To the Council of Delegates:
In April 2002, Mary Jane Trapp, then president of the Ohio State Bar Association, created a task force whose purpose was to study the practice of the property and casualty underwriters of the insurance industry as it relates to using in-house salaried employees to represent liability insurance policyholders, and to develop protocols and modifications to Ohio’s Code of Professional Responsibility, where necessary, which assure the ethical practice of such attorneys for the protection of both the in-house attorney and the public.
The members of the Task Force are F. Michael Apicella, Esq.; David A. Beal, Esq.; Mary L. Cibella, Esq.; James E. Cross, Esq.; Anthony J. Damelio Jr., Esq.; Raymond R. Froelich Jr., Esq.; Michael W. Hawkins, Esq.; Daniel J. Hughes, Esq.; Andrew H. Isakoff, Esq.; Jan A. Saurman, Esq.; Geoffrey Stern, Esq.; Mary Jane Trapp, Esq.; Hon. Clark B. Weaver; and Sandra M. Wetzel, Esq.
As part of its consideration of the issues presented, the Task Force reviewed the report of the Florida Special Commission on Insurance Practices II, as well as court and ethics advisory opinions from various states. Among the areas of significance identified by the Task Force are:
a) Duty of loyalty;
b) Zealous representation;
c) Confidences and secrets;
e) Nonlawyer supervision.
Subcommittees were appointed to address these areas.
Description of the relationship
For purposes of this report, the term “insurance defense staff counsel” refers to an attorney who is employed by an insurance company to represent insureds of the company or the group.
Under the insurance contract, the insurer, in exchange for a premium, agrees with the insured to pay liability losses covered by the policy up to the policy limits and to defend suits filed against the insured with counsel of its choice. The insured gives the insurer the right to control the defense and the right to settle or defend any suit, as it thinks proper, subject to a good faith requirement. Because the insurer is obligated to pay a judgment or settlement up to the policy limits, the insurer has a direct pecuniary interest in the third party action against its insured. Under the vast majority of cases the interests of the insured and insurer are mutually aligned and do not conflict with the possible exceptions involving coverage issues or claims which exceed policy limits.
The ABA in Formal Opinion 282 (1950) recognized that
a community of interest exists between the company and the insured growing out of the contract of insurance with respect to any action brought by a third person against the insured within the policy limitations. The company and the insured are virtually one in their common interest. The requirement that the insurance company shall defend such action contemplates that the company, because of its contractual liability and community of interest, shall take charge of the incidents of such defense including the supervision of the litigation.
When an insured requests the insurer to provide a defense, the insurer selects the attorney to defend the insured and instructs the attorney as to when to defend or settle a case. This is true whether the attorney is insurance defense fee counsel or insurance defense staff counsel. A difference in status between staff counsel and fee counsel is that staff counsel is a full-time, salaried employee of the insurance company while the fee counsel is paid generally on an hourly or case basis for work done on specific cases. In actuality, the fee counsel may have a long-standing relationship with the insurance company and may derive a substantial percentage of the lawyer’s income from the insurance company.
The report of the subcommittees follows.
A. Conflicts of Interest
I. Statement of Principle
A lawyer-employee of an insurance company who, as a duty of his or her employment, undertakes to represent policyholders of the insurance company, owes those insured policyholders the same duty of conflict of interest-free representation which is required of a non-employee retained lawyer undertaking the same representation.
II. Conflict of Interest
There may exist a conflict between the interests of the insured and the insurance company. This conflict, and the ethical issues encompassed in it, is the same whether the lawyer for the insured is an employee staff counsel or retained, outside counsel. The ethical requirements imposed upon the lawyer are the same whether the lawyer assigned by the insurance company to represent the insured defendant is an employee staff counsel or retained outside counsel; the Ohio Code of Professional Responsibility applies equally to both.
Having so concluded, there may be conflict issues engendered by the nature of the insurance contract, and the representation undertaken pursuant thereto, which are not evident in representation where the client is directly responsible for the costs of defense and liability. These include extent of coverage issues, reservations of rights issues, and cooperation matters.
