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Who Is Really Controlling The Defense

THE DILEMMA OF THE LITIGATION AND BILLING GUIDELINES AND OTHER CONTROL DEVICES

MARK A. TICER
Law Office Of Mark A. Ticer
3300 Oaklawn Avenue, Suite 700
Dallas, Tx 75219

DAVID D. DISIERE
Martin, Disiere, Jefferson & Wisdom, L.L.P.
808 Travis, Suite 1800
Houston, Tx 77002

State Bar of Texas

1st ANNUAL ADVANCED INSURANCE LAW COURSE

March 25-26, 2004
Dallas

MARK A. TICER is the principal in the Law Office of Mark A. Ticer. Mr. Ticer's practice primarily focuses in insurance law, particularly insurance coverage, bad faith insurance practices and claims. He received his B.S. degree with honors, from Oklahoma State University and his J.D. degree from Southern Methodist University. Mr. Ticer is a member of the Dallas Bar Association, The Association of Trial Lawyers of America (ATLA), the Texas Trial Lawyers Association (TTLA) and the Dallas Trial Lawyers Association. He is also the former chairman of the Dallas Subcommittee of the Unauthorized Practice of Law Committee.

TABLE OF CONTENTS

  1. INTRODUCTION
    1. Controlling the Defense: Its Origin and Meaning
  2. TYPES OF CONTROL AND CONTROL DEVICES
  3. CONTROL DEVICES FOR THE DEFENSE/ INSURED
    1. Selection of Counsel
    2. Control of Settlement
    3. The Cooperation Clause
    4. Strategy and Tactics - A Hot Area for Conflict
  4. CONTROL DEVICES FOR DEFENSE COUNSEL
    1. Fixed Fee
    2. Litigation Guidelines
    3. Fee Statements Audits
    4. Staff Counsel
  5. Conclusion

TABLE OF AUTHORITIES

American Home Assurance vs. Unauthorized Practice of Law Committee, 121 S.W.3d 831 (Tex. App. - Eastland 2003, no pet. history). 1, 3, 6

American Physician Ins. Exchange vs. Garcia, 876 S.W.2d 842, 846 (Tex. 1994).... 2

Automobile Underwriters Ins. Co. vs. Long, 63 S.W.2d 356, 359 (Tex. Comm'n App. 1983, holding approved)......... 2, 3

Bradt vs. West, 892 S.W.2d 56 (Tex. App. - Houston [1st Dist.] 1994, writ denied).. 1

Britt vs. Cambridge Mutual Fire Ins. Co, 717 S.W.2d 476 (Tex. App. - San Antonio 1986, writ ref'd n.r.e.)... 2

Continental Casualty Co. vs. Pullima, Conley, Bradley, & Reeves, 929 F.2d 103, 108 (2nd Cir. 1991).... 1

Employees Casualty Co. vs. Tilley, 496 S.W.2d 552, 558 1

G.A. Stowers Furniture Co. vs. American Indemnity Co, 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holding approved) 2

In The Matter of Rules of Professional Conduct and Insurer Imposed Billing Rules & Procedures, 2000 WL502545 (Mont. 2000)... 5

Liberty Mutual Ins. Co. vs. Cruz, 883 S.W.2d 164, 165-166 (Tex. 1983).... 2

McGuire vs. Commercial Union Ins. Co, 431 S.W.2d 347, 352-353 (Tex. 1968).... 2

Northern County Mutual Ins. Co. vs. Davalos, 84 S.W.2d 314 (Tex. App. - Corpus Christi 2002, pet. granted) 2, 3

Ranger County Mutual Ins. Co. vs. Guin, 723 S.W.2d 656, 659 (Tex. 1987).... 2

Rodriguez vs. Texas Farmers Ins. Co, 903 S.W.2d 499, 512 (Tex. App. - Amarillo 1995, writ denied).. 3

Safeway Managing Gen. Agency, Inc. vs. Clark & Gamble, 985 S.W.2d 166 (Tex. App. - San Antonio 1998, no writ) .... 1

