoption of the following policy:
If in the course of representing a party insured by [American Home and Travelers] any staff counsel employed in Texas by [such insurer, respectively] seeks advice about a potential conflict of interest between the insured and the insurance company, or any other question of professional ethics, such staff counsel will first consult with the Texas-licensed lawyer who is head of the staff counsel office, and thereafter, if the staff counsel‘s concerns are not resolved, consult with an outside Texas firm, designated by [such insurer, respectively], on such question.
The court of appeals reversed, rejecting all of the Committee‘s arguments.29 The court reached the following conclusions:
- An insurer‘s right, as an employer, to control the details of its employees’ work does not create an irreconcilable conflict with the interests of an insured represented by a staff attorney. Legally, an employer does not control a professional employee‘s judgment, and practically, a staff lawyer faces no more or different conflicts than an outside lawyer.30
- Insurance companies’ use of staff lawyers does not violate Texas Disciplinary Rules of Professional Conduct 1.05 (Confidentiality of Information); 1.06 (Conflict of Interest: General Rule); 2.02 (Evaluation [of a Client Matter] for Use by Third Persons); 5.04(c) & (d) (Professional Independence of a Lawyer); 5.05 (Unauthorized Practice of Law); 7.06 (Prohibited Employment); 8.03 (Reporting Professional Misconduct); and 8.04 (Misconduct).31
- Although this Court has stated that an insurance defense lawyer “owes unqualified loyalty to the insured“,32 “[t]hat statement was dicta and does not preclude the insurer being a client, at least when there is no conflict. . . . Reality and common sense dictate that the insurance company is also a client.” A company that employs lawyers to represent its own interests is not engaged in law practice, and the situation is no different when such lawyers also represent insureds with like interests, even though conflicts may arise and must be addressed.33
An insurer‘s use of staff attorneys to defend insureds does not violate article art. 2.01B(2) of the Texas Business Corporation Act or chapter 81 of the Texas Government Code because an insurer‘s contractual duty to defend is collateral to its purpose of providing insurance. If using staff lawyers is practicing law, so is hiring outside lawyers.34 - Although read literally section 38.123 of the Texas Penal Code would prohibit an insurer‘s use of staff attorneys, it would also prohibit insurance defense altogether, an absurd result. Further, nothing in the legislative history of that 1993 statute indicates its purpose was to prohibit insurers from using staff attorneys. Therefore, the statute should not be given that effect.35
- Only two states, North Carolina and Kentucky, prohibit insurers from using staff attorneys, while several other states do not.36
The court of appeals rendered judgment for American Home and Travelers and remanded the case to the trial court to determine whether they should recover attorney fees from the Committee. Not having requested attorney fees in the trial court, American Home and Travelers concede in this Court that they are not entitled to recover them on remand. The Committee‘s appeal thus presents two issues:
First: in using staff attorneys to discharge their contractual duty to defend insureds against liability claims, are American Home and Travelers engaging in the unauthorized practice of law?
Second: if not, must a staff attorney‘s affiliation with an insurer be fully disclosed to the insured?
Several amicus curiae briefs37 address whether, as a matter of policy, insurers’ use of staff attorneys to defend claims against insureds is beneficial or detrimental to consumers, the bar, and the public. The amicus briefs also explore and question the motives insurers and lawyers may have in supporting or opposing the use of staff attorneys. These are all important matters, but they are properly addressed to the Court‘s administrative function in regulating the practice of law in Texas, not to its adjudicative function in deciding the legal issues presented by this case.38 We consider and decide here only what the unauthorized practice of law is, under existing law, not what it should be, an issue that must be left to another process.
A
We start from a point of agreement among the parties, that a corporation is not authorized to engage in the practice of law. As we have previously stated:
The Supreme Court of Texas has inherent power to regulate the practice of law in Texas for the benefit and protection of the justice system and the people as a whole. The Court‘s inherent power is derived in part from Article II, Section 1 of the Texas Constitution, which divides State governmental power among three departments. The authority conveyed to the Supreme Court by this constitutional provision includes the regulation of judicial affairs and the direction of the administration of justice in the judicial department. Within this authority is the power to govern the practice of law. The Court‘s inherent power under Article II, Section 1 to regulate Texas law practice is assisted by statute, primarily the State Bar Act [Texas Government Code chapter 81].39
The Legislature has acknowledged that the Court has exclusive authority to adopt rules governing admission to the practice of law in Texas.40 Those rules permit only individuals meeting specified qualifications to practice law.41 Entities, including insurance companies, are excluded.