However, recognizing, as the Board of Commissioners did in Opinion 2000-3, that “[t]he precise nature of the relationship among an insured, an insurer, and defense counsel is enigmatic,” it shall be incumbent upon defense counsel — whether outside counsel or staff counsel — to clarify the parameters of the relationship at the beginning of the engagement. By adoption of the following proposed rule, insurance defense counsel is required to disclose to the insured defendant basic facts regarding the relationship between the insurance company, defense counsel and the insured by furnishing said insured defendant a signed copy of the Statement of Insured Client’s Rights, attached hereto.
III. Proposed Rule: Representation of Insureds
When a lawyer undertakes the defense of an insured party other than a governmental entity, at the expense of an insurance company who has retained or appointed the lawyer, in regard to an action or claim for personal injury or for property damages, or for death or lo
ss of services resulting from personal injuries based upon tortious conduct, including product liability claims, the Statement of Insured Client’s Rights shall be provided to the insured at the commencement of the representation. The lawyer shall sign the Statement certifying the date on which the Statement was provided to the insured. If the Statement is not personally delivered to the insured, the lawyer shall send the Statement by ordinary United States mail and shall obtain a Certificate of Mailing from the United States Postal Service, and, shall further attach a copy of the Certificate of Mailing to the Statement. The lawyer shall keep and retain a copy of signed Statement in the client’s file, along with the Certificate of Mailing, if appropriate, which Statement and Certificate shall be available for inspection at reasonable times by the insured or by the appropriate disciplinary agency. Nothing in the Statement of Insured Client’s Rights shall be deemed to augment or detract from any substantive or ethical duty of a lawyer or affect the extra disciplinary consequences of violating an existing substantive legal or ethical duty; nor shall any matter set forth in the Statement of Insured Client’s Rights give rise to an independent cause of action or create any presumption that an existing legal or ethical duty has been breached.
Proposed Alternative Rule; Representation of Insureds
When a lawyer undertakes the defense of an insured party other than a governmental entity, at the expense of an insurance company who has retained or appointed the lawyer, in regard to an action or claim for personal injury or for property damages, or for death or loss of services resulting from personal injuries based upon tortious conduct, including product liability claims, the Statement of Insured Client’s Rights shall be provided to the insured at the commencement of the representation. The lawyer shall sign the Statement certifying the date on which the Statement was provided to the insured. If the Statement is not personally delivered to the insured, the lawyer shall send the Statement to the insured by ordinary United States mail with proof of service endorsed thereon as required by Rule 5(D) of the Ohio Rules of Civil Procedure. The lawyer shall keep and retain a copy of signed Statement and proof of service in the client’s file, which Statement shall be available for inspection at reasonable times by the insured or by the appropriate disciplinary agency. Nothing in the Statement of Insured Client’s Rights shall be deemed to augment or detract from any substantive or ethical duty of a lawyer or affect the extra disciplinary consequences of violating an existing substantive legal or ethical duty; nor shall any matter set forth in the Statement of Insured Client’s Rights give rise to an independent cause of action or create any presumption that an existing legal or ethical duty has been breached.
Proposed Statement of Insured Client’s Rights
An insurance company has selected a lawyer to defend a lawsuit or claim against you. This Statement of Insured Client’s Rights is being given to you to assure that you are aware of your rights regarding your legal representation.
1. Your Lawyer: If you have questions concerning the selection of the lawyer by the insurance company, you should discuss the matter with the insurance company or the lawyer. As a client, your lawyer is responsible for keeping you reasonably informed regarding the case and promptly complying with your reasonable requests for information. You are entitled to be informed of the final disposition of your case within a reasonable time.
2. Directing the Lawyer: If your policy provides for the insurance company to reasonably control the defense of the lawsuit, the lawyer will be receiving instructions from the insurance company. Under such policies, the lawyer cannot act solely on your instructions, and at the same time, cannot act contrary to your interests. Your preferences regarding case handling should be communicated to the lawyer.
