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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.


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