5 N.J.L. 1828
                                        August 26, 1996

                                        145 N.J.L.J. 935
                                        August 26, 1996

Use of House Counsel by Insurance
Companies to Defend Insureds

    The Committee on the Unauthorized Practice of Law has once again been asked to consider the propriety of New Jersey insurance carriers' use of in house or captive counsel (hereinafter “house counsel”) to represent insureds.
     In conducting its review, the Committee not only considered case law and advisory opinions from this and other jurisdictions, but also requested input from insurance companies, attorneys, bar associations and other potentially affected individuals and entities. A substantial number of responses were received, and the letters, memoranda of law, documents and materials submitted by the commentators represented a fair cross-section of viewpoints on the important issues raised by the inquiry. The Committee rejected the suggestion made by some that a fact-finding hearing should be convened because it believed the inquiry involved a legal interpretation that did not require fact-finding and it received absolutely no indication that the practice has caused injury to the public. Following a lengthy debate, the Committee reached its decision.

It should initially be pointed out that several of the commentators questioned the Committee's ability to consider the inquiry on two separate grounds, namely: standing and jurisdiction.

Standing. Pursuant to N.J.S.A. 43:6A-13(a), "No member of the retirement system shall, while receiving a pension pursuant to this act, engage in the practice of law before any of the courts of this State." Additionally, Guideline (5) of the Guidelines on the Practice of Law by Retired Judges provides that "A retired judge may not serve as attorney for any person before ... any ... committee or body of the Supreme Court." It was argued that the submission of an inquiry constituted the practice of law before a committee of the Supreme Court and that, as a retired judge, the inquirer lacked standing.

The Committee rejected this argument as without merit. R. 1:22- 2(a) confers upon the Committee jurisdiction to render advisory opinions relating to the unauthorized practice of law "on request of any person." (Emphasis supplied). There is no requirement that an inquirer be a member of the bar authorized to practice in this State or before the Committee. Compare R. 1:19-2 (the Advisory Committee on Professional Ethics "shall accept inquiries only from the state bar association, from any county or local bar association, or from any member of the New Jersey bar[.]")(Emphasis supplied). Nor was the inquirer, in submitting the inquiry, "serv[ing] as attorney for any person before ... any ... committee or body of the Supreme Court." Therefore, the Committee concluded that he had the same standing as any other person to request an advisory opinion. The fact that he was a retired judge with limitations on his ability to practice was of no moment.

Jurisdiction. Pursuant to R. 1:22-3(b), "No opinion shall be rendered if, to the committee's knowledge, the subject matter either involves or might affect a case or controversy pending in any court." It was argued that since there are countless personal injury actions pending in the courts of this State in which house counsel are representing insureds, a determination by the Committee upsetting the status quo would have a tremendous effect on pending litigation.

The Committee's interpretation of R. 1:22-3(b) is much narrower in scope. Only if the issues presented by the inquiry were the subject matter of a case or controversy pending in a court would the jurisdictional bar of the rule be implicated. The issues raised have, to be sure, been the subject of much debate, not only here in New Jersey, but in other jurisdictions as well. However, to the best of its knowledge, there is in this State no pending litigation involving these issues and the Committee therefore concluded that it possessed the jurisdiction to consider the inquiry.

In Opinion 23, 114 N.J.L.J. 421 (1984), the Committee held that insurance companies are not engaged in the unauthorized practice of law when they conduct the defense of litigation, in which they owe indemnification to their insureds, through house counsel. After careful consideration, the Committee remained convinced that this opinion was properly decided. However, the Committee was troubled by a number of ethical issues raised not only by the inquirer, but by many of the commentators as well. Consequently, it will briefly address these issues in order to bring them to the attention of house counsel.