Saucedo vs. Winger, 915 P.2d 129, 134 (Kan. Ct. App. 1996)............ 2

State Farm Fire & Casualty vs. Gandy, 925 S.W.2d 696, 714 (Tex. 1996).... 2

State Farm Mut. Auto Ins. Co. vs. Traver, 980 S.W.2d 625 (Tex. 1998).... 1

Steel Erection Co. vs. Travelers Indem. Co, 392 S.W.2d 713 (Tex. Civ. - App. San Antonio 1965, writ ref'd n.r.e.)... 2

ETHICS OPINIONS

Conn. Ethics Opinion 00-20 (2000), 2000 WL33170661......... 5

Pennsylvania Ethics Opinion 01-200 (2001) WL1744775........... 5

Tex. Prof. Ethics Comm., Op. 532 (2000)... 5

Texas Prof. Ethics Comm., Op. 533 (2000)... 4

Utah Ethics Opinion 02-03 (2002), 2002 WL340262............ 5

LEGAL ARTICLES

"Insurer Litigation Guidelines and Outside Bill Review: What Now? Part II: A Critique of the Montana Supreme Court's Litigation Guideline Ruling"

23 Insurance Litigation Reporter 529 (2001)............ 5

WHO IS REALLY CONTROLLING THE DEFENSE?
THE DILEMMA OF LITIGATION AND BILLING GUIDELINES AND OTHER CONTROL DEVICES.

I. INTRODUCTION

When this topic and paper was first assigned, defining the parameters of the attorney-client relationship when the defense attorney is hired by an insurer to defend an insured was complicated enough. With the recent decision of American Home Assurance Co., Inc. vs. Unauthorized Practice of Law Committee, 121 S.W.3d 831 (Tex. App. - Eastland 2003, no pet. history), the control issues have become even more complex. Before American Home most agreed that the defense lawyer, while delicately and diplomatically working with the insurer, only had to worry about one client, the insured. The delicate and diplomatic nature of the relationship was hit head on in American Home, however, when the Eastland Court of Appeals wrote:

"Reality and common sense dictate that the insurance company is also a client. The insurance company retains the attorney, controls the legal defense, decides if the case should be settled, and pays any judgment or settlement amount up to policy limits. It is a fiction to say that the insured is the only client in view of the contractual relationships. We agree that the insured is the primary client and that ethical choices must be resolved in favor of the insured."

Id. at 838. Emphasis added.

The "fiction" referred to American Home is discussed in Bradt vs. West, 892 S.W.2d 56 (Tex. App. - Houston [1st Dist.] 1994, writ denied). In Bradt, the Houston Court of Appeals squarely held:

There is no attorney-client relationship between an insurer and an attorney hired by the insurer just to provide a defense to one of the insurer's insureds. Employers Casualty Co. vs. Tilley, 496 S.W.2d 552, 558 (Tex. 1973). Even though such an attorney is typically selected by the insurer, paid by the insurer, and periodically reports to the insurer about the progress of the case against the insured, these facts do not mean that the insurer is the client. Id; Continental Casualty Co. vs. Pullima, Conley, Bradley, & Reeves, 929 F.2d 103, 108 (2nd Cir. 1991). In the context of insurance, the client is the insured. Employees Casualty, 496 S.W.2d at 558.

Id. at 77. See also Safeway Managing Gen. Agency, Inc. vs. Clark & Gamble, 985 S.W.2d 166 (Tex. App. - San Antonio 1998, no writ).

Before American Home, it was relatively clear that the defense lawyer truly represented only one client, the insured, and the attorney was obligated to keep the needs of that client at the forefront of their dealings in the case. Now the question arises: does the dual client relationship change the nature and degree of control an insurer really has over the defense of a case? In light of prior Ethics Opinions, contractual language, and prior Texas Supreme Court precedent the answer is possibly yes. But when conflicting opinions arise between the insurer and defense counsel regarding the direction of the defense and judgment calls on what is in the best interest of the insured in defending the lawsuit, the clear language of Traver and the same Ethics Opinions and guidelines noted above will result in defense counsel taking sides with one client the insured, over the other - the insurer.

