Unauthorized Practice of Law Committee v. American Home Assurance Co., Inc.,
No. 04-0138 (Tex. Mar. 28, 2008)(Majority Opinion by Justice Nathan Hecht)
UNAUTHORIZED PRACTICE OF LAW COMMITTEE [UPLC] v. AMERICAN HOME ASSURANCE COMPANY, INC.
AND THE TRAVELERS INDEMNITY COMPANY; from Dallas County; 11th district (11-02-00212-CV, 121 S.W.3d
831, 11-06-03)
The Court modifies the court of appeals' judgment and affirms that judgment as modified.
Justice Hecht delivered the opinion of the Court, in which Chief Justice Jefferson, Justice O'Neill, Justice
Wainwright, Justice Brister, Justice Medina, and Justice Willett joined.
Justice Phil Johnson delivered a dissenting opinion, in which Justice Green joined.
Links: Texas Supreme Court Opinions | UPLC cases and caselaw |
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UPLC v. American Home Assurance Co.261 SW 3d 24 (Tex. 2008)
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Argued September 28, 2005
Justice Hecht delivered the opinion of the Court, in which Chief Justice Jefferson, Justice O’Neill, Justice
Wainwright, Justice Brister, Justice Medina, and Justice Willett joined.
Justice Johnson filed a dissenting opinion, in which Justice Green joined.
Liability insurance policies commonly provide that the insurer must indemnify the insured from liability for
covered claims and give the insurer the duty, and also the right, to defend such claims. The right to defend in
many policies gives the insurer complete, exclusive control of the defense. Insurance companies retain attorneys
in private practice to represent insureds in defending claims against them, but for decades, in Texas and other
states, insurers have also used staff attorneys — salaried company employees — to save costs.
Generally, a corporation can employ attorneys in-house to represent its own interests but cannot engage in the
practice of law by providing legal representation to others with different interests. Because of its potential
indemnity obligation, an insurer has a direct, substantial financial interest in defending claims against its insured,
and often an insurer and an insured’s interests are aligned toward simply defeating such claims. But their
interests can diverge, as for example when all or part of the claim may not be covered. The issue in this case is
whether a liability insurer that uses staff attorneys to defend claims against its insureds is representing its own
interests, which is permitted, or engaging in the unauthorized practice of law, which is not. Two states, North
Carolina and Kentucky, do not permit such use of staff attorneys, but several other states do.
We hold that an insurer may use staff attorneys to defend a claim against an insured if the insurer’s interest and
the insured’s interest are congruent, but not otherwise. 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. We also hold that a
staff attorney must fully disclose to an insured his or her affiliation with the insurer. We modify the judgment of
the court of appeals and as modified, affirm.[1]
I
Liability insurance policies that obligate the insurer to defend claims against the insured typically give the insurer
“complete and exclusive control” of that defense.[2] There are exceptions and variations, but we focus here on
policies in which the insurer’s right to control the defense is “full and absolute”.[3] Insurers often retain attorneys
in private practice to represent insureds, overseeing and directing their work and paying their fees. Sometimes
an insurer uses a “captive” firm of attorneys who, though not the insurer’s employees, have no other clients.
Insurers also use lawyers employed as salaried corporate staff to represent insureds. In every instance, the
insured’s lawyer “owes the insured the same type of unqualified loyalty as if he had been originally employed by
the insured”[4] and “must at all times protect the interests of the insured if those interests would be compromised
by the insurer’s instructions.”[5]
Staff lawyers perform all the legal services that private attorneys do, filing pleadings and motions, taking
discovery, engaging in settlement discussions, appearing in court, and trying cases. Insurers contend that staff
attorneys are significantly more efficient and economical than private attorneys and thereby reduce defense
costs and premiums.[6] Insurers also claim that the availability of staff attorneys is a useful advertising tool for
selling policies. But critics of the use of staff attorneys argue that when an insurer controls the insured’s attorney
as thoroughly as an employer controls an employee, the attorney-client relationship can be impaired to the
insured’s detriment.[7] This disagreement has been the subject of lingering national debate.
There is some indication that insurers’ use of staff attorneys to represent insureds dates to the end of the
nineteenth century.[8] In 1950, the American Bar Association Committee on Ethics and Professional
Responsibility concluded that such use of staff attorneys was not unethical,[9] and it reaffirmed that view in 2003.
[10] While there appear to be no comprehensive industry studies on the matter,[11] it is safe to say that the
practice is now, and has long been, widespread.[12] The same is true in Texas. A 1963 opinion of the State Bar
of Texas Committee on Interpretation of the Canons of Ethics recognized insurers’ use of staff attorneys to
defend claims against insureds and found nothing improper in the practice.[13] An amicus curiae brief in this
case, submitted by five insurers who use staff attorneys to defend insureds, states that fifteen insurers employ
220 staff attorneys in Texas in 39 offices.[14] Another amicus curiae brief, received from insurance, corporate
counsel, and business interests, estimated that in September 2005, over 10,000 cases in Texas were being
defended by staff attorneys.[15]
The practice of law in Texas is regulated by this Court and by the Legislature.[16] To practice law in Texas, one
must either be licensed by the Court[17] or have special permission.[18] To ensure the quality and integrity of
the bar, the Court requires continuing education[19] and imposes strict disciplinary rules,[20] enforced through
the grievance process.[21] To further protect the public, we have established and appointed the Unauthorized
Practice of Law Committee to be responsible for investigating and prosecuting the unauthorized practice of law.
[22]
In 1998, the Committee sued Allstate Insurance Co., alleging that its use of staff attorneys to defend insureds
against liability claims constituted the unauthorized practice of law.[23] The action prompted Nationwide Mutual
Insurance Co. to sue in federal court for a declaration that Texas law did not prohibit its use of staff attorneys to
represent insureds, but if it did, it violated the United States Constitution.[24] The federal district court decided
that abstention was required under the Pullman doctrine[25] and dismissed the case, and the Fifth Circuit
affirmed in substance.[26] After surveying Texas caselaw and the provisions of the State Bar Act on which the
Committee relied, the Circuit concluded:
we believe that the law is fairly susceptible to a reading that would permit Nationwide to employ staff counsel on
behalf of its insureds. While the Texas courts certainly may decide that Nationwide’s staff attorneys are engaged
in the unauthorized practice of law, we believe that the law is uncertain enough on this issue that we should
abstain from ruling on its federal constitutionality.[27]
Nationwide then sued the Committee in state court and obtained a favorable judgment, affirmed on appeal,
which the Committee petitioned this Court to review while the present case has been pending.[28]
Meanwhile, in August 1999, a staff attorney for American Home Assurance Co., Katherine D. Woodruff, received
a letter from the Committee’s Dallas subcommittee stating that it was investigating whether she and her firm,
Woodruff & Associates, all staff attorneys employed by American Home, were engaged in the unauthorized
practice of law. Shortly thereafter, American Home, Woodruff, Woodruff & Associates, and Travelers Indemnity
Co. brought this action against the Committee for a declaration that “neither the insurance companies’
employment of staff counsel nor the attorneys’ practice as staff counsel constitutes the unauthorized practice of
law”. The Committee counterclaimed for declaratory and injunctive relief. After all claims by and against
Woodruff and Woodruff & Associates were nonsuited, the trial court denied American Home’s and Travelers’
motions for summary judgment, and granted summary judgment for the Committee, declaring that each company’
s “use . . . of staff counsel who are employees . . . to defend insureds (third parties) in Texas is the unauthorized
practice of law”. The trial court suspended its judgment pending appeal, conditioned on American Home’s and
Travelers’ adoption of the following policy:
If in the course of representing a party insured by [American Home and Travelers] any staff counsel employed in
Texas by [such insurer, respectively] seeks advice about a potential conflict of interest between the insured and
the insurance company, or any other question of professional ethics, such staff counsel will first consult with the
Texas-licensed lawyer who is head of the staff counsel office, and thereafter, if the staff counsel’s concerns are
not resolved, consult with an outside Texas firm, designated by [such insurer, respectively], on such question.
