Insurance Companies Use of Captive or In-House Counsel to Represent Insured Constitutes the Unauthorized Practice of Law: Is American Home the Right Decision for Texas Comment.

Abstract

Insurance companies should not be allowed to continue the practice of hiring in-house or captive counsel to defend against a claim covered by their insurance policy. Under a typical liability insurance policy, the insurer has a duty to defend. When legal counsel is retained, the insurer pays for the representation and has a contractual right to control the defense. This places defense counsel in a precarious situation because he or she has to balance the contractual obligations to the insurer against his or her ethical responsibilities to the insured. The defense counsel may be exposed to a malpractice claim by insureds who might allege that defense counsel did not vigorously defend the insured\u27s interest, and their interest was compromised to the insurer\u27s benefit. An insurer might also sue defense counsel alleging that the attorney\u27s negligence exposed it to liability beyond its contractual requirements. The tripartite relationship is unethical. Under Texas Disciplinary Rule of Professional Conduct 1.06(b)(2), an attorney is not allowed to represent a client if the attorney is adversely limited to his responsibility to a third party (e.g. insurance company). According to the Texas State Ethics Committee’s Opinion 532 and 533, the relationship is unethical because a lawyer is obligated to represent the insured free from outside influence. Furthermore, the financial interests of the insurance company and defense counsel create increased pressure to please the insurer because the attorney is dependent upon the insurance company for future assignments. Because of the presence of conflicts of interest and economic tension, along with the opportunity for undue influence in the captive or in-house counsel employment scenario, the practice is inherently problematic and therefore should be prohibited. The Texas Legislature must modify the State Bar Act and explicitly prohibit the practice of insurers hiring in-house or captive counsel