A. Controlling the Defense: Its Origin and Meaning

In the parlance of insurance, it is frequently said that absent a conflict of interest, a dispute over coverage, or a reservation of rights letter, an insurer who offers an unqualified defense to an insured gets to "control the defense." Just what does that mean? The key language in the typical insurance policy that confers control to the insurer is "we will settle or defend, as we consider appropriate, any claim or suit..." In Traver, the Texas Supreme Court interpreted this to mean: "The insurer's control of the insured's defense under this policy thus includes authority to accept or reject settlement offers and, where no conflict of interest exists, to make other decisions that would normally be vested in the client, here the insured." State Farm Mutual Auto. Ins. Co. vs. Traver, 980 S.W.2d at 625, 627 (Tex. 1998). Beyond the choice to settle or defend, it is not all that clear what the insurer gets to control from a legal perspective. Most would agree that the insurer, absent conflict, gets to select counsel to defend the insured. After that, control issues become much more complex.

This paper will focus on control devices. The paper will address issues of control, whether certain controls are permitted, and the legal foundation for these controls including ethical considerations.

II. TYPES OF CONTROL AND CONTROL DEVICES

Types of control that may be exerted by an insurer include: 1. settlement and defense; 2. selection of counsel; 3. the cooperation clause; 4. strategy and tactics; 5. flat fees; 6. litigation guidelines; 7. fee audits by third parties; and 8. staff counsel.

In terms of control devices, one might try to distinguish those that are designed to control the defense, i.e., the insureds, versus those that attempt to control defense counsel. The former types of devices are more frequently permitted while the latter have been met with opposition. For all practical purposes, these controls may not be viewed separately in a vacuum but rather as parts to the picture which work simultaneously.

III. CONTROL DEVICES FOR THE DEFENSE/ INSURED

A. Selection of Counsel

This particular subtopic will be brief, as this is a separate topic of this seminar.

Where the insurer tenders an unqualified defense to the insured, the insurer is entitled in most cases to select counsel to defend the insured. American Physician Ins. Exchange vs. Garcia, 876 S.W.2d 842, 846 (Tex. 1994). The insurer, however, does have a duty to select competent defense counsel. Ranger County Mutual Ins. Co. vs. Guin, 723 S.W.2d 656, 659 (Tex. 1987). Where the insurer offers a qualified defense to the insured, the insured may reject such defense, select its own counsel, and seek payment for such fees if there is coverage. Steel Erection Co. vs. Travelers Indem. Co., 392 S.W.2d 713 (Tex. Civ. - App. San Antonio 1965, writ ref'd n.r.e.) and Britt vs. Cambridge Mutual Fire Ins. Co., 717 S.W.2d 476 (Tex. App. - San Antonio 1986, writ ref'd n.r.e.).

This area may prove to be fertile ground for litigation if the American Home decision remains the law. An insured, especially a sophisticated insured, will undoubtedly question the insurer's selection of counsel if the insured must share representation with its insurer who has a similar but arguably separate agenda.

B. Control of Settlement

The insurer who offers an unqualified defense is entitled to control settlement. Traver, 980 S.W.2d at 627. Perhaps more than any other device, this element of control is unfettered subject only to a duty of acting as an ordinarily prudent insurer would do under the same or similar circumstances. G.A. Stowers Furniture Co. vs. American Indemnity Co., 15 S.W.2d 544, 547 (Tex. Comm'n App. 1929, holding approved).

On the other hand, where a qualified defense is offered and rejected, the insurer is not entitled to control settlement although the insured's actual control and choices may be limited. See State Farm Fire & Casualty Co. vs. Gandy, 925 S.W.2d 696, 714 (Tex. 1996).

This element of control may become complicated where consent must be given to the insurer by the insured. Consent requirements are typically found in professional liability policies. The failure of the insured to consent to settlement in this type of policy may result in absolving the insurer for any excess liability. See Saucedo vs. Winger, 915 P. 2d 129, 134 (Kan. Ct. App. 1996).

C. The Cooperation Clause

A subtle but effective control device frequently and justifiably invoked by the insurer is the "cooperation clause." While this particular clause is the subject of a complete topic in this seminar, it is unquestionably a control tool that an insurer can and does use to direct the defense and influence any settlement. Broadly stated, the insured has a duty to cooperate with the insurer in the investigation and defense of a claim. This clause does not mean that the insured has to do whatever the insurer requests including disputing liability when there is no basis to do so or adhere to the insurer's demands for a certain strategy. Automobile Underwriters Ins. Co. vs. Long, 63 S.W.2d 356, 359 (Tex. Comm'n App. 1983, holding approved). What the clause does mean is that the insured cannot impose liability on the insurer, i.e., default or consent judgment, or deprive the insurer of any valid defense. McGuire vs. Commercial Union Ins. Co., 431 S.W.2d 347, 352-353 (Tex. 1968).

