Introduction

Staff counsel are lawyers required to exercise their independent professional judgment and adhere to the same rules of professional conduct that pertain to all outside counsel. However, they must be especially sensitive to their employment relationship with the insurer and take reasonable steps to ensure that they are in fact acting as independent professionals. Not only must they do the right thing, but it is important that there are sufficient elements of transparency and due process in place to demonstrate that it is being done.

The Litigation Management Dimension

The Corporate Legal Times 200 Largest Legal Department Index lists eight insurers among the 25 largest corporate legal departments. This represents the largest single category within the top 25. Of the top three, State Farm Insurance employs 783, Allstate Insurance employs 740 and Liberty Mutual employs715 lawyers respectively in their legal departments. In total, the "Big 8" insurance legal departments employ in excess of 2,700 lawyers in various capacities in-house. Many of these lawyers have litigation management responsibilities. In that capacity they interact with outside law firms and manage insurance defense. In addition, these litigation managers have to manage files that have been referred to staff counsel. What is the nature of that relationship and to what extent, if any, does it differ from the traditional case management relationship they have with arms-length outside law firms?

The insurer has the right to manage the litigation process. This requires staff counsel to consult with the insurer's claims personnel on claims management matters. In fact, as is the case with managing claims with arms length outside counsel, staff counsel may defer to the claim representative's preferences, so long as doing so does not appear to involve any substantial risk to any interest of the insured. How should litigation managers and staff counsel define the parameters of this practice management guideline and demonstrate that they are adhering to it? All litigation managers and staff counsel should be required to read ABA Formal Opinion 01-421 - Ethical Obligations of a Lawyer Working Under Insurance Company Guidelines and Other Restrictions and sign off on it as a component of their professional development. They should be knowledgeable about and capable of referring any queries regarding the propriety of litigation management to statements like the following:

The insurance company usually is in the best position to manage the litigation to the advantage of both the insured and itself in the most cost-effective way.

However, in light of the common employment relationship between the two parties, staff counsel should clearly document all discussions and their reason for deferring to the litigation manager. If the parties are using an electronic case management system, the insurer would be well advised to insert a box that enables the parties to insert a short point form memo or at least check off in a box that they have given due consideration to their respective professional rights and responsibilities and are proceeding accordingly. Not every interchange between the parties needs to be documented, but decisions made at milestones that involve the balancing of independent professional judgment and litigation management should be validated by a documented entry.

Drawing the Line

Where the line is drawn on involvement of the litigation manager is in assigning cases. A litigation manager is certainly entitled, indeed obligated, to make a risk management decision on behalf of the corporation in referring a case to a law firm that in their discretion has the competencies to best represent the insurer's and insured's best interests. There should be case referral criteria in place that indicates when staff counsel is the appropriate choice.

It is important to distinguish between case referral and lawyer selection. Once the case is referred to the offices of staff counsel, the managing counsel of the staff counsel firm must be in a position to exercise his independent professional judgment and assign cases on the basis of a determination of the best interests of the insured which, as indicated above, are usually commensurate with the those of the insurer in full coverage situations. The litigation manager and managing counsel may consult and confer with one another, much like the litigation manager and relationship partner in an outside law firm confer when a case is referred. However, the determination of what staff counsel is best suited to carry a case is for the managing counsel to make. The referral, consultation and case assignment process should be clearly documented. Ethical rules in all state jurisdictions that permit staff counsel firms require that the initial engagement letter outline the nature of the staff counsel relationship and more or less, depending on the state, explain to the client what are their respective rights and responsibilities. In an effort to demonstrate due process, that letter of engagement should also provide a clear message to the client that the staff counsel selection was done on the basis of the exercise of the independent professional judgment of the managing counsel.

What to Do In a Conflict Situation

When staff counsel has reason to believe that a divergence in interests between the insurer and insured may occur, their first obligation is to inform the insured of the situation. Only when adequate consultation has taken place between the staff counsel and the insured should the insurer be brought into the loop. Adequate consultation entails much more than the passing on of information. Staff counsel, at a minimum, should adhere to the following guidelines:

• Explain the nature of the potential conflict.
• Identify defense counsel's obligation to the company to defend the liability suit in a manner that will minimize the loss.
• Identify defense counsel's duty not to act in disregard of the insured's express desires.
• Explain that the joint representation can continue, despite the (potential) conflict, because the conflict is unlikely (at least for the immediate future) to prevent defense counsel from satisfying his obligations to both the company and the insured.
• Explain the costs and benefits to the insured of waiving the conflict.
• Explain that a time may come when the defense counsel's responsibilities to the company and to the insured will actually conflict. When that happens, the insured will have to decide whether to protect the identified interest of the insured or to compromise that interest and allow counsel to proceed with a defense that is calculated to minimize the loss on the liability claim.
• Explain that defense counsel will respect the insured's decision, but may withdraw if the insured decides to do otherwise than as required to defend the liability claim effectively.
• Explain that the decision facing the insured involves coverage or other questions on which defense counsel cannot advise the insured, but concerning which the insured may wish to obtain advice from independent counsel retained and paid for by the insured.
• If excess exposure is an issue, staff counsel can avoid any conflict by making an offer to settle the claim for the full amount of the coverage. The excess is a matter for the insurer and insured to resolve and does not, as such, impact on the staff counsel's obligation to fully represent the interests of the insured as outlined in the terms of reference for the policy. Although staff counsel should advise the insured of avenues they can pursue to investigate the possibility of additional coverage, this is outside the terms of reference of the policy which defines the basis for the service relationship.