The Committee relies on the more general provision of article 2.01(B)(2) of the Texas Business Corporation Act, which prohibits a corporation from transacting business in Texas “[i]f any one or more of its purposes . . . is to engage in any activity which cannot lawfully be engaged in without first obtaining a license under the authority of the laws of this State . . . and such a license cannot lawfully be granted to a corporation.”42 On the basis of this
B
The parties also agree that a company does not engage in the practice of law by employing attorneys on its salaried staff to represent its own interests. This has long been settled law. In 1933, the Legislature enacted Article 430a of the Texas Penal Code, which made it “unlawful for any corporation or any person, firm, or association of persons, except natural persons who are members of the bar regularly admitted and licensed, to practice law.”45 The statute defined the practice of law broadly but specified that it was not to be “construed to prohibit any person, firm, association or corporation, out of court, from attending to and caring for his or its own business“.46 As for attending to business in court, a corporation was prohibited only from “appear[ing] as an attorney for any person other than itself in any court in this State, or before any judicial body or any board or commission of the State of Texas“.47 Thus, Article 430a recognized that a corporation was not practicing law by using house counsel to provide legal advice regarding the corporation‘s own affairs or to appear in court on its behalf. Article 430a was repealed in 1949, but only because the Legislature recognized that “under the Constitution, the judicial department of the State government has power to define the practice of law and by civil proceedings protect the public from its practice by laymen and corporations.” Therefore, the Legislature concluded, the statute had “no practical value for the suppression of the unauthorized practice of law“.48 The repeal had no effect on the use of house counsel.
Nor does anyone suggest in this case that an insurer is practicing law when it retains a private attorney to provide its insured the defense required by the policy, even though the policy gives the insurer absolute control of the defense. Article 430a specifically excluded insurance defense from its prohibition of the corporate practice of law, stating:
nothing herein shall prohibit any insurance company from causing to be defended, or prosecuted, or from offering to cause to be defended, through lawyers of its own selection, the insureds or assureds in policies issued or to be issued by it, in accordance with the terms of such policies. . . .53
Thirty years after repealing Article 430a, the Legislature again undertook to define the practice of law in amendments to the State Bar Act.54 Recodified as Section 81.101(a) of the Texas Government Code, that definition is now as follows:
In this chapter the “practice of law” means the preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court, including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.
C
The issue, then, is whether an insurer that uses staff attorneys to defend claims against insureds is practicing law or simply defending its own interests in discharging its contractual duty to the insureds and defeating claims it would be required to indemnify. We are aware that state regulation of the unauthorized practice of law may be limited by the First Amendment, such as when an organization furnishes legal services to advance the personal interests of its members through a staff attorney,55 but American Home and Travelers make no constitutional argument in this case. They argue only that they are not practicing law.
American Home and Travelers point to our 1940 decision in Utilities Insurance Co. v. Montgomery, where we said that an insurer obtaining a non-waiver agreement (what we now call a reservation of rights) from its insured “was seeking to protect its own interests rather than those of [its insured]“, and thus “was not unlawfully practicing law” as prohibited by Article 430a, which was then in effect.56 That was clearly correct because the insurer‘s interest in reserving coverage issues was distinct from, if not contrary to, any interest the insured had in the matter. But we did not speak to the insurer‘s interest in defending its insured. Also, nothing in our opinion suggests that the attorneys employed to defend the insured were on the insurer‘s staff rather than engaged in private practice. Montgomery does not aid the insurers.
