ETHICS OPINION
The Supreme Court of Texas appoints the nine members of the Professional Ethics Committee from the bar and the judiciary and designates one of the members as chair. According to section 81.092(c) of the Texas Government Code, “Committee opinions are not binding on the Supreme Court.” The Committee posts drafts of its proposed opinions online at texasbar.com/pec for public comment before the opinions are finalized and printed in the Bar Journal.
Opinion No. 687, April 2020
QUESTION PRESENTED
1. Under the Texas Disciplinary Rules of Professional
Conduct, must a staff lawyer employed by an insurance company to defend
its insureds comply with the company’s guidelines regarding the defense
of such cases?
2. What are a lawyer’s obligations if an insurance company cuts a staff lawyer’s support staff?
Statement of Facts
An insurance company employs staff lawyers and support staff to defend
its insureds in personal injury cases. The insurance company requires
staff lawyers to follow the company’s guidelines in defending lawsuits
against its insureds. One guideline requires that staff lawyers obtain
permission before retaining expert witnesses and notifies staff lawyers
that the company requires 30 days to decide whether to approve the
hiring of experts. The staff lawyers are concerned because, for example,
when plaintiffs’ counsel file medical billing affidavits, the expenses
identified in those affidavits are deemed reasonable and necessary
unless a defendant files a controverting affidavit within a certain
period of time, usually 30 days. This means the staff lawyers must find,
retain, provide medical records to, and obtain controverting affidavits
from an expert within 30 days after a billing affidavit is filed. If
staff lawyers must wait up to 30 days to obtain permission to hire an
expert to contest the billing affidavit, the deadline for filing a
controverting affidavit may have already passed.
In addition, the insurance company cut support staff to reduce costs.
The staff lawyers believe the existing support staff cannot keep up with
the lawyers’ workload. This will require the lawyers to spend
considerably more time performing administrative tasks, which will take
time away from performing lawyer-specific tasks.
Discussion
In Professional Ethics Committee Opinion 533 (September 2000), this
Committee addressed the question of an outside lawyer’s compliance with
an insurance company’s litigation/billing guidelines, which placed
certain restrictions on how the lawyer should conduct the defense of the
insured. The Committee concluded that a lawyer may not agree to
restrictions that interfere with the lawyer’s exercise of independent
professional judgment in rendering legal services to the insured client.
This conclusion applies equally in this situation involving staff
counsel employed by an insurance company to represent the company’s
insureds.
The Texas Supreme Court has held that an insurer may use staff lawyers
to defend a claim against an insured if the insurer’s interest and the
insured’s interest are congruent, provided that the staff lawyer’s
affiliation with the insurer is fully disclosed. Unauthorized
Practice of Law Comm. v. American Home Assur. Co., 261 S.W.3d 24,
26-27 (Tex. 2008). The Court further held that “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.” Id.
at 27.
The Supreme Court noted that insurance policies obligating the insurer
to defend claims against the insured typically give the insurer
“complete and exclusive control” of that defense. Id. The Court
then identified three types of lawyers typically hired by insurers: (1)
lawyers in private practice, (2) “captive” firms of lawyers, who are not
the insurer’s employees but have no other clients, and (3) staff lawyers
employed as “salaried corporate staff to represent insureds.”
Id. The Court held that, in each instance, the insured’s lawyer
“owes the insured the same type of unqualified loyalty as if he had been
originally employed by the insured” and “must at all times protect the
interests of the insured if those interests would be compromised by the
insurer’s instructions.” Id. quoting Employers Cas. Co. v.
Tilley, 496 S.W.2d 552, 558 (Tex. 1973) and State Farm Mut.
Auto. Ins. Co., v. Traver, 980 S.W.2d 625, 628 (Tex. 1998).
“Whether defense counsel also represents the insurer is a matter of
contract between them.” American Home, 261 S.W.3d at 42.
The Supreme Court warned that using staff attorneys comes with
risks:
“If an insurer’s interest conflicts with an insured’s, or the insurer acquires confidential information that it cannot be permitted to use against the insured, or an insurer attempts to compromise a staff attorney’s independent, professional judgment, or in some other way the insurer’s and insured’s interests do not have the congruence they have in the many cases in which they are united in simple opposition to the claim, then the insurer cannot use a staff attorney to defend the claim without engaging in the practice of law. But there are a great many cases that can be defended by staff attorneys without conflict and to the benefit of mutual interests. The use of staff attorneys in those cases does not constitute the unauthorized practice of law.”
Id. at 42-43.
Litigation guidelines imposed by an insurance company employing staff
lawyers implicate several Rules. First, Texas Disciplinary Rule of
Professional Conduct 1.08(e) provides:
“A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) the client consents;
(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 1.05.”
In addition, Rule 5.04(c) 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.”
