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Vol. 3, Iss. 5
March 19, 2014

7th Circuit: Insurer's Use Of “House Counsel” Need Not Be Stated In Its Policies

The practice by insurers, of using their own in-house attorneys to defend their insureds, against third-party claims, is one that has been in existence for a while. This is generally referred to as the insurers’ use of “house” or “staff” counsel. Its permissibility has been the subject of judicial and bar ethics committee reviews in various jurisdictions. The Texas Supreme Court served up a Texas-size opinion on the issue in 2008 that included a national survey. With a few exceptions, the practice is considered kosher.

The use of house counsel was the subject of the Seventh Circuit’s opinion in Golden v. State Farm, No. 12-3901 (7th Cir. Mar. 11, 2014). However, at issue was not its permissibility. Rather, the court had before it the question whether State Farm was obligated to inform an insured, in its policy, that “house” counsel may be used.

Cindy Golden purchased an automobile policy from State Farm to insure her 2007 Dodge Nitro. She renewed her policy at regular six-month intervals. The mandatory liability portion of her policy provided that State Farm would pay “attorney fees for attorneys chosen by us to defend an insured who is sued.”

In 2009, Golden was sued as the result of a collision she had been in earlier that year. “She was represented in the suit by Patrick J. Murphy, who worked in the corporate law department of State Farm. At the outset, Murphy fully and accurately disclosed to Golden his status as a State Farm employee. Specifically, Golden received a letter from Murphy explaining that he was an attorney ‘working as a full time employee of State Farm,’ advising her that he had an ethical obligation to ensure that neither his ‘professional judgment’ nor the quality of his legal service would be ‘compromised by any guidelines or other directives that might be issued by State Farm.’ Murphy’s letter also contained the following disclosure regarding any possible conflict of interest: “Based on the information I have received and reviewed to date, I am not aware of any conflict of interest between your position and State Farm’s position in this case. If you are aware, or become aware, of any conflict, please notify me immediately. Should I discover facts that raise a conflict of interest, I will promptly advise you of the nature of the conflict. If you provide me this information in confidence as your lawyer, I will not disclose what you told me to State Farm. If a conflict arises that cannot be resolved, a new lawyer will be selected to represent you at State Farm's expense.”

The suit was bench tried and State Farm paid the resulting $3,608.09 judgment entered against Golden. Golden did not allege that she received deficient representation or that she ever objected to the use of house counsel in her suit. Instead, she – or, really, her attorney seeking class action status for all of the other victims of this insidious omission -- maintained that State Farm owed her a duty to disclose at the time of policy issuance the possibility that house counsel would be used in the event of a third-party lawsuit. Golden note that “historically and traditionally” State Farm and other insurers defended third-party claims against insureds by hiring private, independent attorneys. Golden alleged that the failure to provide such disclosure amounted to a breach of “special, confidential and fiduciary duties and common law duties to disclose;” a breach of the duty of good faith and fair dealing; and unjust enrichment.

The Indiana District Court concluded that State Farm had no duty to disclose the possibility that house counsel might be employed to represent her in the event of a lawsuit relating to the policy. Golden went to the Seventh Circuit, which affirmed.

Golden argued that a certain prior Indiana Supreme Court case required the provision of “advance notice of an in-house counsel arrangement. Specifically, she makes much of the court’s observation that when an insurance company employs house counsel to represent insureds, ‘accurate disclosure of the arrangement is required.’” However, the Seventh Circuit noted that such earlier opinion said nothing to suggest that “accurate disclosure” required more than precisely the sort of disclosure Golden received: “notice in her policy that State Farm would provide counsel of its choosing and an explanation at the time counsel was assigned of the exact relationship between that counsel and State Farm.”

The court also rejected Golden’s unjust enrichment claim, stating: “There is nothing in the complaint to support an inference that State Farm either a) delivered a product different than that promised in the policy (which stated clearly that it would provide counsel of its choice in the event of a lawsuit), or b) was unjustly enriched by its house counsel arrangement. As the Indiana Supreme Court noted …, ‘[I]n the realm of insurance defense, the public may ultimately reap the benefits of better service at lower cost through the use of house counsel.’ This hardly sounds like the makings of a claim for unjust enrichment.”

So let’s recap. Golden was defended (seemingly) without a reservation of rights, State Farm paid the judgment and State Farm’s house counsel practically stood on his head to explain his role as house counsel, what that meant and how Golden’s interests would be protected in the relationship. But to her counsel, seeking class action status, none of that mattered. Instead, all that did was that if State Farm breached a duty to Golden, by a failure to disclose, there is no doubt that it breached the same duty to thousands more insureds. You get the picture.

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