But we think our opinion four years later in Hexter Title & Abstract Co. v. Grievance Committee does.57 Hexter, an agent for a title insurance company, received applications for insurance and prepared abstracts of title. When its salaried employee-attorneys discovered defects in title, they would prepare an opinion describing the defects and instruments to correct them, which Hexter would then offer to the customer free of charge. Hexter advertised these services to attract customers who would purchase title abstracts and title insurance, but not all applicants who received the services actually bought insurance. Charged with engaging in the unauthorized practice of law in violation of Article 430a, which was still in effect, Hexter argued that its preparation of title opinions and instruments of conveyance was in the furtherance of its own business. We rejected the argument, explaining:
These transactions involve conveyances, releases, and mortgages from grantors to grantees, and to which the insurance company is not a party. They are executed for the purpose of placing good title in the grantee, so that the insurance company may thereafter insure the title if it chooses. Such papers relate to the rights of third parties in which the corporation has no present interest, but only a prospective one. They affect the rights of individuals apart from their interest in the title insurance policy. The work of preparing these papers is distinct from the searching and insuring of the title—the legitimate business for which the corporation is incorporated. It is not the business of the title insurance company to create a good title in an applicant for insurance by preparing the necessary conveyances, nor to cure defects in an existing title by securing releases or prosecuting suits to remove clouds from title, merely for the purpose of putting the title in condition to be insured. The title insurance company must accept the title and insure it as it is, or reject it. It may examine the title, point out the defects, and specify the requirements necessary to meet its demands, but it is the business of the applicant for the insurance to cure the defects.58
If the defendant‘s contention that it has the right to prepare all legal documents necessary to create a good title in the applicant so that it may thereafter make a valid and safe contract to insure the title be sound, then a contractor, wholly unlearned in the law, could with equal propriety advertise that if a prospective purchaser of real property would give him a contract to construct a building thereon, he would examine the abstract of title to the land for the prospective purchaser and draw all papers necessary to put good title in such purchaser. The contractor could argue that in doing so he was only transacting his own business, because it was necessary for the purchaser to have good title to the property in order to enable the contractor to take a valid lien thereon to secure his cost. A fire insurance agent could advertise that if a prospective purchaser of real property would agree to insure the buildings on the premises through his agency he would examine the title and prepare all papers necessary to make the purchaser the owner thereof. Loan companies and banks could make similar propositions on condition that they be permitted to place a loan on the property. Corporations engaged in buying municipal bonds could propose to prepare the bond record and supervise the election for the issuance of the bonds and perform all other necessary legal services, if the municipality would promise to sell the bonds to such corporation. These examples could be multiplied indefinitely. Ultimately most legal work, other than the trial of cases in the courthouse, would be performed by corporations and others not licensed to practice law. The law practice would be hawked about as a leader or premium to be given as an inducement for business transactions.59
Most assuredly the insurance company may examine for its own benefit the abstract of title to property which it proposes to insure, to determine whether or not it will insure the title, and it may specify the corrections necessary to meet its demands. But it may not furnish a title opinion to a prospective purchaser to be used by him in determining whether or not he will buy the property, neither may it hold itself out as being authorized to do so.60
From our analysis in Hexter, we distill three factors to be considered in determining whether a corporation engages in the practice of law by employing staff attorneys to provide legal services to someone other than the corporation, and more particularly, whether a liability insurer is practicing law by using staff attorneys to defend claims against insureds. One factor is whether the company‘s interest being served by the rendition of legal services is existing or only prospective. Hexter rendered services free of charge to attract business and to help applicants for title insurance cure title defects before insurance was purchased. A liability insurer, on the other hand, renders legal services to an insured to satisfy its contractual obligation to provide the insured a defense. While there is evidence that insurers advertise their use of staff attorneys and resulting lower premiums to attract business, legal services are not rendered to attract business but to satisfy a contractual obligation.
But a company does not avoid engaging in the unauthorized practice of law merely because it provides legal services out of contractual obligation. A second factor is whether the company has a direct, substantial financial interest in the matter for which it provides legal services. Hexter‘s interest in providing legal services to customers and prospective customers was to attract business; it had no other interest in their affairs. Hexter was entitled to legal advice concerning the state of titles for purposes of issuing abstracts and insurance, and it was entitled to employ attorneys to provide that advice, but its business interests were distinct and different from those of its customers. A liability insurer‘s interest in avoiding its indemnity obligation gives it a direct, financial, and substantial interest in defending a claim against its insured. If the claim is defeated, the insurer benefits. For Hexter, the principal benefit in correcting defects in a potential customer‘s title was a potential sale.
Most important, however, is a third factor: whether the company‘s interest is aligned with that of the person to whom the company is providing legal services. When the company and its employee or affiliate have common interests, a staff attorney can represent them both because, to quote the 1968 ethics opinion, “there is for all practical purposes only one client involved.”61 Hexter sold services, and its customers bought them. The interests of each were their own. But 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
Applying these factors, we conclude that a liability insurer does not engage in the practice of law by providing staff attorneys to defend claims against insureds, provided that the insurer‘s interests and the insured‘s interests in the defense in the particular case at bar are congruent. In such cases, a staff attorney‘s representation of the insured and insurer is indistinguishable.
