Indiana Supreme Court Approves Insurer Use of In-House Counsel to Defend Policyholders from Third-Party Claims but Forbids Captive Law Firms from Portraying Themselves as outside Councel

Article excerpt

Cincinnati Insurance Company v. Wills, 717 N.E.2d 151 (Indiana Supreme CourtOctober 6,1999)

In recent years, there has been considerable focus on the legal ethics of representation of policyholders pursuant to liability policies. Recently, the Indiana Supreme Court weighed in on aspects of the issue. The court's assessment was largely consistent with decisions in other states. In general, insurers have successfully resisted legal attacks on their use of in-house counsel to represent policyholders against thirdparty tort claims under standard liability policies.

The Wills case started like most liability claims. David and Marcia Wills asserted tort claims against Elaine Mellenger and Betty Suter. Suter was insured by Celina Insurance Group, who appointed in-house counsel Keith Faber to defend Suter in the Wills action. After being apprised of Faber's house counsel status, Suter consented to the representation. The Wills moved to disqualify Faber, asserting that his representation of Suter would be unauthorized practice of law. While the case was pending, Cincinnati Insurance sought to intervene because of the possible effect of the case on Cincinnati's practice of representing policyholders in the area through Berlon & Timmel, which Cincinnati characterized as a "captive law firm." Berlon & Timmel "is staffed exclusively by employees of Cincinnati who represent only Cincinnati's insureds and Cincinnati itself." 717 N.E.2d at 153.

The Wills disqualification motion succeeded before the trial court, which ruled that insurer Celina engaged in unauthorized practice of law by giving its policyholders legal representation through in-house counsel. The trial court further viewed the inhouse lawyer as assisting unauthorized practice by the nonlaw-firm insurance company, a violation of Indiana Rule of Professional Conduct 5.5(b).' The trial court also found Cincinnati's use of Berlon & Timmel to be an unauthorized practice of law and a deceptive practice that would lead policyholders to erroneously think that they were being represented by outside counsel.

The Indiana Supreme Court reversed the trial court on the issue of unauthorized practice, with regard to both Celina's in-house counsel and Cincinnati's captive firm, but affirmed the trial court ruling that an insurer's captive law firm, could not do business under a name that suggested that it was an outside law firm apart from the insurer's organization.

The Indiana Supreme Court began its analysis with an overview of the types of arguments that have been employed to suggest unauthorized practice by staff counsel and captive firms. The court also summarized legal developments on the issue to date, specifically noting that eight states and the ABA have, in ethics opinions, concluded that practice through in-house counsel does not constitute unauthorized practice in and of itself.2 In two states, challenges to policyholder representation have been successful: in Kentucky based on potential conflict of interest between insurer and policyholders and in North Carolina based on a state statutory bar to practice of law by a corporation.4

The court found that Celina's notice to its policyholder had been sufficient to alert the insured to the situation and was not misleading. In disclosing the in-house status of attorney Faber, Celina had apparently informed the policyholder that the assigned attorney's primary loyalty was to the policyholder and that confidences between policyholder and attorney could not be shared with the insurer.

As to unauthorized practice, the court found that in-house counsel was generally accepted and that counsel's legal services for the company were clearly authorized under the Rules of Professional Conduct. Although the situation is more complicated when the company lawyer is representing a customer of the company, the court found this to be permissible because the rendering of legal service was done by an attorney who was subject to the control of the policyholder client rather than the nonlawyer company. …