The court of appeals reversed, rejecting all of the Committee’s arguments.[29] The court reached the following
conclusions:
• An insurer’s right, as an employer, to control the details of its employees’ work does not create an
irreconcilable conflict with the interests of an insured represented by a staff attorney. Legally, an employer does
not control a professional employee’s judgment, and practically, a staff lawyer faces no more or different
conflicts than an outside lawyer.[30]
• Insurance companies’ use of staff lawyers does not violate Texas Disciplinary Rules of Professional
Conduct 1.05 (Confidentiality of Information); 1.06 (Conflict of Interest: General Rule); 2.02 (Evaluation [of a
Client Matter] for Use by Third Persons); 5.04(c) & (d) (Professional Independence of a Lawyer); 5.05
(Unauthorized Practice of Law); 7.06 (Prohibited Employment); 8.03 (Reporting Professional Misconduct); and
8.04 (Misconduct).[31]
• Although this Court has stated that an insurance defense lawyer “owes unqualified loyalty to the insured”,
[32] “[t]hat statement was dicta and does not preclude the insurer being a client, at least when there is no
conflict. . . . Reality and common sense dictate that the insurance company is also a client.” A company that
employs lawyers to represent its own interests is not engaged in law practice, and the situation is no different
when such lawyers also represent insureds with like interests, even though conflicts may arise and must be
addressed.[33]
• An insurer’s use of staff attorneys to defend insureds does not violate article art. 2.01B(2) of the Texas
Business Corporation Act or chapter 81 of the Texas Government Code because an insurer’s contractual duty to
defend is collateral to its purpose of providing insurance. If using staff lawyers is practicing law, so is hiring
outside lawyers.[34]
• Although read literally section 38.123 of the Texas Penal Code would prohibit an insurer’s use of staff
attorneys, it would also prohibit insurance defense altogether, an absurd result. Further, nothing in the
legislative history of that 1993 statute indicates its purpose was to prohibit insurers from using staff attorneys.
Therefore, the statute should not be given that effect.[35]
• Only two states, North Carolina and Kentucky, prohibit insurers from using staff attorneys, while several
other states do not.[36]
The court of appeals rendered judgment for American Home and Travelers and remanded the case to the trial
court to determine whether they should recover attorney fees from the Committee. Not having requested
attorney fees in the trial court, American Home and Travelers concede in this Court that they are not entitled to
recover them on remand. The Committee’s appeal thus presents two issues:
First: in using staff attorneys to discharge their contractual duty to defend insureds against liability claims, are
American Home and Travelers engaging in the unauthorized practice of law?
Second: if not, must a staff attorney’s affiliation with an insurer be fully disclosed to the insured?
Several amicus curiae briefs[37] address whether, as a matter of policy, insurers’ use of staff attorneys to
defend claims against insureds is beneficial or detrimental to consumers, the bar, and the public. The amicus
briefs also explore and question the motives insurers and lawyers may have in supporting or opposing the use of
staff attorneys. These are all important matters, but they are properly addressed to the Court’s administrative
function in regulating the practice of law in Texas, not to its adjudicative function in deciding the legal issues
presented by this case.[38] We consider and decide here only what the unauthorized practice of law is, under
existing law, not what it should be, an issue that must be left to another process.
II
A
We start from a point of agreement among the parties, that a corporation is not authorized to engage in the
practice of law. As we have previously stated:
The Supreme Court of Texas has inherent power to regulate the practice of law in Texas for the benefit and
protection of the justice system and the people as a whole. The Court’s inherent power is derived in part from
Article II, Section 1 of the Texas Constitution, which divides State governmental power among three departments.
The authority conveyed to the Supreme Court by this constitutional provision includes the regulation of judicial
affairs and the direction of the administration of justice in the judicial department. Within this authority is the
power to govern the practice of law. The Court’s inherent power under Article II, Section I to regulate Texas law
practice is assisted by statute, primarily the State Bar Act [Texas Government Code chapter 81].[39]
The Legislature has acknowledged that the Court has exclusive authority to adopt rules governing admission to
the practice of law in Texas.[40] Those rules permit only individuals meeting specified qualifications to practice
law.[41] Entities, including insurance companies, are excluded.
The Committee relies on the more general provision of article 2.01(B)(2) of the Texas Business Corporation Act,
which prohibits a corporation from transacting business in Texas “[i]f any one or more of its purposes . . . is to
engage in any activity which cannot lawfully be engaged in without first obtaining a license under the authority of
the laws of this State . . . and such a license cannot lawfully be granted to a corporation.”[42] On the basis of this
provision, the court of appeals rejected the Committee’s argument, stating that “[t]he short answer is that an
insurance company is not organized to practice law.”[43] But article 2.01(B)(2) applies whenever “any one” of a
corporation’s purposes is to engage in a licensed activity. The court of appeals characterized an insurer’s
defense of an insured as “collateral” to the purpose of indemnification,[44] but that understates the importance
to insureds of a defense against claims. Defense and indemnification are both important provisions of liability
insurance, and it would be hard to say that one was collateral to the other. In any event, we need not construe
article 2.01(B)(2)’s broad limitation on engaging in all licensed activities when our rules governing admission to
practice law are sufficient to exclude insurance companies from engaging in that activity.
B
The parties also agree that a company does not engage in the practice of law by employing attorneys on its
salaried staff to represent its own interests. This has long been settled law. In 1933, the Legislature enacted
Article 430a of the Texas Penal Code, which made it “unlawful for any corporation or any person, firm, or
association of persons, except natural persons who are members of the bar regularly admitted and licensed, to
practice law.”[45] The statute defined the practice of law broadly but specified that it was not to be “construed to
prohibit any person, firm, association or corporation, out of court, from attending to and caring for his or its own
business”.[46] As for attending to business in court, a corporation was prohibited only from “appear[ing] as an
attorney for any person other than itself in any court in this State, or before any judicial body or any board or
commission of the State of Texas”.[47] Thus, Article 430a recognized that a corporation was not practicing law
by using house counsel to provide legal advice regarding the corporation’s own affairs or to appear in court on
its behalf. Article 430a was repealed in 1949, but only because the Legislature recognized that “under the
Constitution, the judicial department of the State government has power to define the practice of law and by civil
proceedings protect the public from its practice by laymen and corporations.” Therefore, the Legislature
concluded, the statute had “no practical value for the suppression of the unauthorized practice of law”.[48] The
repeal had no effect on the use of house counsel.
Ethics opinions and rules do not determine what constitutes the practice of law, but they do reflect the state of
the practice as it exists. In 1958, the State Bar of Texas Committee on Interpretation of the Canons of Ethics
issued a formal opinion that “companies have the right to employ attorneys on a salary basis” to perform legal
services for their employers.[49] The six-sentence, unanimous opinion treated the issue as too plain to require
analysis. Currently, Rule 1.12(a) of the Texas Disciplinary Rules of Professional Conduct recognizes that an
organization may be represented by a lawyer it “employed”.[50] Comment 5 to Rule 1.12(a) adds that “[a] lawyer
representing an organization may, of course, also represent any of its directors, officers, employees, members,
shareholders, or other constituents” as long as there is no conflict of interest that precludes such representation.
[51] The comment assumes that the representation is “dual” — that is, the lawyer is representing the corporation
and individual as part of the same matter. Another formal opinion of the Committee on Interpretation of the
Canons of Ethics concluded in 1968 that a lawyer employed by a corporation does not aid in the unauthorized
practice of law by representing the corporation’s parent or subsidiary because “[t]here is obviously a common
interest and there is for all practical purposes only one client involved.”[52] As these opinions and rules
recognize, a corporation does not engage in practicing law by employing an attorney to represent itself, together
with the common interests of other employees and affiliates.
Nor does anyone suggest in this case that an insurer is practicing law when it retains a private attorney to
provide its insured the defense required by the policy, even though the policy gives the insurer absolute control
of the defense. Article 430a specifically excluded insurance defense from its prohibition of the corporate practice
of law, stating:
nothing herein shall prohibit any insurance company from causing to be defended, or prosecuted, or from
offering to cause to be defended, through lawyers of its own selection, the insureds or assureds in policies
issued or to be issued by it, in accordance with the terms of such policies. . . .[53]
Thirty years after repealing Article 430a, the Legislature again undertook to define the practice of law in
amendments to the State Bar Act.[54] Recodified as Section 81.101(a) of the Texas Government Code, that
definition is now as follows:
In this chapter the “practice of law” means the preparation of a pleading or other document incident to an action
or special proceeding or the management of the action or proceeding on behalf of a client before a judge in
court as well as a service rendered out of court, including the giving of advice or the rendering of any service
requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal
effect of which under the facts and conclusions involved must be carefully determined.