D
It is certainly not unusual for an insured and an insurer to differ over the coverage of a claim or an aspect of the defense so that a single lawyer cannot represent them both, but the Committee and amici argue that the insured-insurer relationship is so fraught with the potential for conflict that an insurer that uses staff attorneys to defend insureds is essentially practicing law. To be sure, conflicts can also arise, and do, when the insured‘s lawyer is not the insurer‘s employee, but the Committee and amici argue that the employment relationship between an insurer and its staff attorney increases and exacerbates these conflicts. For private counsel, they argue, an insurer is but a source of business, whereas for a staff attorney, the insurer controls pay, benefits, and retention. The pressures and loyalties of the employment relationship, they continue, make it more difficult for an attorney to provide an insured the independent judgment and professional relationship, to which the insured is entitled. The insurer‘s profit motive, the Committee and amici assert, is fundamentally inconsistent with the provision of independent legal services through staff attorneys. Even if staff attorneys can sometimes represent insureds, the argument concludes, their use further erodes the practice of law into a business, and such obvious control of insurers over legal services undermines public confidence in the bar.
These arguments raise serious concerns, especially coming from the Committee charged by this Court and the Legislature with protecting the public from the unauthorized practice of law, and we examine them carefully. As we do, however, we note that neither the Committee nor amici has been able to cite any empirical evidence—any actual instance—of injury to a private or public interest caused by a staff attorney‘s representation of an insured. The court of appeals also noted this lack of evidence,62 as have amici63 and at least one prominent commentator.64 Given that insurers have used staff attorneys across the country for decades, the lack of evidence of harm is an important consideration. There is no question, of course, that conflicts arise in the tripartite insurer-insured-defense attorney relationship, but
The most common conflict between an insurer and an insured is whether a claim is within policy limits and the coverage provided. Often coverage cannot be determined when a claim is first filed. Texas procedure does not permit a plaintiff claiming unliquidated damages, such as for physical pain and mental anguish, to state a dollar figure in his petition.66 Even after the basis for the claim is explored in discovery, it may be difficult to quantify the amount of damages and determine whether they fall within policy limits. Other coverage issues may also depend on facts developed in the litigation. When an insurer is concerned that there may be a coverage issue, it usually issues a reservation-of-rights letter when it accepts the defense, agreeing to defend the insured without waiving its right to decline coverage later. Sometimes, according to the brief record before us, letters are issued liberally, as a prophylactic measure, without any specific intent to pursue a coverage issue. A reservation-of-rights letter ordinarily does not, by itself, create a conflict between the insured and the insurer; it only recognizes the possibility that such a conflict may arise in the future. Our record reflects that staff attorneys for the insurers in this case usually do not represent insureds when the insurer‘s adjuster has identified a serious coverage issue, but sometimes do when a reservation-of-rights letter has issued merely as a matter of routine. Declining representation is the safer course67 to avoid conflicts that destroy the congruence of interest between the insurer and the insured that allows for the use of staff attorneys. However, we cannot say as a blanket rule that a staff attorney can never represent an insured under a routine reservation of rights.
It is not unusual for defense counsel to acquire information that the insured could expect to be kept confidential and not disclosed to the insurer. The information may relate to coverage, to underwriting issues such as whether a policy should be cancelled or not renewed, or to other matters. Counsel‘s acquisition of such information may necessitate withdrawal from the representation whether the attorney is on staff or in private practice.68 But Texas law imputes knowledge of confidential information to counsel‘s lawyer-associates so that in a private law firm, all of the lawyers are irrebuttably presumed to have knowledge of the confidential information.69 The presumption does not apply
An insurer has a so-called Stowers duty to accept a claimant‘s reasonable offer to settle within policy limits or stand to an excess judgment.72 The Committee argues that sometimes staff attorneys are restricted by their employer in whether they may apprise an insured of the insurer‘s Stowers obligation and are sometimes required to obtain management approval before making or responding to settlement offers that implicate that duty. The Committee argues that a staff attorney cannot be expected to disregard the insurer‘s policies on such matters, even when it would be in the insured‘s best interest to do so, because of fear of reprisal in employment. But a private defense attorney who fails to follow the insurer‘s instructions may also fear reprisal—in loss of business and consequent pressure from partners and the law firm. As we have noted, defense counsel, whether private or on staff, owes the insured unqualified loyalty.73 It is possible that counsel will fail to render that loyalty, but we cannot presume that a staff attorney is more likely to do so, especially absent any evidence of a complaint ever having been made.