Comment 5 to Rule 5.04 explains that a lawyer should constantly guard
against the erosion of the lawyer’s professional judgment by third
parties who pay the lawyer:
“Because a lawyer must always be free to exercise professional judgment without regard to the interests or motives of a third person, the lawyer who is employed or paid by one to represent another should guard constantly against erosion of the lawyer’s professional judgment. The lawyer should recognize that a person or organization that pays or furnishes lawyers to represent others possesses a potential power to exert strong pressures against the independent judgment of the lawyer. The lawyer should be watchful that such persons or organizations are not seeking to further their own economic, political, or social goals without regard to the lawyer’s responsibility to the client.”
Finally, Rule 1.06(b)(2) 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.”
Opinion 533 clarified that lawyers cannot follow an insurance
company’s litigation guidelines or directives that interfere with the
lawyer’s exercise of independent professional judgment. Id.
(“Litigation/billing guidelines which interfere with the lawyer’s
professional judgment not only violate the above mentioned Rules [Rules
1.06, 2.01, 5.04, and 1.08] but also violate Rule 1.01(b) which
prohibits a lawyer from frequently failing to ‘carry out completely the
obligations that the lawyer owes to a client or clients’”).
Accord, ABA Comm. on Ethics & Prof’l Responsibility, Formal
Op. 01-421 (2001)(“Ethical Obligations of a Lawyer Working under
Insurance Company Guidelines and Other Restrictions”). The ABA Committee
observed that material impairment would likely occur only in “rare
instances” and that in the “vast majority of cases,” litigation
management guidelines do not raise ethics concerns.
Under section 134(2) of the Restatement (Third) of the Law
Governing Lawyers (2000), lawyers may comply with insurers’
instructions if the direction does not interfere with the lawyer’s
independence of professional judgment, the direction is “reasonable in
scope and character,” and the client gives informed consent. Comment d
to section 134 explains that directions are reasonable in scope and
character if, for example, “the third party will pay any judgment
rendered against the client and makes a decision that defense costs
beyond those designated by the third party would not significantly
change the likely outcome.” The third party’s directions must allow for
effective representation. Id.
In one illustration, the Restatement states that an insurer may limit
the number of depositions taken in defense of the insured if the
insurance contract authorizes the insurer to make decisions about the
expense of defense and the lawyer reasonably believes that additional
depositions can be forgone without violating the duty of competent
representation. Id. § 134, cmt. f, illus. 5.
In sum, a lawyer may not blindly comply with an insurance company’s
litigation guidelines. Instead, a lawyer must determine in each case and
in each applicable situation whether a given directive is reasonable and
consistent with the client’s interests. As applied to the facts
presented here, a staff lawyer should not allow the 30-day approval
deadline for experts to materially compromise the insured client’s
position. A lawyer who believes that a particular guideline interferes
with her independent professional judgment in a case should try to
persuade the insurer to withdraw or modify the limitation in that case.
See ABA Formal Op. 01-421 (“A lawyer must not permit compliance
with ‘guidelines’ and other directives of an insurer relating to the
lawyer’s services to impair materially the lawyer’s independent
professional judgment in representing an insured.”). If the conflict
becomes irreconcilable, the lawyer must withdraw. Id.
The analysis is the same for the insurance company’s decision to cut
support staff to save costs. Although the staff lawyers believe the
existing support staff cannot keep up with the lawyers’ workload and
will require the lawyers to spend considerably more time performing
administrative tasks, the ultimate issue is whether the lawyers’ ability
to adequately represent the insureds will be materially compromised. If
the answer is no, then the staffing decision creates no conflict between
the insurance company and the insureds. Although the lawyers may not
enjoy performing administrative tasks, the restriction on support staff
often will not rise to the level of a conflict prohibiting continued
representation of the insured. If, on the other hand, the limited
support staff is impinging on competent representation of the insureds,
the staff lawyer should try to persuade the insurer to remove the
limitation by providing more staffing. If this is unsuccessful, and the
staff lawyer cannot adequately discharge the duties owed to the insured
clients, then the lawyer must withdraw from the representation.
Conclusion
Under the Texas Disciplinary Rules of Professional Conduct, a staff
lawyer employed by an insurance company to defend its insureds may
comply with the insurer’s guidelines only if the staff lawyer’s
affiliation with the insurance company is fully disclosed to the client,
the guideline does not interfere with the lawyer’s independent
professional judgment, and the guideline is reasonable in scope and
character and consistent with the client’s interests. A lawyer who
believes that a particular guideline as applied in a specific situation
interferes with her ability to discharge duties to the represented
client should try to persuade the insurer to withdraw or modify the
limitation. If the conflict cannot be cured, the lawyer must withdraw
from the representation.
The insurance company’s decision regarding support staffing raises
issues under the Texas Disciplinary Rules of Professional Conduct only
if it materially compromises a staff lawyer’s ability to adequately
discharge the lawyer’s duties to the insured clients. If a lawyer
believes that inadequate staffing is materially compromising the
lawyer’s ability to adequately represent the insured clients, then the
lawyer should try to persuade the insurer to increase staffing. If the
conflict cannot be cured, the lawyer must withdraw.TBJ