Nothing in the legislative history of the amendments indicates that the Legislature intended any change in the
general understanding of the practice of law. Implicit in the definition is that the practice of law requires the
rendering of legal services for someone else. Section 81.101(a) does not outlaw house counsel in Texas. This
section does not mean that a corporation engages in the practice of law when its attorney-employees provide
legal advice regarding the corporation’s own affairs or represent others with identical interests in court. Only
when a corporation employs attorneys to represent the unrelated interests of others does it engage in the
practice of law.
C
The issue, then, is whether an insurer that uses staff attorneys to defend claims against insureds is practicing
law or simply defending its own interests in discharging its contractual duty to the insureds and defeating claims
it would be required to indemnify. We are aware that state regulation of the unauthorized practice of law may be
limited by the First Amendment, such as when an organization furnishes legal services to advance the personal
interests of its members through a staff attorney,[55] but American Home and Travelers make no constitutional
argument in this case. They argue only that they are not practicing law.
American Home and Travelers point to our 1940 decision in Utilities Insurance Co. v. Montgomery, where we said
that an insurer obtaining a non-waiver agreement (what we now call a reservation of rights) from its insured “was
seeking to protect its own interests rather than those of [its insured]”, and thus “was not unlawfully practicing law”
as prohibited by Article 430a, which was then in effect.[56] That was clearly correct because the insurer’s
interest in reserving coverage issues was distinct from, if not contrary to, any interest the insured had in the
matter. But we did not speak to the insurer’s interest in defending its insured. Also, nothing in our opinion
suggests that the attorneys employed to defend the insured were on the insurer’s staff rather than engaged in
private practice. Montgomery does not aid the insurers.
But we think our opinion four years later in Hexter Title & Abstract Co. v. Grievance Committee does.[57] Hexter,
an agent for a title insurance company, received applications for insurance and prepared abstracts of title.
When its salaried employee-attorneys discovered defects in title, they would prepare an opinion describing the
defects and instruments to correct them, which Hexter would then offer to the customer free of charge. Hexter
advertised these services to attract customers who would purchase title abstracts and title insurance, but not all
applicants who received the services actually bought insurance. Charged with engaging in the unauthorized
practice of law in violation of Article 430a, which was still in effect, Hexter argued that its preparation of title
opinions and instruments of conveyance was in the furtherance of its own business. We rejected the argument,
explaining:
These transactions involve conveyances, releases, and mortgages from grantors to grantees, and to which the
insurance company is not a party. They are executed for the purpose of placing good title in the grantee, so that
the insurance company may thereafter insure the title if it chooses. Such papers relate to the rights of third
parties in which the corporation has no present interest, but only a prospective one. They affect the rights of
individuals apart from their interest in the title insurance policy. The work of preparing these papers is distinct
from the searching and insuring of the title-the legitimate business for which the corporation is incorporated. It is
not the business of the title insurance company to create a good title in an applicant for insurance by preparing
the necessary conveyances, nor to cure defects in an existing title by securing releases or prosecuting suits to
remove clouds from title, merely for the purpose of putting the title in condition to be insured. The title insurance
company must accept the title and insure it as it is, or reject it. It may examine the title, point out the defects, and
specify the requirements necessary to meet its demands, but it is the business of the applicant for the insurance
to cure the defects.[58]
If Hexter’s rendition of legal services to customers and prospective customers was not the practice of law, then it
was difficult to imagine what would be:
If the defendant’s contention that it has the right to prepare all legal documents necessary to create a good title
in the applicant so that it may thereafter make a valid and safe contract to insure the title be sound, then a
contractor, wholly unlearned in the law, could with equal propriety advertise that if a prospective purchaser of
real property would give him a contract to construct a building thereon, he would examine the abstract of title to
the land for the prospective purchaser and draw all papers necessary to put good title in such purchaser. The
contractor could argue that in doing so he was only transacting his own business, because it was necessary for
the purchaser to have good title to the property in order to enable the contractor to take a valid lien thereon to
secure his cost. A fire insurance agent could advertise that if a prospective purchaser of real property would
agree to insure the buildings on the premises through his agency he would examine the title and prepare all
papers necessary to make the purchaser the owner thereof. Loan companies and banks could make similar
propositions on condition that they be permitted to place a loan on the property. Corporations engaged in
buying municipal bonds could propose to prepare the bond record and supervise the election for the issuance of
the bonds and perform all other necessary legal services, if the municipality would promise to sell the bonds to
such corporation. These examples could be multiplied indefinitely. Ultimately most legal work, other than the trial
of cases in the courthouse, would be performed by corporations and others not licensed to practice law. The law
practice would be hawked about as a leader or premium to be given as an inducement for business transactions.
[59]
We concluded that Hexter was engaged in the unauthorized practice of law. We emphasized that Hexter was
permitted to employ salaried attorneys to advise it on the state of title for its own uses; it was prohibited only from
providing the same service to customers and prospective customers for their use:
Most assuredly the insurance company may examine for its own benefit the abstract of title to property which it
proposes to insure, to determine whether or not it will insure the title, and it may specify the corrections
necessary to meet its demands. But it may not furnish a title opinion to a prospective purchaser to be used by
him in determining whether or not he will buy the property, neither may it hold itself out as being authorized to do
so.[60]
From our analysis in Hexter, we distill three factors to be considered in determining whether a corporation
engages in the practice of law by employing staff attorneys to provide legal services to someone other than the
corporation, and more particularly, whether a liability insurer is practicing law by using staff attorneys to defend
claims against insureds. One factor is whether the company’s interest being served by the rendition of legal
services is existing or only prospective. Hexter rendered services free of charge to attract business and to help
applicants for title insurance cure title defects before insurance was purchased. A liability insurer, on the other
hand, renders legal services to an insured to satisfy its contractual obligation to provide the insured a defense.
While there is evidence that insurers advertise their use of staff attorneys and resulting lower premiums to
attract business, legal services are not rendered to attract business but to satisfy a contractual obligation.
But a company does not avoid engaging in the unauthorized practice of law merely because it provides legal
services out of contractual obligation. A second factor is whether the company has a direct, substantial financial
interest in the matter for which it provides legal services. Hexter’s interest in providing legal services to
customers and prospective customers was to attract business; it had no other interest in their affairs. Hexter was
entitled to legal advice concerning the state of titles for purposes of issuing abstracts and insurance, and it was
entitled to employ attorneys to provide that advice, but its business interests were distinct and different from
those of its customers. A liability insurer’s interest in avoiding its indemnity obligation gives it a direct, financial,
and substantial interest in defending a claim against its insured. If the claim is defeated, the insurer benefits. For
Hexter, the principal benefit in correcting defects in a potential customer’s title was a potential sale.
Most important, however, is a third factor: whether the company’s interest is aligned with that of the person to
whom the company is providing legal services. When the company and its employee or affiliate have common
interests, a staff attorney can represent them both because, to quote the 1968 ethics opinion, “there is for all
practical purposes only one client involved.”[61] Hexter sold services, and its customers bought them. The
interests of each were their own. But in the vast majority of cases, a liability insurer and an insured have the
same interest in defeating a liability claim, and their interests differ only when there are coverage questions or
when the consequences of the manner in which the defense is rendered affect them differently.
Applying these factors, we conclude that a liability insurer does not engage in the practice of law by providing
staff attorneys to defend claims against insureds, provided that the insurer’s interests and the insured’s interests
in the defense in the particular case at bar are congruent. In such cases, a staff attorney’s representation of the
insured and insurer is indistinguishable.