While forceful in tone, the cooperation clause in Texas has been narrowly limited and governed, in most cases, by a prejudice standard. In other words, there may be a complete lack of cooperation, but absent prejudice to the insurer or the most egregious of violations, a breach of this clause will not preclude coverage. Liberty Mutual Ins. Co. vs. Cruz, 883 S.W.2d 164, 165-166 (Tex. 1983).

D. Strategy and Tactics - A Hot Area for Conflict

Insurers have long operated under the presumption that when they offer an unqualified defense to the insured they are entitled to control strategy and tactics in the litigation. This presumption, however, is currently being tested in the Texas Supreme Court as a result of the Corpus Christi Court of Appeals ruling against the insurers. See Northern County Mutual Ins. Co. vs. Davalos, Cause No. 02-1007 (argued October 8, 2003).

In Northern County Mutual Ins. Co. vs. Davalos, 84 S.W.2d 314 (Tex. App. - Corpus Christi 2002, pet. granted), the insured, Timoteo Davalos, was involved in an automobile accident. Davalos sued the other driver involved as well Davalos' own insurer. That suit was filed in Matagorda County. Several months later, the driver defendant in Davalos sued Davalos in Dallas County. Because Davalos could not tender the Dallas County suit to his insurer over the Christmas holidays, Davalos' counsel in the Matagorda case answered the Dallas County suit subject to a motion to transfer and/or abate the Dallas County suit to Matagorda County. When Davalos promptly tendered the Dallas County suit for a defense to his insurer, Northern County refused to defend until Davalos waived or withdrew his motion to transfer venue. Davalos refused and later sued Northern County for breaching its duty to defend and violations of Tex. Ins. Code Ann., art. 21.55 (Vernon Supp. 2004).

Northern County claimed that it had the contractual right to control litigation tactics including choice of venue. Northern County relied on dicta in a concurring opinion where the insured colluded with a Plaintiff to impose liability on the insurer. Rodgriguez vs. Texas Farmers Ins. Co., 903 S.W.2d 499, 512 (Tex. App. - Amarillo 1995, writ denied) (Quinn, J. concurring). "It cannot be sincerely disputed that motions to transfer venue or dismiss via special appearances are defense tactics available to an insurer. They have potential to influence the course of the proceeding." Id. Northern County contended Davalos refused to cooperate with it despite its own representative testifying that neither Davalos nor his counsel breached any duty to cooperate.

The Corpus Christi Court of Appeals found that Northern County breached its duty to defend and affirmed the summary judgment in favor of Davalos.

Northern County's argument in the Texas Supreme Court focused on its right to exclusive control of the defense when an unqualified defense was tendered. Petitioner's Brief on the Merits, pp.6-12. On the other hand, Davalos took the position that decisions regarding strategy and tactics belong to the client, i.e., Davalos, and Davalos' defense counsel. Specifically, Davalos contended that the insurer cannot override or interfere with the professional judgment of defense counsel. This fact finds strong support under Texas law which observes that issues of strategy and tactics are the essence of professional judgment. See Traver, 980 S.W.2d at 627-628. See also Respondent's Brief on the Merits, pp. 21-28.

Furthermore, an insurer cannot impose new conditions precedent or require an insured to waive his rights in order to obtain a defense. Automobile Underwriters Ins. Co. vs. Long, 63 S.W.2d at 359. Better stated an insured does not waive his own affirmative rights in order to receive his defense.

Understandably, several insurers and one insurance association came to Northern County's defense suggesting that the Court of Appeals' opinion in Davalos represented the end of control for insurers if the decision was allowed to stand. Surprisingly, one of the nation's largest insurers, however, has appeared to side with Davalos in suggesting that strategic calls are left to the independent judgment of counsel. Brief of Amicus Curiae American International Companies, pp.7-12. The outcome of Northern County vs. Davalos will certainly provide some guidance on who ultimately gets to make these strategic and tactical calls and perhaps clarify the impact of American Home on the attorney client relationship.

