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Challenges to the long-standing insurance company practice of using in-house law firms to represent policyholders have bubbled up to high courts in Illinois and Texas. Lawyers favoring staff counsel for insurance companies say policyholders’ interests are aligned with the insurance company, so there’s little difference between using an internal law firm and hiring outside lawyers to defend an insured’s case. Dissenting attorneys argue that policyholders’ interests can be shortchanged when lawyers employed by an insurance company exercise little control over their own cases. ‘More prevalent’ Although the Illinois Appellate Court rejected a lawyer’s motion to sanction State Farm Mutual Automobile Insurance Co. for the practice earlier this month, lawyer David Novoselsky intends to appeal to the Illinois Supreme Court. Hiatt v. Kelly, No. 05-1721 (Ill. App. Ct., 1st Dist.). “This is an issue dealing with unauthorized practice of law,” Novoselsky said. “It’s getting more and more prevalent.” Illinois state courts have rejected other complaints filed by Novoselsky in his long-running battle at the trial court level to eradicate the staff counsel practice, said State Farm’s lawyer, Mark Rakoczy of New York-based Skadden, Arps, Slate, Meagher & Flom’s Chicago office. Illinois law is reasonably well settled by a 1979 state Supreme Court decision, said insurance litigation specialist William Barker of the Chicago office of Sonnenschein Nath & Rosenthal. Kittay v. Allstate Insurance Co., 397 N.E.2d 200. The Texas Supreme Court is weighing the issue in two cases brought by the court-designated Unauthorized Practice of Law Committee. Arguments were heard in Unauthorized Practice of Law Committee v. American Home Assurance Co., No. 04-0138, last September. Also, the court is reviewing briefs in Unauthorized Practice of Law Committee v. Nationwide Mut. Ins. Co., No. 05-0130. James Walker of Dallas-based Walker & Sewell, who represents Nationwide, pointed out that Texas appeals courts have upheld the practice of insurance company-run law firms. “The implication that [clients] are in better hands with outside counsel doesn’t hold water,” he said. A situation in which nonlawyer executives decide how lawyers can run their cases is the corporate practice of law in any industry, said Dallas lawyer Mark A. Ticer, who represents the Unauthorized Practice of Law Committee in its case against American Home and Travelers. “Insurance companies want a special exemption,” Ticer said. “They seek to control the lawyers as their employee.” The committee’s briefs to the Texas Supreme Court cite cases in which insurance company lawyer-employees were prohibited from conducting investigations or retaining expert witnesses.

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