D
It is certainly not unusual for an insured and an insurer to differ over the coverage of a claim or an aspect of the
defense so that a single lawyer cannot represent them both, but the Committee and amici argue that the insured-
insurer relationship is so fraught with the potential for conflict that an insurer that uses staff attorneys to defend
insureds is essentially practicing law. To be sure, conflicts can also arise, and do, when the insured’s lawyer is
not the insurer’s employee, but the Committee and amici argue that the employment relationship between an
insurer and its staff attorney increases and exacerbates these conflicts. For private counsel, they argue, an
insurer is but a source of business, whereas for a staff attorney, the insurer controls pay, benefits, and
retention. The pressures and loyalties of the employment relationship, they continue, make it more difficult for an
attorney to provide an insured the independent judgment and professional relationship, to which the insured is
entitled. The insurer’s profit motive, the Committee and amici assert, is fundamentally inconsistent with the
provision of independent legal services through staff attorneys. Even if staff attorneys can sometimes represent
insureds, the argument concludes, their use further erodes the practice of law into a business, and such obvious
control of insurers over legal services undermines public confidence in the bar.
These arguments raise serious concerns, especially coming from the Committee charged by this Court and the
Legislature with protecting the public from the unauthorized practice of law, and we examine them carefully. As
we do, however, we note that neither the Committee nor amici has been able to cite any empirical evidence —
any actual instance — of injury to a private or public interest caused by a staff attorney’s representation of an
insured. The court of appeals also noted this lack of evidence,[62] as have amici[63] and at least one prominent
commentator.[64] Given that insurers have used staff attorneys across the country for decades, the lack of
evidence of harm is an important consideration. There is no question, of course, that conflicts arise in the
tripartite insurer–insured–defense attorney relationship, but there is nothing to indicate that staff attorneys do
not either resolve them as they would be resolved in any other representation or withdraw, just as private
attorneys would.[65]
The most common conflict between an insurer and an insured is whether a claim is within policy limits and the
coverage provided. Often coverage cannot be determined when a claim is first filed. Texas procedure does not
permit a plaintiff claiming unliquidated damages, such as for physical pain and mental anguish, to state a dollar
figure in his petition.[66] Even after the basis for the claim is explored in discovery, it may be difficult to quantify
the amount of damages and determine whether they fall within policy limits. Other coverage issues may also
depend on facts developed in the litigation. When an insurer is concerned that there may be a coverage issue, it
usually issues a reservation-of-rights letter when it accepts the defense, agreeing to defend the insured without
waiving its right to decline coverage later. Sometimes, according to the brief record before us, letters are issued
liberally, as a prophylactic measure, without any specific intent to pursue a coverage issue. A reservation-of-
rights letter ordinarily does not, by itself, create a conflict between the insured and the insurer; it only recognizes
the possibility that such a conflict may arise in the future. Our record reflects that staff attorneys for the insurers
in this case usually do not represent insureds when the insurer’s adjuster has identified a serious coverage
issue, but sometimes do when a reservation-of-rights letter has issued merely as a matter of routine. Declining
representation is the safer course[67] to avoid conflicts that destroy the congruence of interest between the
insurer and the insured that allows for the use of staff attorneys. However, we cannot say as a blanket rule that a
staff attorney can never represent an insured under a routine reservation of rights.
It is not unusual for defense counsel to acquire information that the insured could expect to be kept confidential
and not disclosed to the insurer. The information may relate to coverage, to underwriting issues such as whether
a policy should be cancelled or not renewed, or to other matters. Counsel’s acquisition of such information may
necessitate withdrawal from the representation whether the attorney is on staff or in private practice.[68] But
Texas law imputes knowledge of confidential information to counsel’s lawyer-associates so that in a private law
firm, all of the lawyers are irrebuttably presumed to have knowledge of the confidential information.[69] The
presumption does not apply the same way to non-lawyers in the firm.[70] It is not clear whether confidential
information acquired by staff attorneys would be imputed to non-attorneys outside the corporation’s legal
department, such as management, or if it were, whether the imputation would provide a basis for estopping the
insurer from asserting an issue to which the information pertained, such as coverage. It could be argued that a
staff attorney’s knowledge of confidential information would estop the insurer from using it altogether.[71] While
these problems present risks to the insurer in using staff counsel, they do not necessarily destroy the
congruence of the insurer’s and insured’s interest.
An insurer has a so-called Stowers duty to accept a claimant’s reasonable offer to settle within policy limits or
stand to an excess judgment.[72] The Committee argues that sometimes staff attorneys are restricted by their
employer in whether they may apprise an insured of the insurer’s Stowers obligation and are sometimes required
to obtain management approval before making or responding to settlement offers that implicate that duty. The
Committee argues that a staff attorney cannot be expected to disregard the insurer’s policies on such matters,
even when it would be in the insured’s best interest to do so, because of fear of reprisal in employment. But a
private defense attorney who fails to follow the insurer’s instructions may also fear reprisal — in loss of business
and consequent pressure from partners and the law firm. As we have noted, defense counsel, whether private or
on staff, owes the insured unqualified loyalty.[73] It is possible that counsel will fail to render that loyalty, but we
cannot presume that a staff attorney is more likely to do so, especially absent any evidence of a complaint ever
having been made.
The Committee argues that staff attorneys are subject to other litigation guidelines requiring approval to conduct
investigations, hire expert witnesses, and take other actions in defense of claims. The Committee acknowledges
that private attorneys are often subject to the same kinds of restrictions, but it argues that private counsel are
more independent and less likely to adhere to guidelines that compromise the insured’s interests. There is
evidence in the record, however, that American Home and Travelers do not restrict staff attorneys in exercising
independent judgment. Rule 5.04(c) of the Texas Disciplinary Rules of Professional Conduct 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.”[74] Again, we cannot
presume that staff attorneys are more likely to act unethically in this respect with no evidence of complaints that
they have done so.
One amicus argues that an insured may have personal concerns that a staff attorney cannot protect, such as a
concern about the effect of a claim or defense on the insured’s reputation, or family demands. These may occur,
but we see no reason why a staff attorney would necessarily be less respectful of them than private counsel.
The Committee argues that under Texas law insurance defense counsel represents only the insured, not the
insurer, and that staff attorneys — who necessarily represent the insurer — cannot defend insureds without
violating this rule. But we have never held that an insurance defense lawyer cannot represent both the insurer
and the insured, only that the lawyer must represent the insured and protect his interests from compromise by
the insurer.[75] And we have noted that “an insurer’s right of control generally includes the authority to make
defense decisions as if it were the client ‘where no conflict of interest exists.’”[76] Rule 1.06 of the Texas
Disciplinary Rules of Professional Conduct allows a lawyer to represent more than one client in a matter if not
precluded by conflicts between them.[77] Whether defense counsel also represents the insurer is a matter of
contract between them.[78]
In sum, the Committee argues that while an insurer’s control of defense counsel always impinges on counsel’s
professional judgment and loyalty to the insured, the ethical problems are greater in number and magnitude
when the defense is conducted by a staff attorney who owes the insurer allegiance as both a client and boss.
These problems, the Committee argues, even though they may sometimes be resolved satisfactorily, should be
avoided altogether. We do not minimize these difficulties or criticize the Committee for raising them by means of
this proceeding. And we are especially concerned that the use of staff attorneys not diminish professionalism in
insurance defense or harm the public. The use of staff attorneys comes with risks, as American Home and
Travelers themselves acknowledge. If an insurer’s interest conflicts with an insured’s,[79] 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.