There can be no doubt that the New Jersey Supreme Court has given more than nodding acceptance to the practice of having house counsel represent insureds. In re Weiss, Healey & Rea, 109 N.J. 246 (1988), involved an inquiry by house counsel regarding the propriety of practicing under a traditional law firm name including the names of individual attorneys employed by an insurance carrier. In deciding the merits of that issue, the Court not only acknowledged the reality of house counsel representing insureds, but approved of the practice as good public policy. "These are not second-class lawyers; these are first-class lawyers who are delivering legal services in an evolving format. If this form of practice results in lower legal costs, the public has an interest in seeing that able attorneys continue to be attracted to it." Id. at 254.

Of primary importance to the Committee, at least insofar as this inquiry is concerned, the Court noted that the question before it was not whether an insurer may provide in-house counsel for its insureds, citing Opinion 23, supra, 114 N.J.L.J. 421, as dispositive of the issue. And while it acknowledged that the practice gave rise to certain ethical issues, the Court concluded that house counsel "will not ordinarily encounter problems of conflict of interest; in almost all cases, the interests of both the insurer and the policyholder will coincide." In re Weiss, Healey & Rea, supra, 109 N.J. at 253. As far as the Court was concerned, the only question that truly needed to be addressed was how the form of association, i.e. attorneys employed as house counsel, might be designated.

In addressing this issue, the Court stated its belief that "the clients of in-house counsel should have a full understanding of the kind and caliber of legal services that they are receiving." Id. at 253-54. However, it was unsure whether or not a disclaimer or disclosure should be required. Consequently, it appointed an ad hoc committee to study the issue of house counsel's communications to the public.

The Ad Hoc Committee recognized, as did the Court, that "[t]he difficulty in fashioning an appropriate disclaimer is that the more accurately it conveys the relationship of the associates to the insurer, the less valuable it may become to them." Ibid. (quoting In re Weiss, Healey & Rea, supra, 109 N.J. at 254-55). It ultimately rejected the idea of requiring a disclaimer or disclosure, concluding that "it is not the label attached to the practice of a group of associated attorneys, but rather the assumed joint professional and financial responsibility under which the attorneys practice that is important." Report of the Ad Hoc Supreme Court Committee on Law Firm Names, supra, 125 N.J.L.J. at 320. The fact that house counsel will be indemnified by the employing insurance company is not important as long as the attorneys assume joint professional and financial responsibility for the acts of each attorney performed in the conduct of the office's affairs. Consequently, the Ad Hoc Committee recommended revision of RPC 7.5(d) to provide that "Lawyers may state or imply that they practice in a partnership only if the persons designated in the firm name and the principal members of the firm share in the responsibility and liability for the firm's performance of legal services." Report of the Ad Hoc Supreme Court Committee on Law Firm Names, supra, 125 N.J.L.J. at 320. The Supreme Court adopted the proposed revision on June 29, 1990, to be effective September 4, 1990.

However, neither the Report nor the revised RPC 7.5(d) addressed the Court's stated concerns that "the clients of in-house counsel should have a full understanding of the kind and caliber of legal services that they are receiving." In re Weiss, Healey & Rea, supra, 109 N.J. at 253-54. This was of concern to the Committee and may, in the future, need to be addressed by the Advisory Committee on Professional Ethics or the Committee on Attorney Advertising.

The Committee also believes that the Supreme Court's amendment of R. 1:21-1(c), adopted July 13, 1994 to be effective September 1, 1994, nullified any reliance the inquiry may have placed on the rule to support the proposition that insurance carriers defending insureds with in-house counsel are engaged in the unauthorized practice of law. The amendment deleted the last sentence of the paragraph which had originally been intended to make clear that an attorney serving as an officer, trustee, director, agent or employee of a corporation could not, by reason of that fact alone, represent the corporation. R. 1:21-1(c) now provides that "...a business entity other than a sole proprietor shall neither appear nor file any paper in any action in any court of this State except through an attorney authorized to practice in this State." The Committee believes the representation of a corporation, in this instance an insurance carrier, by an attorney authorized to practice in this State extends to the carrier's insureds.