IV. CONTROL DEVICES FOR DEFENSE COUNSEL

A. Fixed Fee

Another control device is a fixed fee arrangement between the insurer and the insured's lawyer. This control device is hardly subtle. It provides for a fixed fee for defense counsel and a strong disincentive for defense counsel to pursue and conduct discovery before attempting to evaluate and settle a case, but provides strong incentive to settle early if the settlement authority is adequate to do so. In the dual client relationship espoused by American Home, however, it arguably sends the message that the insurer only wants the least amount possible done on a particular matter which may work to the detriment of the insured. In its worst form, this type of arrangement could result in the civil law equivalent of a grossly under-funded lawyer defending a capital murder case.

In this scenario, a fixed fee arrangement in defending a liability claim is not just a control device but also a stranglehold of the entire defense of the insured. Several years ago, a Texas law firm took over the defense of numerous cases for a managing agent of a recognizable insurer. Many defense attorneys in Texas were told to pack up their files and send them to this firm. They did so and the cases were defended to the detriment of the insureds. The amount spent per case may have been less than $2,000. Having experienced firsthand the type of defense offered in a fixed fee arrangement which resulted in a verdict five (5) times over the policy limit, the effort by defense counsel was arguably a direct reflection of the fixed fee.

The fixed fee is a control mechanism designed to control litigation expenses and in doing so, limits the defense of an insured. More importantly, it can present an ethical dilemma for those lawyers who embrace this arrangement. Furthermore, without the ability to modify the arrangement as the case develops, the fixed fee arrangement invites financial disaster for the attorney and potentially increases the exposure for their client(s). While Texas ethical rules permit this type of arrangement, the ethical opinion also points out that it is incumbent on the defense lawyer to make up any deficiency and suffer the economic pressure. Tex. Comm. on Professional Ethics, Op. 542 (2002). This fact makes the fixed fee arrangement a losing proposition in more ways than one.

B. Litigation Guidelines

When combined with common sense and flexibility in their application, litigation guidelines can help avoid unnecessary expense and help control costs. For many defense attorneys, however, few words spark more negative responses than the words "litigation guidelines." To some, these words are synonymous with the statement "we are cutting your bill." These "tools" in their extreme form are used without human intervention, disregard common sense and are a blatant control device used by some insurers to control everything about the defense of the insured. Despite Texas' prohibition against this type of application, many insurers flaunt their use and further drive a wedge between themselves and defense counsel retained to protect their insureds. The pressure regarding litigation guidelines for outside counsel is problematic and for staff counsel the heat has to be enormous.

Litigation guidelines sometimes address almost every aspect of the defense such as the retention of experts, whether and how much legal research may be done, who may perform certain tasks, whether a deposition may be videotaped, whether an investigation may be conducted, whether other litigation tools may be used, whether certain motions may be filed, and who is to prepare various legal documents.

No Texas appellate court has squarely addressed this issue, but a 2000 Ethics Opinion clearly and unambiguously rejected the use of litigation guidelines. See Tex. Prof. Ethics Comm., Op. 533 (2000). The question presented in this opinion was: "May a lawyer, who is retained by an insurance company to defend is insured, ethically comply with litigation/billing guidelines which place certain restrictions on how the lawyer should conduct the defense of the insured?" Id. at p.1. The Committee answered this issue in the negative.

In one litigation manual of a major insurer, the guideline provided: "Direction of the overall claim investigation is the responsibility of the claims technician. Investigation shall be conducted by claims personnel with guidance from counsel where appropriate. Counsel shall not conduct investigation. All requests for investigation shall be addressed to the claims technician handling the case." Emphasis added. This same "Management Program" provides on expert witnesses: "Expert witnesses, including medical witnesses, shall not be engaged without the claims technician's prior approval. Medical examinations will be arranged by the claims technician, unless otherwise authorized." Emphasis added.