E
Finally, we note that insurers’ use of staff attorneys to defend claims against insureds has been approved in
several other states.[80] The supreme courts of Georgia, Indiana, Missouri, and Tennessee,[81] and lower
courts in five other states,[82] have held that insurers’ use of staff attorneys does not constitute the
unauthorized practice of law. The Florida Supreme Court has reached essentially the same conclusion by
approving ethical rules that allow the practice provided the staff attorney determines and discloses whether he
or she represents only the insured or the insurer as well.[83] Three states — Illinois, Maryland, and Minnesota
— have statutes that would, either expressly or as applied, except insurance companies and their use of staff
counsel from that state’s prohibition of the unauthorized practice of law.[84] Ethics committees in eight states
have issued opinions that insurers’ use of staff attorneys does not constitute the unauthorized practice of law,
[85] and committees in three other states have held that it is not unethical for staff attorneys to represent
insureds.[86] Only the supreme courts of Kentucky and North Carolina, approving ethics opinions in their
respective states, have concluded that insurers’ use of staff attorneys to defend insureds is prohibited as the
corporate practice of law.[87]
III
The Committee also argues that the use of staff attorneys is prohibited by section 38.123 of the Texas Penal
Code. That section, entitled “Unauthorized Practice of Law, states in paragraph (a):
A person commits an offense if, with intent to obtain an economic benefit for himself or herself, the person:
(1) contracts with any person to represent that person with regard to personal causes of action for property
damages or personal injury;
(2) advises any person as to the person’s rights and the advisability of making claims for personal injuries or
property damages;
(3) advises any person as to whether or not to accept an offered sum of money in settlement of claims for
personal injuries or property damages;
(4) enters into any contract with another person to represent that person in personal injury or property
damage matters on a contingent fee basis with an attempted assignment of a portion of the person’s cause of
action; or
(5) enters into any contract with a third person which purports to grant the exclusive right to select and
retain legal counsel to represent the individual in any legal proceeding.[88]
By “person” the statute means “an individual, corporation, or association”.[89] The provision does not apply to
lawyers.[90] A first offense is a Class A misdemeanor; a subsequent offense is a third degree felony.[91]
The court of appeals observed that a literal reading of this statute would prohibit liability insurers not only from
using staff attorneys to defend insureds but from using private attorneys as well, a result the court called absurd.
[92] But the statute does not go quite so far. It does not prohibit an insurer from contracting with private counsel
to represent an insured. Paragraph (a) could be read to prohibit a staff attorney from agreeing to represent an
insured if the agreement were really between the staff attorney’s employer, the insurer, and the insured. One
might argue that the agreement in that situation was between the staff attorney and the insured, since only the
attorney could provide legal representation, even though the insurer made the staff attorney available.
But we need not struggle over the exact meaning of paragraph (a) because we do not think that section 38.123
was intended to address liability insurers’ defense of their insureds. That is clear from paragraph (a)(5), which
prohibits any contract that grants one party the exclusive right to select and retain legal counsel to represent the
other. Since liability insurance policies commonly give that right to insurers, and have for many years, section
38.123 would make every insurer a felon. It “is simply too much to believe”[93] that the Legislature had that in
mind when it enacted section 38.123, and we are quite sure that liability policy provisions giving insurers the
right to control the defense have not changed since its enactment. What the Legislature had in mind when it
enacted the statute in 1993 was stiffer prohibitions against barratry. That was the subject of the bill as enacted,
[94] as well as a related bill,[95] and the publicly announced motivation of the sponsor and supporters, including
the State Bar of Texas.[96] Insurance defense is not barratry.
IV
Finally, the Committee argues that if staff attorneys are permitted to represent insureds, they must fully disclose
their affiliation with insurers. American Home and Travelers do not oppose this requirement on principle but
argue only that there is no evidence in the record that full disclosure is not being made. Rule 7.02 of the Texas
Disciplinary Rules of Professional Conduct prohibits a lawyer from making any false or misleading
representations about his or her services, and it goes without saying that a staff lawyer must fully disclose to a
represented insured the identify of the lawyer’s employer.
The Committee also argues that staff attorneys cannot use a name similar to a law firm, such as Woodruff &
Associates, the name used at one time by American Home’s staff attorneys. The Committee raised this issue in
its motion for summary judgment, though not in its pleadings, and the trial court denied relief. The Committee did
not appeal, and therefore the issue is not before us.
* * * * *
American Home and Travelers may use staff attorneys to defend claims against insureds provided that the
insurer’s and insured’s interests in the situation are congruent as described in this opinion, but staff attorneys
must disclose their affiliation to their clients. The court of appeals’ judgment is modified accordingly, and the
remand for consideration of attorney fees is reversed. As modified, the judgment is
Affirmed.
_______________________________
Nathan L. Hecht
Justice
Opinion delivered: March 28, 2008
--------------------------------------------------------------------------------
[1] 121 S.W.3d 831 (Tex. App.–Eastland 2003).
[2] State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 627 (Tex. 1998) (“We have recognized that a liability policy may grant
the insurer the right to take ‘complete and exclusive control’ of the insured’s defense.” (quoting G.A. Stowers Furniture Co. v. Am.
Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929, holding approved))).
[3] See Stowers, 15 S.W.2d at 547.
[4] Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 558 (Tex. 1973).
[5] Traver, 980 S.W.2d at 628.
[6] Michael D. Morrison & James R. Old, Jr., Economics, Exigencies and Ethics: Whose Choice? Emerging Trends and Issues in
Texas Insurance Defense Practice, 53 Baylor L. Rev. 349, 394 (2001) (“Insurers find the use of house counsel attractive because
some believe their use is less expensive than the use of independent attorneys who charge by the hour. Insurers claim that in
addition to the elimination of the private attorney’s profit, the relatively high level of specialization of house counsel in the nuances
of the particular products offered by the insurer and the repeated exposure to cases based upon these products offers greater
efficiency which allows the insurer to provide the insured with a competent defense at a lower cost.”). See also Brief of Amicus
Curiae American Insurance Ass’n, National Ass’n of Mutual Insurance Cos., Property Casualty Insurers Ass’n of America, Ass’n of
Corporate Counsel, Insurance Council of Texas, and Texas Ass’n of Business at 20 (stating that an AIA National Litigation
Statistical Survey of 34 insurer groups comprising 25.5% of the property casualty market reflected that the average amount paid on
cases defended by outside counsel was $34,044 for auto claims and $39,697 for other claims, while those numbers for cases
defended by staff counsel were $29,807 and $21,097, respectively, excluding environmental, coverage, and extra-contractual
litigation). See generally Charles Silver, Flat Fees and Staff Attorneys: Unnecessary Casualties in the Continuing Battle over the
Law Governing Insurance Defense Lawyers, 4 Conn. Ins. L.J. 205, 241-242 (1997) (“As outside defense costs rose throughout the
1980s and early 1990s, more and more insurers found it advantageous to bring legal work in-house. The available evidence
suggests that these insurers saved a lot of money. One company found that cases handled by outside defense lawyers settled for
32 percent more money, took 45 percent longer to close, consumed 144 percent more attorney time, and cost 156 percent more in
fees than similar cases handled by staff attorneys. . . . Another insurer’s study of claims closed in 1995 found that the mean
settlement size (which includes trial judgments) in cases handled by staff attorneys and outside defense counsel were roughly the
same, but that outside attorneys were one and a half times as expensive as staff attorneys in automobile cases and nearly three
times as expensive in other liability matters. A third insurer estimated that it saved it $26 million in 1992. In 1993, a survey of
member companies of the American Insurance Association indicated that staff counsel operations saved carriers an average of
$32 million annually (from a low of $10 million to a high of $72 million), that outside counsel cost 2.89 times more per case
($4,983 dollars more per case in real terms), and that indemnity costs for both groups of attorneys were roughly the same. A
survey conducted by the American Corporate Counsel Association found that insurers who maintain staff counsel offices ‘can
secure legal services at significant cost savings, somewhere approaching 40%-50% . . . by lowering overhead and removing
profits.’” (footnotes omitted)).
[7] See, e.g., Morrison & Old, supra note 6, at 407 (“[T]he bottom line is that the use of house counsel takes a situation that virtually
all commentators already agree is fraught with conflicts and economic tension, and adds even greater opportunity for mischief.
No one wants to presume unethical conduct by any lawyer, regardless of his or her employer. Reality, however, dictates that when
the source of coercion is one’s sole employer, or one’s only client, the potential for interference with one’s judgment is far greater
than in the independent counsel context. The question is how much potential interference is too much? At what point does the
profession collectively decide that avoiding even the appearance of impropriety is sufficiently important to prohibit certain
practices?” (footnote omitted)).
[8] See Silver, supra note 6, at 237 (“Liability insurance companies began using staff attorneys to defend lawsuits against
policyholders at least a century ago.”) (citing Affidavit of Oliver B. Dickins, Jr., Deputy General Counsel of the Travelers Insurance
Company (Oct. 27, 1993) (“Travelers actually began its staff counsel program in 1892 in Metropolitan New York and has had
experience in that location with staff counsel since that time”)).
