Court Panel Slams its Gavel on Allstate
By Andrea Ortega
The Texas Supreme Court's disciplinary panel, the Unauthorized Practice of Law
Committee, has filed a suit against Allstate Insurance Co., alleging the company is
illegally practicing law. The suit argues that Allstate's use of "captive" law
firms is in violation of Texas law, which prohibits corporations from practicing law.
Insurers claim this is a common practice in the industry. "Most companies use
in-house lawyers, and have been using them for close to 30 years," Rod Phelan,
Allstate's defense attorney, said. Phelan, a partner at Baker & Botts in Dallas, said
the committee doesn't like that in-house lawyers are taking work away from private
attorneys who often work for insurance companies.
The suit, filed in a Dallas state court, alleges that Allstate's use of in-house
counsel to handle a policyholder's litigation violates state law because corporations are
not allowed to practice law on behalf of a third-party, in this case the policyholder. The
committee said there is conflict of interest between the policyholder and the insurer.
For instance, should the defending insured tell his attorney that he had been drinking
alcohol before the accident, there would be grounds to deny coverage, said Gary Schumann,
an attorney for Hohmann & Taube in Austin. "It puts the attorney in a real
conflict of interest," Schumann said. Allstate has been using
in-house attorneys for more than 10 years and currently uses services from four captive
firms statewide. While these firms operate independently from Allstate, the firm's entire
clientele base and salaries come from the insurer.
"It's strictly a cost saving issue," Sharon Cooper, Allstate's
spokesperson, said. Cooper explained using staff counsel saves the company on attorney
fees that might be much higher when using an outside counsel, thereby keeping prices down.
Cooper said Allstate does not use in-house attorneys when two policyholders are involved
or when other conflicts arise. She said outside attorneys are used in about half of all
case, usually because of volume. There are approximately 27 Allstate staff attorneys in
Texas' four offices. Cooper said all staff attorneys are required to pass cases on to
outside counsel at the first sign of conflict.
There are only two states, North Carolina and Kentucky, that ban the use of
in-house attorneys by insurance companies. Several states have contested the issue, but
all have since upheld their use.
The practice of using staff counsel is widespread in the industry. Both State Farm
Insurance Co. and Farmers Group Inc. use staff counsel.