The furnishing of legal services to an insured by a liability insurance company involves such a community or identity of financial interest so as to define the service involved as in the insurer's own interest. See ABA Committee on Ethics and Professional Responsibility Informal Opinion 282 (1950) and Informal Opinion 1402 (1977). Therefore, the Committee found that insurance companies conducting the defense of litigation in which they owe indemnification to their insureds through house counsel are not engaged in the unauthorized practice of law.

The Committee found most persuasive the argument that house counsel and outside counsel must confront the same ethical issues and the fact that one is employed while the other is retained by an insurance carrier is a distinction without a difference. Nevertheless, the Committee determined that there are certain circumstances present and activities that have allegedly been taking place in the house counsel setting that warrant special attention and analysis. The following concerns were, for the most part, raised by outside counsel:

1. A circular distributed to house counsel encouraging them to "lobby" the Committee noted that "[v]irtually every state has established that the use of house counsel is not the unauthorized practice of law provided the attorney's professional judgment is not directed by non-lawyers. This can be accomplished in house counsel operations by having salaried attorneys supervised by a managing attorney instead of a claims manager." To the extent that a lawyer's professional judgment is directed by a non-lawyer, there may well be problems involving not only the unauthorized practice of law by the insurance carrier, but also "assist[ing] a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law" on the part of house counsel. RPC 5.5(b).

2. One commentator alleged that insurance carriers' house counsel are performing legal services for and being charged out to self- insuring companies on an hourly rate basis which includes a profit margin. In essence, house counsel is becoming a profit center instead of a loss-avoidance and cost containment center. If this practice does indeed exist, the employing entity is engaged in the unauthorized practice of law since it is not protecting its own interests or those of its insureds. The practice would also expose house counsel to discipline for sharing legal fees with a nonlawyer. RPC 5.4(a). Cf. Advisory Committee on Professional Ethics Opinion 669, 132 N.J.L.J. 574, 1 N.J.L. 1706 (1992).

3. In In re Weiss, Healey & Rea, supra, 109 N.J. 246, the Supreme Court expressed its concern that "the clients of in-house counsel ... have a full understanding of the kind and caliber of legal services that they are receiving." Id. at 253-54. It has been suggested that this could be accomplished by requiring appropriate disclosure to insureds upon a carrier's assignment of house counsel. Without disparaging house counsel, such disclosure could explain in plain language that (1) assigned counsel is a corporate employee rather than an independent contractor; (2) the lawyer's primary obligation is to the client and not the insurer; (3) the client's confidences are, within specified limits, protected by the attorney-client privilege; and (4) safeguards are in place to protect the interests of the insured in the event a conflict of interest or other problem arises during the representation.
    We have been advised by some house counsel that they routinely disclose such information to their clients and, not having been presented with any information that failure to so disclose has resulted in harm to the insureds, are therefore reluctant to suggest that disclosure be required. Since the Court's concern could apply equally to outside counsel, such disclosures may also be desirable in the outside counsel context. Nevertheless, it is an issue deserving of further study by the appropriate authority, be it the Advisory Committee on Professional Ethics or some other committee of the Supreme Court.

This is not to say that other ethical issues may not be present when house counsel represent insureds. As the Supreme Court noted in Weiss, Healey & Rea at footnote 5, instances in which the interests of the parties might not coincide have been previously addressed by the ACPE in Opinion 502, 110 N.J.L.J. 349 (1982); Opinion 407, 102 N.J.L.J. 363 (1978); and Opinion 165, 92 N.J.L.J. 831 (1969) (disputed facts regarding coverage). See also Opinion 357, 99 N.J.L.J. 1074 (1976) (representing both plaintiff and the insurer); Opinion 333, 99 N.J.L.J. 496 (1976) (insurance company's counsel representing both insured original defendant and insured third-party defendant); and Opinion 166, 92 N.J.L.J. 843 (1969) (use at trial of statements given by policyholder to insurance companies). These are but a few of the issues that may and do arise. A very good discussion of other issues present in this context may be found in Jordan and Kahn, Ethical Issues Relating to Staff Counsel Representation of Insureds, Tort & Insurance Law Journal, Fall 1994.