[9] ABA Comm. on Ethics and Prof’l Reponsibility, Formal Op. 282 (1950) (“A lawyer, employed and compensated by an
automobile insurance company, which holds a standard contract of insurance with an insured, may with propriety: A. Defend the
insured in an action brought by a third party without making any charge to the insured; B. Prosecute an action for the insured
against a third party, upon a fee basis, along with a subrogation action by the insurance company; C. Defend for a fee a person
sued in a 'Public Liability and Property Damage' action brought by a third party when at the same time he represents the 'Collision'
insurance company and the insured in a cross-action against such third party.”).
[10] ABA Comm. on Ethics and Prof’l Reponsibility, Formal Op. 03-430 (2003) (“[T]he Committee reaffirms its prior opinions and
concludes that insurance staff counsel ethically may undertake such representations so long as the lawyers (1) inform all
insureds whom they represent that the lawyers are employees of the insurance company, and (2) exercise independent
professional judgment in advising or otherwise representing the insureds.”).
[11] See Silver, supra note 6, at 238 (stating that “[i]ndustry-wide statistics are not available”).
[12] See id. at 238 n.105 (citing Insurance Services Office, Inc., Legal Defense: A Large and Still Growing Insurance Cost [ISO
Insurance Issues Series] 14-15 (1992) (stating that an ISO DATA, Inc. study of claims closed in either the third-quarter of 1990 or
the first quarter of 1991 found that 22% of all claims were referred to in-house lawyers)); id. at 238-239 n.108 (citing James
Howland & Michael Pritula, Legal Costs: Can the Flow Be Slowed?, Best’s Rev.-Prop.-Cas. Ins. Ed., Feb. 1991, at 14 (stating that
“Cigna and Liberty Mutual have more than doubled their staff counsel operations in the past decade,” and that “[c]arriers like
Allstate and The Travelers report that staff counsel handles well over half of their litigated cases”)); id. at 239-240 (citing a private
survey showing that “13 companies employed more than 3,000 attorneys and maintained more than 400 offices in fiscal 1997”);
Morrison & Old, supra note 6, at 394 (noting that the private survey conducted by Professor Silver shows that the use of staff
attorneys “is well established among a significant number of insurance companies and is in fact a growth industry”).
[13] Comm. on Interpretation of the Canons of Ethics, Op. 260 (1963).
[14] Brief of Amicus Curiae Allstate Insurance Co., USAA, Zurich American Insurance Co., Progressive Casualty Insurance Co.,
and Liberty Mutual Insurance Co. at 2.
[15] Brief of Amicus Curiae American Insurance Ass’n, National Ass’n of Mutual Insurance Cos., Property Casualty Insurers Ass’n
of America, Ass’n of Corporate Counsel, Insurance Council of Texas, and Texas Ass’n of Business at 2.
[16] In re Nolo Press/Folk Law, Inc., 991 S.W.2d 768, 769-770 (Tex. 1999) (orig. proceeding) (“The Supreme Court of Texas has
inherent power to regulate the practice of law in Texas for the benefit and protection of the justice system and the people as a
whole. The Court’s inherent power is derived in part from Article II, Section 1 of the Texas Constitution . . . [and] is assisted by
statute.” (footnotes omitted)).
[17] See Tex. Gov’t Code § 81.051(a) (“The state bar is composed of those persons licensed to practice law in this state”).
[18] E.g. Tex. R. Govern. Bar Adm’n XIV (foreign legal consultants), XIX (pro hac vice); Rules and Regulations Governing the
Participation of Qualified Law Students and Qualified Unlicensed Law School Graduates in the Trial of Cases in Texas (law
students and unlicensed graduates).
[19] Tex. State Bar R. art. XII, §§ 1-13, reprinted in Tex. Gov’t Code Ann., tit. 2, subtitle G, app. A (Vernon 2008).
[20] Tex. Disciplinary R. Prof’l Conduct 1.01-8.05, reprinted in Tex. Gov’t Code Ann., tit. 2, subtitle G, app. A (Vernon 2008) (Tex.
State Bar R. art. X).
[21] Tex. R. Disciplinary P. 1.01-15.11, reprinted in Tex. Gov’t Code Ann., tit. 2, subtitle G, app. A-1 (Vernon 2008).
[22] In re Nolo Press, 991 S.W.2d at 771-772; Order Approving Rules For The Unauthorized Practice of Law Committee, Misc.
Docket No. 07-9197, Section 2 (Tex. Nov. 27, 2007) (available from the Supreme Court of Texas website) (providing that the
Committee is comprised of nine members appointed by the Court and stating: “The Committee shall keep the Court and the State
Bar informed with respect to the unauthorized practice of law by laypersons and lay agencies and the participation of attorneys
therein, and concerning methods for the prevention thereof. The Committee shall seek the elimination of the unauthorized
practice by action and methods as may be appropriate for that purpose, including the filing of suits in the name of the
Committee.”); Tex. Gov’t Code §§ 81.103(a) (“The unauthorized practice of law committee is composed of nine persons appointed
by the supreme court.”), 81.104 (“The unauthorized practice of law committee shall: (1) keep the supreme court and the state bar
informed with respect to: (A) the unauthorized practice of law by lay persons and lay agencies and the participation of attorneys in
that unauthorized practice of law; and (B) methods for the prevention of the unauthorized practice of law; and (2) seek the
elimination of the unauthorized practice of law by appropriate actions and methods, including the filing of suits in the name of the
committee.”).
[23] Unauthorized Practice of Law Comm. v. Collins, No. 98-8269 (298th Dist. Ct., Dallas County, Tex.).
[24] Nationwide Mut. Ins. Co. v. Unauthorized Practice of Law Comm., 283 F.3d 650, 651 (5th Cir. 2002).
[25] Railroad Comm’n of Tex. v. Pullman Co., 312 U.S. 496, 501-02 (1941).
[26] Nationwide, 283 F.3d at 657. The circuit reversed the district court’s dismissal with prejudice and remanded for dismissal
without prejudice.
[27] Id. at 655.
[28] Unauthorized Practice of Law Comm. v. Nationwide Mut. Ins. Co., 155 S.W.3d 590 (Tex. App.–San Antonio 2004, pet. pending)
(No. 05-0130).
[29] 121 S.W.3d 831, 833, 846 (Tex. App.–Eastland 2003).
[30] Id. at 836.
[31] Id. at 837.
[32] State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 628 (Tex. 1998).
[33] 121 S.W.3d at 838-839.
[34] Id. at 839-842.
[35] Id. at 842-843.
[36] Id. at 843-845.
[37] Amici submitting briefs in support of the Committee are the Texas Ass’n of Defense Counsel, the Texas Medical Ass’n, and
the Texas Trial Lawyers Ass’n. Amici submitting briefs in support of the insurers are Allstate Insurance Co., USAA, Zurich
American Insurance Co., Liberty Mutual Insurance Co., Progressive Casualty Insurance Co., the American Insurance Ass’n, the
National Ass’n of Mutual Insurance Cos., the Property Casualty Insurers Ass’n of America, the Ass’n of Corporate Counsel, the
Insurance Council of Texas, the Texas Ass’n of Business, and attorney Julia F. Pendery. The State Bar of Texas has submitted a
brief that does not take sides but urges the Court to grant the Committee’s petition and give guidance on the issues.
[38] See In re Nolo Press/Folk Law, Inc., 991 S.W.2d 768, 777-778 (Tex. 1999) (holding that arguments that the records of the
Unauthorized Practice of Law Committee should not be confidential raised administrative issues to be resolved by the Supreme
Court); State Bar of Tex. v. Gomez, 891 S.W.2d 243, 245-246 (Tex. 1994) (holding that whether attorneys should be required to
provide pro bono legal services was an administrative matter).
[39] In re Nolo Press, 991 S.W.2d at 769-770 (footnotes omitted).