3. Litigation Guideline: Insurance companies establish guidelines governing how lawyers are to proceed in defending a lawsuit. Those guidelines may affect the range of actions the lawyer can take and may require authorization of the insurance company before certain actions are undertaken. You are entitled to know the guidelines affecting the extent and level of legal services being provided to you. Upon request, the lawyer or the insurance company should explain the applicable guidelines to you. If the lawyer is denied authorization to provide a service or undertake an action the lawyer believes necessary to your defense, you are entitled to be informed that the insurance company has declined authorization for the service or action.
4. Confidentiality: Lawyers have a general duty to keep secret the confidential information a client provides, subject to limited exceptions. However, the lawyer chosen to represent you also may have a duty to share with the insurance company information relating to the defense or settlement of the claim. Whenever a waiver of the lawyer-client confidentiality privilege is needed, your lawyer has duty to consult with you and obtain your informed consent. Some insurance companies retain auditing companies to review the billing and files of the lawyers they hire to represent policyholders. If the lawyer believes an audit, a bill review or other action initiated by the insurance company may release private information in a manner that may be contrary to your interest, the lawyer must advise you regarding the matter, and provide an explanation of the purpose of the audit and the procedure involved. Your written consent must be given in order for an audit to be conducted. If you withhold your consent, the audit shall not be conducted.
5. Conflicts of Interest: Most insurance policies state that the insurance company will provide a lawyer to represent your interest as well as those of the insurance company. The lawyer is responsible for identifying conflicts of interest and advising you of them. If at any time you believe the lawyer provided by the insurance company cannot fairly represent you because of a conflict of interest between you and the company [such as whether there is insurance coverage for the claim against you], you should discuss this with the lawyer and explain why you believe there is a conflict. If an action conflict of interest arises that cannot be resolved, the insurance company may be required to provide you with another lawyer.
6. Settlement: Many insurance policies state that the insurance company alone may make a final decision regarding settlement of a claim. Under some policies your agreement is required. If you want to object to or encourage a settlement, you should discuss your concerns with your lawyer to learn your rights and possible consequences. No settlement of the case requiring you to pay money in excess of your policy limits can be reached without your agreement.
7. Your Risk: There might be a Judgment entered against you for more than the amount of your insurance, and you might be required to pay it. Your lawyer has a duty to advise you about this risk and other reasonably foreseeable adverse result.
8. Fees and Costs: As provided in your insurance policy, the insurance company usually pays all of the fees and costs of defending the claim. If you are responsible for directly paying the lawyer any fees and costs, your lawyer must promptly inform you of that.
9. Hiring your own Lawyer: The lawyer provided by the insurance company is representing you only to defend the lawsuit. If you desire to pursue a claim against the other side, or desire legal services not directly related to the defense of the lawsuit against you, you will need to make your own arrangements for another lawyer. You may also hire another lawyer at your own expense to monitor the defense being provided by the insurance company. If there is a reasonable risk that the claim made against you exceeds the amount of coverage under your policy, you should consider consulting another lawyer.
10. Reporting Violations: If at any time you believe that your lawyer has acted in violation of your rights, you have the right to report the matter to the Office of Ohio Disciplinary Counsel, the agency that oversees the practice and behavior of all lawyers in Ohio. You may also report the matter to a local bar association. For information on how to do this, you may call (phone #) or you may access information at http://www.sconet. State.OH.US/BOC/.
B. Zealous Representation/Exercise Independent Professional Judgment/Non-Lawyer Supervision
I. Statement of Principle
A lawyer-employee of an insurance company who, as a duty of his or her employment, undertakes to represent policyholders of the insurance company, owes those clients the same duty of zealous and competent representation, free of intervention from nonlawyers which is required of a non-employee retained lawyer undertaking the same representation.
This portion of the Report explores issues related to the areas of zealous representation and non-lawyer supervision as they pertain to the practice of law by insurance defense staff counsel employed by insurance companies to represent insureds who are entitled a defense under a liability policy.