The Committee argues that staff attorneys are subject to other litigation guidelines requiring approval to conduct investigations, hire expert witnesses, and take other actions in defense of claims. The Committee acknowledges that private attorneys are often subject to the same kinds of restrictions, but it argues that private counsel are more independent and less likely to adhere to guidelines that compromise the insured‘s interests. There is evidence in the record, however, that American Home and Travelers do not restrict staff attorneys in exercising independent judgment. Rule 5.04(c) of the Texas Disciplinary Rules of Professional Conduct prohibits a lawyer from “permit[ting] 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.”74 Again, we cannot presume that staff attorneys are more likely to act unethically in this respect with no evidence of complaints that they have done so.
One amicus argues that an insured may have personal concerns that a staff attorney cannot protect, such as a concern about the effect of a claim or defense on the insured‘s reputation, or family de-
The Committee argues that under Texas law insurance defense counsel represents only the insured, not the insurer, and that staff attorneys—who necessarily represent the insurer—cannot defend insureds without violating this rule. But we have never held that an insurance defense lawyer cannot represent both the insurer and the insured, only that the lawyer must represent the insured and protect his interests from compromise by the insurer.75 And we have noted that “an insurer‘s right of control generally includes the authority to make defense decisions as if it were the client ‘where no conflict of interest exists.‘”76 Rule 1.06 of the Texas Disciplinary Rules of Professional Conduct allows a lawyer to represent more than one client in a matter if not precluded by conflicts between them.77 Whether defense counsel also represents the insurer is a matter of contract between them.78
In sum, the Committee argues that while an insurer‘s control of defense counsel always impinges on counsel‘s professional judgment and loyalty to the insured, the ethical problems are greater in number and magnitude when the defense is conducted by a staff attorney who owes the insurer allegiance as both a client and boss. These problems, the Committee argues, even though they may sometimes be resolved satisfactorily, should be avoided altogether. We do not minimize these difficulties or criticize the Committee for raising them by means of this proceeding. And we are especially concerned that the use of staff attorneys not diminish professionalism in insurance defense or harm the public. The use of staff attorneys comes with risks, as American Home and Travelers themselves acknowledge. If an insurer‘s interest conflicts with an insured‘s,79 or the insurer acquires confidential infor-
E
Finally, we note that insurers’ use of staff attorneys to defend claims against insureds has been approved in several other states.80 The supreme courts of Georgia, Indiana, Missouri, and Tennessee,81 and lower courts in five other states,82 have held that insurers’ use of staff attorneys does not constitute the unauthorized practice of law. The Florida Supreme Court has reached essentially the same conclusion by approving ethical rules that allow the practice provided the staff attorney determines and discloses whether he or she represents only the insured or the insurer as well.83 Three states—Illinois, Maryland, and Minnesota—have statutes that would, either expressly or as applied, except insurance companies and their use of staff counsel from that state‘s prohibition of the unauthorized practice of law.84 Ethics committees in eight states have is-
III
The Committee also argues that the use of staff attorneys is prohibited by section 38.123 of the Texas Penal Code. That section, entitled “Unauthorized Practice of Law,” states in paragraph (a):
A person commits an offense if, with intent to obtain an economic benefit for himself or herself, the person:
(1) contracts with any person to represent that person with regard to personal causes of action for property damages or personal injury;
(2) advises any person as to the person‘s rights and the advisability of making claims for personal injuries or property damages;
(3) advises any person as to whether or not to accept an offered sum of money in settlement of claims for personal injuries or property damages;
(4) enters into any contract with another person to represent that person in personal injury or property damage matters on a contingent fee basis with an attempted assignment of a portion of the person‘s cause of action; or
(5) enters into any contract with a third person which purports to grant the exclusive right to select and retain legal counsel to represent the individual in any legal proceeding.88
By “person” the statute means “an individ
The court of appeals observed that a literal reading of this statute would prohibit liability insurers not only from using staff attorneys to defend insureds but from using private attorneys as well, a result the court called absurd.92 But the statute does not go quite so far. It does not prohibit an insurer from contracting with private counsel to represent an insured. Paragraph (a) could be read to prohibit a staff attorney from agreeing to represent an insured if the agreement were really between the staff attorney‘s employer, the insurer, and the insured. One might argue that the agreement in that situation was between the staff attorney and the insured, since only the attorney could provide legal representation, even though the insurer made the staff attorney available.