[40] See Tex. Gov’t Code § 81.061 (“Rules governing the admission to the practice of law are within the exclusive jurisdiction of the
supreme court.”); see also id. § 82.021 (“Only the supreme court may issue licenses to practice law in this state as provided by
this chapter. The power may not be delegated.”). We note that in 2001, shortly after this case was filed in the trial court, two bills
were introduced in the Texas House of Representatives to prohibit staff counsel from representing insureds. Tex. H.B. 1383, 77th
Leg., R.S. (2001); Tex. H.B. 3563, 77th Leg., R.S. (2001). The former bill was reported out of committee and sent to be calendared,
without further action; the other was considered in committee but not reported out.
[41] Tex. R. Govern. Bar Adm’n I-XXI. See also Tex. Gov’t Code § 81.102 (“(a) Except as provided by Subsection (b), a person may
not practice law in this state unless the person is a member of the state bar. (b) The supreme court may promulgate rules
prescribing the procedure for limited practice of law by: (1) attorneys licensed in another jurisdiction; (2) bona fide law students;
and (3) unlicensed graduate students who are attending or have attended a law school approved by the supreme court.”).
[42] Tex. Bus. Corp. Act art 2.01(B)(2). The Act applies to insurance companies to the extent it is not inconsistent with the Texas
Insurance Code. Id. arts. 2.01(B)(4)(d) (“No corporation may adopt this Act or be organized under this Act or obtain authority to
transact business in this State under this Act: . . . [i]f any one or more of its purposes is to operate any of the following: . . .
insurance companies of every type and character that operate under the insurance laws of this State”), 9.14(A) (“This Act does not
apply to domestic corporations organized under any statute other than this Act . . . ; provided, however, that if any domestic
corporation was heretofore or is hereafter organized under or is governed by a statute other than this Act . . . that contains no
provisions in regard to some of the matters provided for in this Act, . . . or if such a statute specifically provides that the general
laws for incorporation or for the granting of a certificate of authority to transact business in this State, as the case may be, shall
supplement the provisions of such statute, then the provisions of this Act shall apply to the extent that they are not inconsistent with
the provisions of such other statute . . . .”); Tex. Ins. Code §§ 841.002, 841.003 (stating that for life, health, and accident insurers,
“An insurance company incorporated in this state is subject to the Texas Business Corporation Act . . . to the extent [it is] not
inconsistent with this chapter or another law described by Section 841.002.”), 822.002 (same for other insurers).
[43] 121 S.W.3d 831, 839 (Tex. App.–Eastland 2003).
[44] Id.
[45] Act of May 31, 1933, 43d Leg., R.S., ch. 238, § 1, 1933 Tex. Gen. Laws 835, 835-838, repealed by Act of May 19, 1949, 51st
Leg., R.S., ch. 301, § 1, 1949 Tex. Gen. Laws 548.
[46] Id. § 2.
[47] Id. § 3 (emphasis added).
[48] Act of May 19, 1949, 51st Leg., R.S., ch. 301, §§ 1, 2, 1949 Tex. Gen. Laws 548. See also Tex. Gov’t Code § 81.101(b) (“The
definition [of the ‘practice of law’] in this section is not exclusive and does not deprive the judicial branch of the power and authority
under both this chapter [81 of the Texas Government Code] and the adjudicated cases to determine whether other services and
acts not enumerated may constitute the practice of law.”).
[49] Comm. on Interpretation of the Canons of Ethics, State Bar of Tex., Op. 167 (1958).
[50] Tex. Disciplinary R. Prof’l Conduct 1.12 (“A lawyer employed or retained by an organization represents the entity.”).
[51] Id. cmt 5.
[52] Comm. on Interpretation of the Canons of Ethics, State Bar of Tex., Op. 343 (1968).
[53] Act of May 31, 1933, 43d Leg., R.S., ch. 238, § 1, 1933 Tex. Gen. Laws 835, 835-838, repealed by Act of May 19, 1949, 51st
Leg., R.S., ch. 301, § 1, 1949 Tex. Gen. Laws 548.
[54] Act of May 28, 1979, 66th Leg., R.S., ch. 510, § 1, 1979 Tex. Gen. Laws 1081, 1090-1091, codified at Tex. Rev. Civ. Stat. Ann.
art. 320a-1, § 19(a) (Vernon 1979), recodified by Act of April 30, 1987, 70th Leg., R.S., ch. 148, § 3.01, 1987 Tex. Gen. Laws 534,
604, at Tex. Gov’t Code § 81.101(a).
[55] See, e.g., United Mine Workers of Am. v. Ill. State Bar Ass’n, 389 U.S. 217, 225 (1967) (holding that to prohibit, as an
unauthorized practice of law, a union from using salaried lawyers to help members pursue workers’ compensation claims
violated the First Amendment).
[56] 138 S.W.2d 1062, 1064 (Tex. 1940).
[57] 179 S.W.2d 946 (Tex. 1944).
[58] Id. at 952.
[59] Id. at 953.
[60] Id. at 954.
[61] Comm. on Interpretation of the Canons of Ethics, State Bar of Tex., Op. 343 (1968).
[62] 121 S.W.3d 831, 833 (Tex. App.–Eastland 2003) (“The UPLC also concedes that ‘there is no evidence in the record regarding
complaints by insureds’ despite the long period during which insurance companies have used staff counsel.”).
[63] Brief of Amicus Curiae American Insurance Ass’n, National Ass’n of Mutual Insurance Cos., Property Casualty Insurers Ass’n
of America, Ass’n of Corporate Counsel, Insurance Council of Texas, and Texas Ass’n of Business at 6; Brief of Amicus Curiae
Allstate Insurance Co., USAA, Zurich American Insurance Co., Liberty Mutual Insurance Co., Progressive Casualty Insurance Co. at
24.
[64] Charles Silver, When Should Government Regulate Lawyer-client Relationships? The Campaign to Prevent Insurers from
Managing Defense Costs, 44 Ariz. L. Rev. 787, 799 (2002) (“A review of the many reports, cases, advisory opinions, and law review
articles produced in recent years uncovered no documented evidence of harm to policyholders.”).
[65] See generally Tex. Disciplinary R. Prof’l Conduct 1.06 (relating to conflicts of interest).
[66] Tex. R. Civ. P. 47 (“An original pleading which sets forth a claim for relief, whether an original petition, counterclaim, cross-
claim, or third party claim, shall contain . . . (b) in all claims for unliquidated damages only the statement that the damages sought
are within the jurisdictional limits of the court.”).
[67] See Brief of Amicus Curiae Allstate Insurance Co., USAA, Zurich American Insurance Co., Liberty Mutual Insurance Co.,
Progressive Casualty Insurance Co. at 44-45 (“[M]any insurers avoid this practice and always let outside counsel take the risk
when providing a defense subject to a reservation of rights. Travelers and American Home use outside counsel whenever the
coverage issue could be affected by the defense or outcome of the litigation.”).
[68] See generally Tex. Disciplinary R. Prof’l Conduct 1.05 (providing for attorney-client confidentiality).
[69] Tesco Am., Inc. v. Strong Indus. Inc., 221 S.W.3d 550, 553 (Tex. 2006) (“Texas law imputes one attorney’s knowledge to all
attorneys in a firm.” (citing National Med. Enter., Inc. v. Godbey, 924 S.W.2d 123, 131 (Tex. 1996))).
[70] In re American Home Prods., Inc., 887 S.W.2d 831, 834-35 (Tex.1994) (orig. proceeding); Phoenix Founders, Inc. v. Marshall,
887 S.W.2d 831, 834-836 (Tex. 1994) (orig. proceeding).
[71] Cf. In re George, 28 S.W.3d 511(Tex. 2000) (orig. proceeding).
[72] G.A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929, holding approved).
[73] See supra notes 4 and 5, and accompanying text.
[74] Tex. Disciplinary R. Prof’l Conduct 5.04(c).
[75] State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 628 (Tex. 1998) (“[B]ecause the lawyer owes unqualified loyalty to the
insured, the lawyer must at all times protect the interests of the insured if those interests would be compromised by the insurer’s
instructions.” (citation omitted)); American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 844 n.6 (Tex. 1994) (noting that
defense counsel in that case represented the insured and not the insurer); Employers Cas. Co. v. Tilley, 496 S.W.2d 552, 558
(Tex. 1973) (“[An insurance defense] attorney becomes the attorney of record and the legal representative of the insured, and as
such he owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured. If a conflict
arises between the interests of the insurer and the insured, the attorney owes a duty to the insured to immediately advise him of
the conflict.”) .