Controlling Disciplinary Rules
• DR 2-103(C)(3)(b) permits a lawyer to perform legal services for those to whom the lawyer was recommended by any of the organizations enumerated in divisions
(D)(1) to (4) provided that
a) The person to whom the recommendation is made is a member or beneficiary of such office or organization;
b) The lawyer remains free to exercise independent professional judgment on behalf of the lawyer’s client.
• DR 5-101, with respect to the lawyer’s independent professional judgment, provides under subsection (A)(1) that, “Except with the consent of the client after full disclosure, a lawyer shall not accept employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s financial, business, property, or personal interests.”
• DR 5-105(A) provides that, “A lawyer shall decline proffered employment if the exercise of his [or her] independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, except to the extent permitted under DR 5-105(C).”
• DR 5-105(B) provides “A lawyer shall not continue multiple employment if the exercise of his [or her] independent professional judgment in behalf of a client will be or is likely to be adversely affected by his [or her] representation of another client, except to the extent permitted under DR 5-105(C).”
• DR 5-107(B) provides that, “A lawyer shall not permit a person who recommends, employs, or pays him [or her] to render legal services for another to direct or regulate his [or her] professional judgment in rendering such legal services.”
• DR 4-101 provides for the preservation of confidences and secrets of a client where the client has requested that such confidences be held inviolate or the disclosures of which would be embarrassing or would be likely to be detrimental to the client.
• DR 4-101(B)(3) prohibits the use of a confidence or secret for the advantage of a third person unless the client consents after full disclosure.
• DR 4-101(D) provides that a “lawyer shall exercise reasonable care to prevent his [or her] employees, associates, and others whose services are utilized by him [or her] from disclosing or using confidences or secrets of a client” except as allowed by
III. Zealous Representation (Exercise of Independent Professional Judgment) and Non-Lawyer Supervision
All attorneys are ethically required not to allow their independent professional judgment to be overridden. The foregoing disciplinary rules clearly establish that whether an attorney employed by an insurance company represents only the insured or both the insured and insurer in some manner1, the attorney must exercise his or her “independent professional judgment” without regard to his or her own financial, business, or personal interest. The lawyer is forbidden to allow the employer or payor to direct or regulate his or her professional judgment.
While the Disciplinary Rules do not prohibit an attorney from representing two or more clients whose interests are not actually or potentially differing, the Ethical Considerations do require that the lawyer disregard the desires of others that might impair his or her free judgment; make full disclosure of any outside pressures to which he/she is subjected and/or withdraw from representation of the client. “Since a lawyer must always be free to exercise his [or her] professional judgment without regard to the interests or motives of a third person, the lawyer who is employed by one to represent another must constantly guard against erosion of his or her professional freedom” (EC 5-24). More specifically, “…a lawyer must decline to accept direction of his [or her] professional judgment from any layman” (EC 5-25).
The Ethical Considerations provide further direction and would seem to eliminate any question of the lawyer’s obligations with respect to taking directions or suggestions as to how he should fulfill his or her professional obligations or his or her duty of undivided loyalty to his or her client, i.e., the insured. See EC 5-13, EC 5-14, EC 5-15, EC 5-17, EC 5-20, EC 5-22, EC 5-24, and EC 5-25.
Following the principle of Canon 3 which provides that a lawyer should assist in preventing the unauthorized practice of law, EC 3-3 recognizes that the Disciplinary Rules protect the public in that they prohibit a lawyer from acting in cases of divided loyalties, and from submitting to the control of others in the exercise of his or her judgment.
The foregoing has not attempted to discuss each and every Disciplinary Rule and/or Ethical Considerations, which might be applicable. For example, Canon 5 with respect to loyalty to the client would also mandate the exercise of “independent professional judgment.” EC 5-22 previously mentioned, appears to proscribe non-lawyer supervision. EC 5-25 specifically prohibits non-lawyer supervision.