Ethics Opinion 533 cites seven (7) examples which are prohibited limitations on defense counsel:

  1. Whether to hire an expert in the defense of the insured;
  2. What, if any, legal research may be conducted by the lawyer in defense of the insured;
  3. What, if any, depositions may be taken in the defense of the insured;
  4. Whether the defense counsel may investigate the claims made against the insured;
  5. Whether particular depositions may be videotaped;
  6. Whether any motions, including, motion to dismiss or for summary judgment, may be filed; and
  7. Whether the lawyer or a paralegal should engage in the preparation of various documents.

Tex. Prof. Ethics Comm., Op. 533, p.2.

The authors of Opinion 533 in rejecting the propriety of litigation guidelines focused on the impairment of an attorney's professional judgment. Op. 533 at pp. 2-4. "The attorney-client relationship is a personal relationship in which the client generally must trust the lawyer to exercise appropriate professional judgment on the client's behalf." Id. at p.3. The language of the opinion states:

When a lawyer has been retained by an insurer to represent an insured, the representation may be limited to matters related to insurance coverage. (Rule 1.02, Comment 4). However, when restrictions in litigation/billing guidelines direct and control legal services rendered by the lawyer to a client and how those services are to be delivered, imposing such restrictions upon the lawyer would result in a violation of the Rules by the lawyer. Although, the lawyer is free to enter into an agreement with the insurer regarding his fee and services to be rendered for the insured/client, such agreement cannot override the ethical responsibilities of the lawyer under the Texas Disciplinary Rules. In other words, regardless of such agreement with the insurer, the lawyer must at all times be free to exercise his or her independent professional judgment in rendering legal services to the client.

Id. at p. 4.

The prohibition of litigation guidelines, however, is not carte blanche for defense counsel to engage in a financial windfall. The Montana Supreme Court advised:

We caution, however, that this holding should not be construed to mean that defense counsel have a "blank check" to escalate litigation costs nor that defense counsel need not ever consult with insurers. Under Rule 1.5, M.R. Prof. Conduct, for example, an attorney must charge reasonable fees. See Rule 1.5, M.R. Prof. Conduct (providing in part that "[a] lawyer's fees shall be reasonable"). Nor, finally, should our holding be taken to signal that defense counsel cannot be held accountable for their work.

In the Matter of the Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2000 WL 502545, p.2 (Mont. 2000).

Other jurisdictions do have a not per se prohibition of an insurer's use of litigation guidelines, finding instead that they should be examined on a case by case basis. See Pennsylvania Ethics Op. 01-200 (2001), 2001 WL 1744775 and Utah Ethics Opinion 02-03 (2002), 2002 WL 340262. At least one so called legal commentator says the Montana Supreme Court got it all wrong when it outlawed litigation guidelines and other states should not follow Montana. William T. Barker, "Insurer Litigation Guidelines and Outside Bill Review: What Now? Part II: A Critique of the Montana Supreme Court's Litigation Guideline Ruling," 23 Insurance Litigation Reporter, 529 (2001). Mr. Barker's article critiquing the prohibition of litigation guidelines belittles anything other than the dual client model, dismisses the notion of the permeated potential conflicts between insureds and insurers, and announces that no lawyer will allow insurers to compromise an attorney's professional judgment. These authorities and legal commentators give credence to this control device, which has been rejected in Texas.

Whether litigation guidelines are unethical or illegal unfortunately may not be the actual issue. The practical effect for defense counsel, who exercises their best legal judgment but in doing so legal violates the guidelines, is simply a loss of business. The secondary impact may very well be one in direct opposition to the reduced costs being sought. Potential legal defenses will be overlooked and the decreasing quality of the legal defense combined with improved networking and no similar restrictions on plaintiff's counsel will result in increased judgments, settlements and the number of lawyers on the plaintiff's side of the bar willing to take on new cases. Like it or not, ethical or unethical, billing guidelines are an obvious restriction imposed by the insurer. These guidelines can and do affect the type of defense received by an insured and the ultimate outcome of the case.

C. Fee Statements Audits

Almost every state that has considered this issue has rejected any wholesale allowance of submitting a defense lawyer's bill to a third party auditor. In Texas, the issue was framed as follows:

"Without the informed consent of the client, may a lawyer, who is retained by an insurance company to defense its insured, be required by the insurance company to submit fee statements to a third-party auditor describing legal services rendered by the lawyer on behalf of the client?"

Tex. Comm. Prof. Ethics, Op. 532 (2000).