[76] Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004) (emphasis added) (citing Traver, 980 S.W.2d at
627).
[77] See also Restatement (Third) of the Law Governing Lawyers § 134 (2000) (“(1) A lawyer may not represent a client if someone
other than the client will wholly or partly compensate the lawyer for the representation, unless the client consents under the
limitations and conditions provided in § 122 and knows of the circumstances and conditions of the payment. (2) A lawyer’s
professional conduct on behalf of a client may be directed by someone other than the client if: (a) the direction does not interfere
with the lawyer's independence of professional judgment; (b) the direction is reasonable in scope and character, such as by
reflecting obligations borne by the person directing the lawyer; and (c) the client consents to the direction under the limitations and
conditions provided in § 122.”).
[78] See Charles Silver, Does Insurance Defense Counsel Represent the Company or the Insured?, 72 Tex. L. Rev. 1583, 1603-
1604 (1994).
[79] Davalos, 140 S.W.3d at 689 (stating that certain serious conflicts of interest with an insured may prevent an insurer from
insisting on its contractual right to control the defense, but noting that “[e]very disagreement about how the defense should be
conducted cannot amount to a conflict of interest [or] the insured . . . could control the defense by merely disagreeing with the
insurer’s proposed actions”).
[80] See generally Michelle Brown Cashman, Annotation, Propriety of Insurers’ Use of Staff Attorneys to Represent Insureds, 2 A.L.
R. 6th 537, 545-550 (2005).
[81] Coscia v. Cunningham, 299 S.E.2d 880, 882-883 (Ga. 1983); Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151, 163 (Ind. 1999); In re
Allstate Ins. Co., 722 S.W.2d 947, 951 (Mo. 1987); In re Youngblood, 895 S.W.2d 322, 331 (Tenn. 1995).
[82] Gafcon, Inc. v. Ponsor & Assocs., 120 Cal. Rptr. 2d 392, 404 (Cal. Ct. App. 2002); Kittay v. Allstate Ins. Co., 397 N.E.2d 200, 202
(Ill. App. Ct. 1979); King v. Guiliani, No. CV 92-0290370-S, 1993 Conn. Super. LEXIS 1889, at *6-28, 1993 WL 284462, at *2-9
(Conn. Super. Ct. July 27, 1993) (mem.); Strother v. Ohio Cas. Ins. Co., 14 Ohio Op. 139, 1939 Ohio Misc. LEXIS 1184, at *11 (Ohio
Com. Pl. 1939); Schoffstall v. Nationwide Mut. Ins. Co., 58 Pa. D. & C.4th 14, 36, 2002 Pa. Dist. & Cnty. Dec. LEXIS 196, at *28-29,
2002 WL 31951309 (Pa. Com. Pl. 2002), aff’d 844 A.2d 1297 (Pa. Super. Ct. 2003) (unpublished table decision), pet. denied 851 A.
2d 142 (Pa. 2004) (unpublished decision per curiam).
[83] In re Amendment to Rules Regulating the Fla. Bar re Rules of Prof’l Conduct, 838 So.2d 1140, 1141-1142 (Fla. 2003); see
also In re Rules Governing the Conduct of Attorneys in Fla., 220 So.2d 6, 7, 9 (Fla. 1969) (refusing to approve an ethics rule that
would have prohibited an employee-attorney from representing anyone other than the employer “unless it shall clearly appear that
the sole financial interest and risk involved is that of the lay agency”).
[84] 705 Ill. Comp. Stat. 220/5 (West 2007) (“Nothing contained in [the Corporation Practice of Law Prohibition Act] shall prohibit...
any litigation in which any corporation may be interested by reason of the issuance of any policy or undertaking of insurance”); Md.
Code Ann., Bus. Occ. & Prof. § 10-206(b)(3) (LexisNexis 2007) (requiring admission to the bar to practice law except for “an
insurance company while defending an insured through staff counsel”); Minn. Stat. Ann. § 481.02, subd. 3(3) (West 2008)
(prohibiting the unauthorized practice of law but not “any insurance company from causing to be defended, or from offering to
cause to be defended through lawyers of its selection, the insureds in policies issued or to be issued by it, in accordance with the
terms of the policies”).
[85] Alabama Office of Gen. Counsel, Ethics Op. RO-2007-01 (2007), http://www.alabar.org/ogc/PDF/2007-01.pdf; Alaska Bar Ass’n
Ethics Comm., Op. 99-3 (1999), http://www.alaskabar.org/index.cfm?ID=4880; State Bar of California Standing Comm. on Prof’l
Responsibility and Conduct, Formal Op. 1987-91 (1987), http://calbar.ca.gov/calbar/html_unclassified/ca87-91.html; Colorado Bar
Ass’n, Formal Ethics Op. 91 (1993), http://www.cobar.org/index.cfm/ID/386/subID/1812/CETH/Ethics-Opinion-91:-Ethical-Duties-of-
Attorney-Selected-by-Insurer-to-Represent-Insured,-01/16/93/; Illinois State Bar Ass’n, Advisory Op. on Prof’l Conduct 89-17
(1990), 1990 WL 709688; Iowa Sup. Ct. Bd. of Prof’l Ethics and Conduct, Op. 88-14 (1989), http://www.iowabar.org/ethics.
nsf/e61beed77a215f6686256497004ce492/370793439078ef48862564c30054b529!OpenDocument; Michigan Bar Comm. on
Prof’l & Judicial Ethics, Op. CI-1146 (1986), http://www.michbar.org/opinions/ethics/numbered_opinions/ci-1146.html?
CFID=273276&CFTOKEN=45526763; New Jersey Sup. Ct. Comm. on Unauthorized Practice, Op. 23 (1996), http://lawlibrary.
rutgers.edu/ethics/cuap/cua23_2.html; Wisconsin State Bar Comm. on Prof’l Ethics, Formal Op. E-95-2 (1998), http://www.wisbar.
org/AM/Template.cfm?Section=Search§ion=Formal_Opinion&template=/cm/contentdisplay.cfm&contentfileid=6344.
[86] New York Bar Ass'n Prof'l Ethics Comm., Op. 109 (1969), http://www.nysba.org/AM/Template.cfm?
Section=Ethics_Opinions&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=13494; Oklahoma Bar Ass’n, Ethics Op. 309
(1998), http://www.okbar.org/ethics/309.htm; Pennsylvania Bar Ass’n Comm. on Legal Ethics and Prof’l Responsibility, Formal Op.
96-106 (1997), 1997 WL 188817.
[87] American Ins. Ass’n v. Ky. Bar Ass’n, 917 S.W.2d 568, 569, 574 (Ky. 1996) (approving Kentucky Bar Ass’n, Unauthorized
Practice of Law Op. U-36 (1981)); Gardner v. N.C. State Bar, 341 S.E.2d 517, 518 (N.C. 1986) (approving North Carolina State Bar,
Ethics Op. CPR 326 (1983)).
[88] Tex. Penal Code § 38.123(a).
[89] Id. § 1.07(a)(38).
[90] Id. § 38.123(b) (“This section does not apply to a person currently licensed to practice law in this state, another state, or a
foreign country and in good standing with the State Bar of Texas and the state bar or licensing authority of any and all other states
and foreign countries where licensed.”).
[91] Id. § 38.123(c)-(d).
[92] 121 S.W.3d 831 843 (Tex. App.–Eastland 2003).
[93] Bridgestone/Firestone, Inc. v. Glyn-Jones, 878 S.W.2d 132, 135 (Tex. 1994) (Hecht, J., concurring) (“As the Court observes,
that the Legislature would absolve seat belt manufacturers from products liability claims in a subsection of a traffic statute is
simply too much to believe.”).
[94] Act of May 27, 1993, 73d Leg., R.S., ch. 723, 1993 Tex. Gen. Laws 2829 [S.B. 1227].
[95] Tex. H.B. 2506, 73d Leg., R.S. (1993).
[96] See e.g. Charles B. Camp, State Bar Plans Crackdown on Ambulance-Chasers, The Dallas Morning News, Mar. 20, 1993, at
F1.