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                                         114 N.J.L.J. 421
                                        October 25, 1984


Appointed by the New Jersey Supreme Court


Use of House Counsel by Insurance
Companies to Defend Insureds

    The Committee has been asked to issue an Advisory Opinion based upon hypothetical facts concerning the use of full-time, salaried attorney employees of an insurance company ("house counsel") to defend insureds in litigated matters. The inquirer raises the question of whether such a practice is violative of R. 1:21-1(c) and thereby constitutes the unauthorized practice of law.
    We are mindful of the fact that every case in which an insured is represented by counsel selected by the insurance company may potentially present an issue of conflict between the interests of the company and those of the insureds. Further, the inquirer presents this issue in the light of ethical concerns arising out of the failure of the employer to provide working conditions which allow for efficient and effective representation of the litigant. Such conflict and ethical issues are dealt with by an existing body of case law and ethics opinions and are not the subject of this opinion. See, e.g., Burd v. Sussex Mutual Insurance Co., 56 N.J. 383 (1970). We deal solely with the question of the status of the attorney as a full-time salaried employee as distinguished from outside counsel retained by the company.

    This opinion is based upon the assumed facts that an insurance company operating in New Jersey defends its insureds in litigated matters by utilizing full-time attorney-employees. While we recognize that the actual corporate structure in practice may differ from company to company, we deal here with the general question of the propriety of the use of house counsel and not with the extent, greater or lesser, to which that attorney might be subject to administrative controls imposed by non-lawyer members of the corporate hierarchy. We reject the suggestion that an evidential hearing is appropriate in this regard since, as noted, the facts may well differ from company to company and the subject inquiry is purely hypothetical in nature. To the extent that the actual practice in a specific situation may project certain of the ethical issues raised by the inquirer, such questions should be submitted to the Advisory Committee on Professional Ethics.
    R. 1:21-1(c) proscribes the "practice of law" by a corporation other than a professional corporation organized pursuant to N.J.S.A. 14A:17-1 et. seq. The nature of the activity performed is the key to determining what conduct constitutes the practice of law. Our Supreme Court has drawn a distinction in this regard between a corporation acting for itself and that same corporation performing activities for others. New Jersey State Bar Ass'n v. Northern N.J. Mortgage Ass'n., 22 N.J. 184 (1956). Where the attorney-employee advises and protects the corporate interest rather than the sole interest of third party clients, the use of the employee has been held not to constitute the practice of law. While the case at hand involves a hybrid of the two functions, 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 Opinions No. 282 (1950) and 1402 (1977). This Committee thus finds that insurance companies conducting the defense of litigation in which they owe indemnification to their insureds through house counsel does not constitute the practice of law.
    There is ample authority in other jurisdictions for the position adopted by this Committee; indeed, every jurisdiction which has considered the issue has held the questioned conduct allowable. See, e.g., Liberty Mut. Ins. Co. v. Jones, 130 S.W. 2d 945 (Mo. Sup. 1939); The United States Automobile Ass'n v. Zeller, 135 S.W. 2d 161 (Tex. App. 1939); Kittay v. Allstate Ins. Co., 78 Ill. App. 3rd 335, 33 Ill. Dec. 867, 397 N.E. 2d 200 (1979); Coscia v. Cunningham, 250 Ga. 521, 299 S.E. 2d 880 (Ga. 1983); In re Rules Governing the Conduct of Attorneys in Florida, 220 So. 2d 6 (Fla. Sup. 1969).

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