Regardless of the employment status, all Ohio lawyers must comply with the Ohio Code of Professional Responsibility. Whether fee counsel or staff counsel, both are accountable in terms of their compliance with the Code. In terms of ethical requirements, the vast majority of states that have addressed issues concerning staff counsel have concluded that there is no difference between staff counsel and fee counsel — both are bound by the same code of professional responsibility.
In In Re Youngblood (Tenn. 1995) 895 S.W.2d 322, the court specifically found that:
The obligation to defend the insured under a contract of insurance obviously contemplates representation by counsel who can exercise professional judgment and devote complete loyalty to the insured regardless of the circumstances. The same loyalty is owed the client whether the attorney is employed and paid by the client, is a salaried employee of the insurer, or is an independent contractor engaged by the insurer. Compliance with the Code in all cases will be measured against the Code itself rather than some variation of the outside counsel practice….
And in In Re Allstate Insurance Co. (Mo. 1987) 722 S.W.2d 947, the Missouri Supreme Court concluded that:
Employed attorneys are bound by the same rules of professional conduct as are independent practitioners. If a conflict appears, the lawyer, employed or retained, must immediately resolve it by terminating representation of one or both parties. If the client suffers damage because his [or her] attorney represents conflicting interests, a civil action is available. If the attorney is an employee, the employer is undoubtedly liable, jointly and severally, which would not be the case if an independent contractor were retained. The lawyers involved are also subject to professional discipline. There is no basis for a conclusion that employed lawyers have less regard for the rules of professional conduct that private practitioners do.
In most cases, the only person capable of determining whether the attorney’s independent professional judgment has been overridden is the attorney2. It is common practice for insurance company personnel to discuss defense tactics and settlement strategy with counsel. Defense counsel, however, must abide by the Ohio Code of Professional Responsibility, must be unhampered in exercising his or her professional judgment and must be free to advise one client unimpeded by the influence of other clients or by parties paying clients’ fee.
Within the staff counsel setting, the attorney’s exercise of independent professional judgment may be further safe guarded by the structure of the organization. Staff counsel organizations should be designed as law firms that are controlled by senior attorneys. Attorneys within the staff counsel organization should be the ones responsible for employment reviews, salary administration and promotions/demotions. Minimum standards for a law firm as addressed in the Florida report include:
• Offices, personnel and records of the attorneys representing policyholders must be functionally and physically separate from other operations of the company to maintain client confidentiality and prevent conflicts of interest;
• Word processing systems, computer data retrieval systems, secretarial support staff and other administrative services should have the appropriate separation to protect clients’ confidences from unintentional disclosure;
• Lawyers must disclose in writing the nature of their employment to insured to avoid the potential for misrepresentation.
To enhance the professional consciousness of attorneys confronted by the ethical dilemmas arising from this unique relationship, it is recommended that the Ohio State Bar Association form a permanent Staff Counsel Committee. Primary objectives of this committee include:
• Training on issues regarding the insurance defense practice;
• Networking opportunities that would provide an avenue for interaction among insurance defense attorneys;
• Recommending guidelines regarding written notice to clients regarding issues involving coverage and exposure in excess of the policy limits, supervision, continuing representation, abandonment.
C. Confidences and Secrets/Duty of Loyalty
I. Statement of Principle
A lawyer-employee of an insurance company, who, as a duty of his or her employment, undertakes to represent policy holders of the insurance company, owes those policy holders the same duty of loyalty, and is obliged to protect their confidences and secrets to no lesser extent, which is required of a non-employee lawyer undertaking the same representation.
II. Preservation of Confidences and Secrets
While it is expected that non-lawyers may have access to client files in the normal course of representation, such access should be limited to the assigned lawyer’s secretaries, paralegals, law clerks and/or attorneys within the house counsel organization. If the assigned lawyer is supervised by an attorney in the same office or offices of house counsel, that supervising attorney shall have access to client files in order to ensure that the attorneys whom he/she supervises are performing their duties appropriately. No person without oversight of the assigned lawyer shall have access to confidential client data, except that where some or all such information is stored on computers, it is permissible for maintenance purposes to allow information technology (IT) specialists access to the hardware on which such information is stored, or to allow them access to object programs or source codes to correct errors. All IT personnel must be expressly warned that such incursions shall avoid access to client data files.
