The Ethics behind the Use of Staff Counsel
LACBA Update, September 2007

By Joel A. Osman, managing attorney of Osman & Associates, part of Travelers’ staff counsel organization. He represents defendants in legal malpractice cases and is currently vice chair of LACBA’s Professional Responsibility and Ethics Committee. The opinions expressed are his own.

All jurisdictions, including California, forbid individuals and/or corporations not admitted to the bar from engaging in the practice of law.1 Notwithstanding this apparent prohibition, many, indeed perhaps most, insurance companies employ large numbers of in-house attorneys as “staff counsel” to discharge their contractual duty to defend their insureds. What are the ethical rules that make such staff counsel operations possible?

Though staff counsel operations pre-date 1987, there were no California-specific case law or ethics opinions that addressed the ethical considerations raised by such operations until that year. In 1987, the State Bar’s Standing Committee on Professional Responsibility and Conduct (COPRAC) issued its Formal Opinion 1987-91, which addressed whether an insurance company could employ in-house counsel to represent insureds in litigation brought by third parties pursuant to its policies of insurance. In deciding that such staff counsel operations were permissible, COPRAC acknowledged the absence of any case law in California addressing this point and turned instead to the substantial body of case law from other states that recognized the validity of staff counsel operations.

Formal Opinion 1987-91 concludes that in-house counsel for an insurer may represent insureds so long as (1) the attorneys ensure that the insurance company does not control or interfere with their exercise of professional judgment in representing insureds, (2) any fees are not split with the insurance company or any other parties, (3) cases involving conflicts of interest between the insurer and the insured are referred to outside counsel, and (4) the firm name used by the staff counsel operation is not false, deceptive, or misleading.

However, ethics opinions rendered by COPRAC or any local bar association such as the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee are advisory only and are not binding upon the courts. Thus, it was not until 2002 that there was binding case law in this state confirming the ethical viability of staff counsel operations for insurance companies.

In GAFCON, Inc. v. Ponsor & Associates, 98 Cal.App.4th 1388 (2002), the issue was squarely addressed. In that case, GAFCON brought suit against Travelers Property Casualty Company and one of its staff counsel firms, Ponsor & Associates, seeking among other relief a judicial declaration that Travelers’ use of employee attorneys to defend its insureds constituted the unauthorized practice of law. The trial court granted summary judgment in favor of defendants. On appeal, GAFCON asked the court of appeal to decide as a matter of law that insurance companies “engage in the unauthorized practice of law when they use employee attorneys to defend their insureds.” Id. at 1395. The court of appeal concluded under the undisputed facts of the case that Travelers’ use of staff counsel to represent GAFCON did not amount to the practice of law:

In reaching this conclusion, we necessarily hold an insurance company does not engage in the practice of law due to the mere employment relationship between the insurer and the attorneys defending its insured against third party claims. Our holding is in part based on the recognition that in these circumstances, and absent conflicts of interest giving rise to independent counsel, the attorney represents both insurer and insured. Id. at 1396, 1397.

In reaching this holding, the court of appeal took note of extensive case authority from other states in which similar holdings were reached and also quoted extensively from the COPRAC Formal Opinion 1987-91. The court also reiterated that it was not bound by the holding of that ethics opinion:

We are not bound by an ethics opinion, and we need not adopt it in full for our holding in this case. It is sufficient here to recognize (1) an insurance company has a direct pecuniary interest in the underlying third party action against its insured and (2) having such an interest, it is entitled to have counsel represent its own interest as well as those of its insured, as long as their interests are aligned. In the present situation, the insurer is representing its own interests through licensed attorneys who also happened to be its employees. Counsel’s status as a salaried employee of the insured does not inherently create a temptation to violate or disregard ethical rules. We reject the argument that such a relationship supports the presumption that in-house counsel will always favor the insurer’s interests. Conflicts of interest may arise in such circumstances, but the same is true for an outside law firm that might be dependent upon a particular insurance company for a substantial amount of business. Id. at 1414.

It is clear from Formal Opinion 1987-91 and the GAFCON case that the existence of staff counsel for insurance companies is on firm ethical grounds so long as the appropriate proprieties are observed: (1) the insurance company has a pecuniary interest in the outcome of the case (i.e., its own money must be at risk), (2) the insurance company does not control or interfere with the exercise of the professional judgment of its staff counsel in representing insureds,2 and (3) there are no conflicts of interest (such as those created by a reservation of rights) extant between the insurer and its insured.

1 See BUS. & PROF. CODE §6125 and CAL. RULES OF PROF'L CONDUCT R. 3-101(a).

2 A claim person does not “control or interfere with the exercise of the professional judgment of its staff counsel in representing insureds” by failing to follow the advice of that counsel any more than individual or corporate clients do when they fail to follow the advice of counsel. An attorney, whether staff counsel or private counsel, exercises his or her professional judgment by proffering advice to the client. The client may choose to follow that advice or not. Failing to follow the advice of counsel may or may not be wise, but it does not constitute interference in the exercise of the attorney’s judgment.