But we need not struggle over the exact meaning of paragraph (a) because we do not think that section 38.123 was intended to address liability insurers’ defense of their insureds. That is clear from paragraph (a)(5), which prohibits any contract that grants one party the exclusive right to select and retain legal counsel to represent the other. Since liability insurance poli
IV
Finally, the Committee argues that if staff attorneys are permitted to represent insureds, they must fully disclose their affiliation with insurers. American Home and Travelers do not oppose this requirement on principle but argue only that there is no evidence in the record that full disclosure is not being made. Rule 7.02 of the Texas Disciplinary Rules of Professional Conduct prohibits a lawyer from making any false or misleading representations about his or her services, and it goes without saying that a staff lawyer must fully disclose to a represented in
The Committee also argues that staff attorneys cannot use a name similar to a law firm, such as Woodruff & Associates, the name used at one time by American Home‘s staff attorneys. The Committee raised this issue in its motion for summary judgment, though not in its pleadings, and the trial court denied relief. The Committee did not appeal, and therefore the issue is not before us.
* * * * *
American Home and Travelers may use staff attorneys to defend claims against insureds provided that the insurer‘s and insured‘s interests in the situation are congruent as described in this opinion, but staff attorneys must disclose their affiliation to their clients. The court of appeals’ judgment is modified accordingly, and the remand for consideration of attorney fees is reversed. As modified, the judgment is Affirmed.
Justice JOHNSON filed a dissenting opinion, in which Justice GREEN joined.
Justice JOHNSON, joined by Justice GREEN, dissenting.
Many matters addressed by briefs of the parties1 and amici involve ethical and potential liability considerations of insurers and their staff counsel when staff counsel defend insureds. As the Court points out, those considerations do not determine what is or is not the unauthorized practice of law. The Court details several such issues, some easily-identified and some not-so-easily-identified, that are imbedded in the relationships when an insurer se
I agree that corporate insurance companies are not permitted to practice law in Texas. 261 S.W.3d at 34; see
The Legislature specifically authorized the practice of law by entities other than natural persons over thirty-five years ago. Beginning in January 1970, certain types
any type of personal service rendered by attorneys-at-law which requires as a condition precedent to the rendering of such service within this state, the obtaining of a license, permit, certificate of registration, or other legal authorization and which prior to the passage of this Act and by reason of law could not be performed within this state by a corporation.
In Hexter Title & Abstract Co. v. Grievance Committee, 142 Tex. 506, 179 S.W.2d 946 (1944), this Court considered whether a corporation was practicing law when attorney employees of the corporation pre
Section 1. It shall be unlawful for any corporation or any person, firm, or association of persons, except natural persons who are members of the bar regularly admitted and licensed to practice law.
Sec. 2. For the purpose of this Act, the practice of law is defined as follows: Whoever * * * (b) For a consideration, reward or pecuniary benefit, present or anticipated, direct, or indirect, advises or counsels another as to secular law, or draws a paper, document or instrument affecting or relating to secular rights; * * * or (d) For a consideration, direct or indirect, gives an opinion as to the validity of the title to real or personal prop
erty, * * * is practicing law. Nothing in this section shall be construed to prohibit any person, firm, association or corporation, out of court, from attending to and caring for his or its own business, * * * nor from preparing abstracts of title, certifying, guaranteeing or insuring titles to property, real or personal, or an interest therein, or a lien or encumbrance thereon, * * *. Sec. 3. It shall be unlawful for any corporation to practice law as defined by this Act or to appear as an attorney for any person other than itself in any court in this state, or before any judicial body or any board or commission of the State of Texas; or hold itself out to the public or advertise as being entitled to practice law; and no corporation shall prepare corporate charters or amendments thereto, or other legal documents not relating to its authorized business, or draw wills; or hold itself out in any manner directly or indirectly as being entitled to do any of the foregoing acts; * * *.
Id. at 951 (emphasis added). We held that the title and abstract company was practicing law even if the documents were prepared by licensed attorneys and even if non-lawyer corporate executives did not direct how the documents were to be prepared:
The fact that the corporation has several licensed lawyers in its employment to prepare the instruments in question does not alter the case. According to the agreed statement of facts the executive officers of the corporation direct the kind of instruments to be drawn and what should be put in them. But even in the absence of such direction by the executives the result would be the same.
The attorney in preparing such papers does so as the agent of the corporation by whom he is employed. His first obligation of loyalty is to the corporation. His acts are the acts of the corporation, and even through the corporation acts through an attorney, it is nevertheless practicing law.
Id. at 953-54 (emphasis added).
Fairly reading former article 430a, section 2 addressed out-of-court activities and section 3 addressed in-court activities. Section 3 specifically prohibited corporations from appearing “as an attorney for any person other than itself in any court in this State.” Id. at 951. As the Court has noted, article 430a specifically provided that an insurer was not precluded from defending its insureds by lawyers of its own selection. Id. But what the statute did not say was that a corporation could, itself, defend its insureds in court.