If access to confidential client data is sought by persons other than those identified above, the client must be informed in writing, by the assigned attorney, of the intent to seek access, the purpose of the access, and the procedure involved. The client shall be informed that such access may negate attorney-client confidentiality, if such circumstance is possible. If written consent is withheld by the client, such access shall not occur.
The subcommittee concurs with the Board of Commissioners on Grievances and Discipline Opinion 2000-2, and adopts that language as part of this Report.
In reporting the progress of a case to the insurance carrier, the assigned attorney shall preserve the confidences and secrets of a client in accordance with Canon 4 and Disciplinary Rule 4-101 of the Code of Professional Responsibility. The client shall be made aware that such reports are made, and shall be entitled, upon request, to receive a copy of each report made to the insurer.
III. Duty of Loyalty
A lawyer who undertakes to represent a policy holder of an insurance company, whether that lawyer is employed by the insurance company, may find that there are instances in which he/she feels that he/she can represent both the interests of the insurance company and the interests of the policy holder. If after careful review of Canon 5 of the Code of Professional Responsibility and its application to the lawyer’s unique fact situation, the lawyer determines that dual representation is not permissible under the Disciplinary Rules, the lawyer must not undertake such dual representation.
Members of the bench and bar have a continuing duty to examine the delivery of legal services and the administration of justice. Our Code of Professional Responsibility begins with this ethical consideration: “A basic tenet of the professional responsibility of lawyers is that every person in our society should have ready access to independent professional services of a lawyer of integrity and competence of the bar....”
The goal of the House Counsel Task Force was to explore the nature of the various relationships among the salaried defense counsel, the insured, and the insurer and to recommend appropriate action concerning this relationship designed to ensure the independence of house counsel in the exercise of their professional judgment, to ensure the protection of the client’s confidences and secrets and to ensure that the insured clients understand the nature of the relationship and their rights.
Since these recommendations are not self-executing, further action is required. The Task Force recommends that this Report, as approved by the Council of Delegates, be forwarded to the Supreme Court of Ohio with the request that the court adopt the proposed changes or amendments to existing rules. Other recommended actions can and should be undertaken by the Ohio State Bar Association. Finally, the recommendations of the Task Force should be implemented by the insurance industry through both internal directives and administrative regulations adopted by the Department of Insurance.
Members of the Task Force came from varied employment backgrounds and brought to the discussion the perspectives of insurance company house counsel, outside defense counsel, plaintiff’s counsel, counsel who practice in the area of ethics and discipline, and the bench. Each was unstinting as to the time and effort devoted to the Task Force’s activities, and each was motivated to further the interests of the public and the bar.
Mary Jane Trapp, Cleveland
1It is unsettled in Ohio whether an attorney has one client — the insured, or two clients, the insured and insurer. The Florida Commission addressed this issue by recognizing that the existence of a dual client relationship is a legal and factual question and recommended that the Florida Rules of Professional Conduct be amended to create a subsection addressing the ethical duty of an attorney representing an insured to establish a clear, mutual understanding as to who is the client at the inception of undertaking the representation.
In conducting an analysis of whether there has been an infringement on an attorney’s exercise of independent professional judgment it is necessary to understand what the “exercise of independent professional judgment” means. The Ethical Considerations within the Ohio Code of Professional Responsibility provide guidance. EC 3-5 states that “the essence of the professional judgment of the lawyer is his educated ability to relate the general body and philosophy of law to a specific legal problem of a client. EC 7-7 helps clarify what the “exercise of independent judgment” is not. EC 7-7 provides that “authority to make decisions is exclusively that of the client.” Often discussions on the “exercise of independent professional judgment” tend to extend beyond counsel’s advice and counsel and include decision making authority.