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The use of so-called captive law firms by insurance companies has come under scrutiny in Florida, Texas and California. The use of captive firms is a controversial, decades-old practice by the insurance industry of using attorneys on their payroll to represent policyholders. The recent outcomes do not substantially alter the balance of power on this subject because most states that have examined the issue have given it official sanction. However, the Texas proceedings demonstrate that the minority position, which views the practice as a violation of ethics rules, still has vigorous support. And the cases in Texas and California and the bar report in Florida show that there is continued confusion about how to deal with the questions posed by captive firms. On May 20, Judge Gary Hall, of the 68th District Court of Dallas County, Texas, ruled that two insurers engaged in the unauthorized practice of law when they employed staff counsel to represent their policyholders. American Home Assurance Co. Inc. v. Unauthorized Practice of Law Committee, No. DV-99-08673-C. Hall allowed the companies to continue their current practices pending their appeal of his decision. Mark Ticer, former chairman of a Texas Supreme Court subcommittee dealing with the unauthorized practice of law, argued the case. He acknowledged that Texas is in the minority on the issue, with courts in Kentucky and North Carolina being the only others to have outlawed the practice. But he insisted that while other states may have been swayed by changing business practices, in Texas “our ethics are not for sale.” He dismissed claims that the Texas Bar is protecting the economic interests of lawyers in private practice, arguing that the real beneficiaries are policyholders who are rarely aware that their attorneys are under the control of their insurance company. He thinks the loyalties of staff counsel are particularly likely to be divided in cases where an insurance company provides legal assistance to a policyholder, but also reserves the right to dispute the extent of coverage it must provide to the policyholder. CALIFORNIA RULES On June 5, California’s 4th District Court of Appeal ruled that insurers using staff counsel are not engaged in the unauthorized practice of law. The court conceded that a corporation not licensed to practice law generally cannot hire out its in-house counsel to represent third parties; in-house counsel may represent only their client, the corporation. But an insurer’s staff counsel, on the other hand, do represent their employer at the same time that they represent the interests of policyholders: The insurer “is entitled to have counsel represent its own interests as well as those of the insured, as long as their interests are aligned.” Noting that attorneys commonly represent multiple clients, it found no reason to believe that a staff counsel’s efforts would be compromised absent a demonstrated conflict of interest. In large part, the court trusted to the ethical devotion of individual attorneys to resist any improper pressure from their paymasters. Finally, the court felt that staff counsel could represent policyholders even if the insurer chose to dispute the extent of coverage, provided some other employee was in charge of coverage issues. Gafcon Inc. v. Ponsor & Associates, No. D037229. The California court estimated that nine state courts have approved the use of staff counsel. Ticer disputes that number, noting that the court cited two Texas cases that he says stand for a different proposition. Ticer also says that in Texas, unlike California, insurance companies are not considered to be the co-clients of lawyers they hire for their policyholders. Katherine E. Giddings, the American Insurance Association’s national coordinating counsel for litigation management issues, estimated that 36 states recognize that insurer and policyholder are co-clients. Six disagree, she said, but some of those six give the insurer a role in litigation as the policyholder’s contractual agent. She claimed that only Montana has ruled out a co-client relationship altogether. Giddings represented the insurance industry before the Florida Bar’s Special Commission on Insurance Practices II, which was convened in response to a trial judge’s pique and issued its report in March. Although the Florida Supreme Court has never explicitly given its imprimatur to captive firms, in 1969 it rejected a proposed rule that would have outlawed the practice, hinting that the State Bar should concern itself with protecting the public instead of the interests of lawyers. But in 2001, Miami-Dade County Circuit Judge Paul Siegel became angry when he learned that attorneys whose pleadings gave the impression that they belonged to an independent firm turned out to be employees of an insurer. He insisted that all staff counsel disclose their insurance affiliation on their pleadings. Siegel’s rule had the insurance industry worried that juries would go to town if they knew a deep-pocketed insurer stood behind a policyholder. Siegel’s rule was ultimately overturned as exceeding his authority, but prompted the Florida Bar to convene the commission. The commission concluded that insurers may use a law-firm-style name for their staff counsel, provided they are insulated from other employees who might sway their judgment. The committee also suggested ethics rule changes, which await court approval, that would require staff counsel to disclose their affiliation to policyholders and judges, although not to juries.

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