More than twenty years after Hexter was decided, another case presented the issue of whether a nonprofit corporation was practicing law by using employee attorneys to represent indigents. Touchy v. Houston Legal Found., 432 S.W.2d 690 (Tex.1968). Hugo A. Touchy, three other practicing attorneys, and an organization composed of attorneys (collectively, “Touchy“) brought suit against the Houston Legal Foundation, a charitable corporation.4 Touchy sought to enjoin the Foundation from engaging in (1) practices which allegedly violated the Texas Canons of Ethics, (2) the unauthorized practice of law, and (3) practices which were demeaning to the legal profession and economically harmful to the plaintiffs. Id. at 691. As to the unauthorized practice of law claim, Touchy asserted that the Foundation was
practicing law without authorization by directly representing clients by signing pleadings, motions, and other documents filed in court. Id. at 693.5 The State Bar Act then provided that all persons licensed to practice law were members of the State Bar and all persons not members were “‘prohibited from practicing law in this State.‘” Id. at 695 (quoting Act of April 6, 1939, 46th Leg., R.S., ch. 1, §§ 2, 3, 1939 Tex. Gen. Laws 64-66, repealed by Act of April 30, 1987, 70th Leg., R.S., ch. 148, § 3.01, 1987 Tex. Gen. Laws 534, 593 (former TEX. REV. CIV. STAT. 320a-1)).
The Foundation responded by filing a plea in abatement challenging Touchy‘s standing to bring suit and a motion for summary judgment urging that Touchy did not have standing and that, as a matter of law, the Foundation was neither practicing law nor engaging in conduct demeaning to the profession. Id. at 691. The trial court granted both the plea in abatement and the motion for summary judgment, then dismissed the suit. Id. The court of appeals affirmed. Id. This Court held that by sustaining the plea in abatement, the trial court held that Touchy did not have standing to maintain the suit and could not have reached the merits. Id. at 693. The Court held that Touchy had standing, reversed the lower court judgments and remanded for further proceedings. In remanding, the Court set out the manner in which the unauthorized practice of law claim was to be tried:
The trial of the cause is to be governed by the following specific instructions: The petitioners will have the burden of pleading and proving that the
Foundation is engaged in the unlawful practice of law by directly representing clients as an attorney, by signing pleadings in its name, or by appearing for such clients through its employees, in presenting pleadings, motions, orders and other documents filed in the several courts of this State. Without pleadings and proof establishing that the activities of the Foundation constitute the practice of law, cases such as San Antonio Bar Association v. Guardian Abstract & Title Co., 156 Tex. 7, 291 S.W.2d 697 (1956) and Hexter Title & Abstract Co. v. Grievance Committee, 142 Tex. 506, 179 S.W.2d 946 (1944), will have no application. In each of those cases, the title companies were corporations for profit. Charges were made and fees were received for legal services rendered to clients of the companies by employee attorneys of the companies. In Hexter, this Court pointed out that the facts showed that the employee attorney‘s first loyalty was to the corporation for which he worked rather than to his client; on occasions, superior officials in the corporation, some being lay officials, instructed the employee attorney as to what kind of instrument to prepare and as to the phrasing of the instrument. If, on the trial of the case, it is established by competent evidence that the Foundation is truly a legal aid society which acts merely as a conduit or intermediary to bring the attorney and client together and does not purport to control or exploit the manner in which the attorney represents his indigent client, the operations and activities of the Founda
tion should not be held to be in violation of Article 320a-1, Vernon‘s Annotated Civil Statutes, which provides that ‘all persons not members of the State Bar are hereby prohibited from practicing law in this State.’
Id. at 694-95 (emphasis added). Two points made by the Court are notable in regard to the pending matter. First, the Court recognized that actions of the attorneys employed by the Foundation were those of the corporation and that Touchy had the burden to prove “the Foundation is engaged in the unlawful practice of law by directly representing clients as an attorney, by signing pleadings in its name, or by appearing for such clients through its employees, in presenting pleadings, motions, orders and other documents filed in the several courts of this State.” Id. at 694 (emphasis added). Second, the Court distinguished for-profit corporations where employees provided legal services that resulted in economic benefit to the corporation from nonprofit corporations where neither the attorney nor the corporation benefitted. Even as to the nonprofit Foundation, the Court did not indicate that if the attorneys employed by the corporation filed pleadings and documents in court that the corporation was not practicing law. The Court simply stated that if the Foundation truly functioned as a legal aid society which acted only as a conduit or intermediary (1) to bring the attorney and client together and (2) which did not purport to control or “exploit” the manner in which the attorney represented the indigent client, the Foundation “should not be
The State Bar Act (the Act) presently addresses the question of when a person is practicing law. See
the “practice of law” means the preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court, including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.
