MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2000-46
Advertising and Conflict of Interest Concerns Arising Out of Insurance Company Employed Counsel Representing Insureds
In your letter of May 19, 2000, you requested clarification on ethical issues and concerns regarding lawyers employed by insurance carriers providing in-court representation to the carrier's insureds. More specifically, you requested advice regarding the manner in which a "captive firm" (the "law firm" of lawyer-employees of the insurance company) may advertise and the extent of its disclosure obligations with regard to their status as lawyer-employees of the insurance company. In so doing, you invite our attention to the recent Indiana Supreme Court case, Cincinnati Ins. Co. v. Wills, 717 N.E.2d 151 (Ind. 1999), which held that an insurance company does not necessarily engage in the unauthorized practice of law when it employs house counsel to represent its insured, but the lawyer's relationship to the insurance company must be completely and accurately disclosed to the insured.
The Maryland Rules of Professional Conduct explicitly prohibit lawyers from using false or misleading communications about themselves or their services. Rule 7.1. Furthermore, the rules prohibit a lawyer from using a firm name, letterhead or other professional designation that violates Rule 7.1, and specifically provide that "[l]awyers may state or imply that they practice in a partnership or other organization only when that is the fact." See Rule 7.5(a), (d). Accordingly, the Maryland Rules support the Indiana Court's conclusion that "the use of captive law firm names is not permissible" under the Rules of Professional Conduct. See Cincinnati, 717 N.E.2d at 165.
The use of a name, such as "Smith & Jones", or a generic term, such as "Law Offices", for a captive law firm incorrectly and misleadingly implies independence from the insurance company. Captive law firms may not use any name suggesting a legal entity other than the insurance company to describe their practice as employees of the insurance company. To the contrary, as this Committee previously has noted, "a lawyer-employee of a corporation ought to clearly represent that fact through letterhead that purports to be the corporation's." Ethics Docket 2000-31. Therefore, employee-lawyers must use their employer's letterhead, including the employer's traditional marks, so as not to be distinguished from its other employees. See Ethics Docket 2000-31. The use of such corporate letterhead by the "captive lawyers" does not change the fact that a "captive firm" must practice under an appropriate name, i.e., one that indicates its relationship to the insurance company.
Moreover, as the Indiana Supreme Court found in Cincinnati, this Committee finds that insurance companies do not necessarily engage in the unauthorized practice of law when house counsel represent their insureds in litigation claims. See Cincinnati, 717 N.E.2d at 153. According to Rule 5.5 of the Maryland Rules of Professional Conduct, the practice of law is limited to members of the bar. Corporations are not allowed to practice law and never have been. However, corporations have always been permitted to employ in-house counsel. The Rules of Professional Conduct imply that the entity itself, in this case the insurance company, is not unlawfully practicing law as long as the legal activities are conducted through licensed attorneys. Ethics Docket 2000-31.
Further, the Maryland rules allow for an attorney to be paid by someone other than the client, so long as the person paying the attorney does not "direct or regulate the lawyer's professional judgment in rendering such legal services." Rule 5.4(c). As the Court of Appeals stated in Brohawn v. Transamerica Ins. Co., 276 Md. 396 (1975), "the attorney selected by the insurer to represent the insured, although employed by the insurer, still has the duty to represent the insured with complete fidelity and may not advance the interests of the insurer to the prejudice of the rights of the insured." Brohawn, 276 Md. at 411. Nevertheless, this Committee has noted previously that the attorney in this situation would be representing both the insurer and the insured. Ethics Docket 2000-23.
This "dual representation" role could result in conflict of interest issues if the lawyer is unable to set aside his or her loyalties to his or her employer. Rule 1.7(b) states:
A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person … unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation."
A conflict of interest is not inherent in such a dual representation situation. In many instances, the interests of the insurance company and the insured are the same. Moreover, the mere potential for conflict does not require that insurance company abandon a business method that it has found to be efficient and cost-effective and which the insured has knowingly accepted. Cincinnati, 717 N.E.2d at 163.
However, given this possibility of a conflict of interest, the Committee believes that the lawyer-employee of the insurance company must fully and accurately disclose the status as an employee of the insurance company to the insured. The attorney must explain his or her ethical obligations of loyalty and honesty as owed to the insured and the insurance company. Similarly, if and when any conflict of interest issues arise, the lawyer must disclose the nature of all such issues to the insured, and must explain how the conflict might affect his or her representation of the insured. For a more complete discussion of conflict of interest issues raised when an insurance company's staff attorney represents the insured, see Ethics Docket 2000-23.
In most insurance policies, the insurance company promises to defend the insured in any suit stating a claim within the policy coverage. If a conflict of interest arises, the insurer is not relieved of this contractual responsibility. If, after a full disclosure of the nature of the potential conflict to the client, the client chooses to continue to be represented by the "captive lawyer," he or she may do so as long as the attorney can adequately represent the client's interests. Brohawn, 276 Md. at 411. The client would thereby be accepting that the lawyer's exercise of his independent professional judgment would be different than if he was an independent counsel. Geoffrey C. Hazard, Jr., Ethics in the Practice of Law 36 (1978). However, if the attorney feels that his responsibilities to the insurance company will "materially limit" his representation of the client, he must withdraw from the case. Rule 1.7.
On the other hand, if a conflict of interest arises and after full disclosure the client does not wish to be represented by the "captive attorney," the insurer must still provide a defense for the insured, either by finding an independent attorney to represent the insured or by assuming the reasonable costs of an attorney chosen by the insured. It is up to the insured to decide which option to pursue. Brohawn, 276 Md. at 411-12. This, however, as held by the Maryland Court of Special Appeals in Roussos v. Allstate Ins. Co., 104 Md. App. 80 (1995), does not mean that the insurer is required to fund an attorney of the insured's choosing when the insured merely disagrees with the manner in which he or she is being defended by the "captive lawyer" and there is no conflict of interest issue. Id. at 90.
The Committee hopes that this addresses most of your concerns. However, some of the ethical issues surrounding the employment of attorneys by insurance companies to represent the insured must be decided upon the specific factual situations on a case-by-case basis.
References: Rules of Professional Conduct 1.7, 5.5, 7.1, 7.5;
Ethics Dockets 2000-23, 2000-31;