The Texas Committee answered the issue in the negative finding such information "confidential" and protected by Tex. Discp. Rule 1.05. Absent "informed consent," this material cannot be turned over. Interestingly, Opinion 532, the Committee wrote: "Although a lawyer defending an insured is normally selected, employed, and paid by the insurance company, it is established Texas law that the lawyer's only client in that situation is the insured." Id., p. 2. Connecticut concurs with this reasoning and conclusion regarding fee statement audits. Ethics Opinion 00-20 (2000), 2000 WL33170661. Other states create a distinction in billing statements between confidential and nonconfidential information, the former being prohibited from disclosure and the latter being allowed to be disclosed. Penn. Ethics Op. 01-200 (2001), 2001 WL1744775.

Just like the litigation guidelines, the existence of an audit by a third party or the insurer itself serves as a practical tool for the insurer to control litigation costs, but unfortunately often with the accompanying overriding effect on defense counsel's independent legal judgment. As with litigation guidelines, those who complain may soon find they have nothing more to complain about.

D. Staff Counsel

One subject which is generating activity in Texas is the propriety of staff counsel. A Texas district court found the use of staff counsel constituted the unauthorized practice of law while the Eastland Court of Appeals reached the opposite conclusion. See American Home Assurance Co., Inc. vs. Unauthorized Practice of Law Committee, 121 S.W.3d at 831. Whether the use of staff counsel to defend an insured is prohibited or not, for the moment, their existence and use cannot be denied.

With the use of staff counsel, it is argued that there is no independent buffer as compared to outside counsel who are not directly employed by the insurer. With the use of staff counsel, the insurer has, at the very least, the right to control both the defense and defense counsel without engaging in the "fiction" mentioned in American Home. With an insurer's own internal controls, there cannot be much debate that the use of staff counsel is another control device that the insurer possesses. Further, the employment of staff counsel keeps the debate "in house." Whatever disagreements may exist between the insurer who uses its own employees to defend its insureds and staff counsel, the debate remains internal.

Given the American Home decision finding that the defense lawyer now has two (2) clients, the impact of the use of staff counsel as a control device is greatly magnified. The insured defended by staff counsel must rely on staff attorneys who have the enormous burden of standing up to their employers who may seek to interfere, override, or discount counsel's professional judgment while retaining the ability to review the attorney's performance, make decisions on promotions, salary and continued employment. Whatever pressures are felt by outside counsel, these stressors have to be compounded where staff counsel may not only lose a client, but their job.

This control is compounded when an insurer and staff counsel undertake the defense of an insured where a reservation or rights or material conflict exists. The appearance of impropriety arises in these situations with the perception by the insured that the free flow of information is not restricted or impaired between the insurer and defense counsel. This perception justified or not, could obviously have an adverse impact of the free flow of information between the "other client" - the insured, and staff counsel, ultimately working to the detriment of all, including the legal system itself.

Staff counsel is also typically governed by its own code of conduct, which frequently prohibits taking action adverse to the insurer, staff counsel's employer. Sometimes staff counsel are given an out through side agreements or pledges where the employer's instructions may work adversely to the insured. This exception to the loyalty requirement to the insurer would likely provide little comfort to the insured and at the least create a practical and ethical quandary for staff counsel.

The use of staff counsel, for all practical purposes, is the ultimate control device and is the consolidation of all devices of control in favor of the insurer. Whether a proponent or opponent of staff counsel, it cannot be denied that the use of staff counsel to defend insureds is the best example of exclusive control by an insurer. American Home, while supporting their use, greatly complicates the ethical and "fictional" dilemma faced by defense counsel and best representation of the "other client," the insured.

V. Conclusion

While many insurers understand the conflicts, dilemmas and limitations of the control devices discussed above and several have already abandoned or limited their use of some or all of these devices, other insurers facing the competitive pressures of rising costs and competitive premiums, may be greatly encouraged by American Home to implement and enforce even more stringent standards. As a result, Defense counsel, whether on staff or otherwise, will be challenged by these devices and will need further clarification from the courts and the ethics committee on how to address these issues when conflicts arise. If recent trends continue, the issue of who is really controlling the defense becomes clearer as reliance on the independent legal judgment of counsel in the best interests of the insured slowly slips away.