Former article 430a section 3 precluded a corporation from practicing law or appearing in court “as an attorney for any person other than itself” whereas the current Act effectively incorporates the prohibition on appearing in court for another by including the phrase “on behalf of a client” in the definition of “practice of law.”
In determining whether an insurer practices law by having its staff attorney represent an insured in a lawsuit, the logical place to begin is with the premise that a
The parties agree that staff attorneys are employed for the purpose of defending insureds at a lower cost than could be achieved if the insurer hired independent counsel. The attorney-client relationship between a staff attorney and an insured comes into being and continues only because of the staff attorney‘s employment by the insurer. Staff attorneys defending insureds thus are employees performing tasks they were employed to perform and defending persons they are assigned to defend by their employer who benefits financially by the staff attorneys’ practice of law. The actions of staff attorneys in so defending insureds undeniably are actions of the corporation. See In re Vesta, 192 S.W.3d at 762; Holloway, 898 S.W.2d at 796; Touchy, 432 S.W.2d at 694; Hexter, 179 S.W.2d at 954.
When a corporation‘s employee attorneys prepare documents for and otherwise represent the corporation itself, the corporation is not practicing law as defined by the plain language of section 81.101(a) of the Act. The attorney employees’ actions in such instances are actions of the corporation—it is representing itself. See In re Vesta, 192 S.W.3d at 762 (“As a general rule, the actions of a corporate agent on behalf of the corporation are deemed the corporation‘s acts.” (quoting Holloway, 898 S.W.2d at 795)). There is no “client” involved as to such corporate actions other than the attorney-client relationship be
There is no contention that insurers are precluded from having staff counsel represent the insurers’ own interests in court. It is not unusual for multiple attorneys, each representing different interests, to be present at a proceeding involving an insured. For example, an insured driver involved in an automobile accident might hire a lawyer who then files suit against the driver of the other vehicle. The other driver might assert a counterclaim, or a passenger might join in the same suit and sue the insured. The liability insurer of the original plaintiff will usually hire a separate attorney to defend the claims against the insured and to possibly represent the insurer‘s subrogation interest, if any. Or if a claim against the insured
Interpreting the State Bar Act to preclude staff attorneys from defending insureds does not yield an absurd result. See Loutzenhiser, 140 S.W.3d at 356. Both authority to control as well as responsibility for controlling corporate actions ultimately lie with the corporation‘s board of directors, and no claim is made by American Home that its board membership is limited to licensed attorneys. A corporate board‘s first duties are to the corporation, not customers of the corporation. See Holloway, 898 S.W.2d at 795 (noting that it is the duty of corporate officers to protect the interests of the corporation). As part of its duties a board establishes policies, gives overall guidance to the corporation, and hires corporate managers to see that corporate policies and guidance are followed in fulfilling corporate purposes. The board may delegate its authority or right to control the corporation‘s actions by control of its employees, but the board ultimately remains responsible for corporate actions.
Corporate purposes can be varied, but it cannot seriously be contended that a for-profit corporation does not have making profits and enhancing shareholder value as its primary goals.8 Good management practices dictate that corporate managers
This record does not evidence directors and managers of the insurers having made anything but ethical business decisions in fulfilling their duties to the corporation. But ethical duties imposed on licensed attorneys as to their clients are different than business ethics of the commercial marketplace. The “practice of law” definition in the State Bar Act does not contain profit or loss considerations.
In sum, the Act does not preclude insurers from representing their own interests in lawsuits if they choose to do so. But under the State Bar Act, a corporate insurer cannot represent a client in a lawsuit. Because acts of staff attorneys are acts of the insurer, when staff attorneys defend insureds in lawsuits the insurer violates the Act, is practicing law without a license, and is engaging in the unauthorized practice of law. I would reverse the
Jim LOWENBERG, on Behalf of Himself and all Others Similarly Situated, Petitioner,
v.
CITY OF DALLAS, Respondent.
No. 06-0310.
Supreme Court of Texas.
March 28, 2008.
Rehearing Denied Sept. 26, 2008.