The ruling -- in a wrongful termination suit against Farmers brought by a former Early, Maslach litigator -- goes to the heart of a national debate over the professional independence of attorneys paid by insurance companies.

If pursued as expected, Judge Soussan Bruguera's ruling Feb. 3 and its amendment April 13 would place before a California appellate court the key question of whether the industrywide practice of assigning insurance company lawyers to policyholders is inherently illegal, unethical, or both.

Stephen Price, Farmers' vice president in charge of litigation and a co-defendant in Ricketts v. Farmers Group Inc., BC 165961, defends the company's practices as perfectly legal, ethical and widespread within the insurance industry. He says an appeal notice has been filed.

The underlying employment dispute centers on Donald Ricketts, a Santa Clarita solo practitioner hired by Early, Maslach in 1993. One of his glowing performance reviews, dating from 1995, recounted his contributions in complex litigation and concluded he was "unquestionably a great asset to the firm."

But Ricketts says he had serious ethical concerns from the start. In one case, the insured who had been sued and was his client spoke only Spanish. He says Farmers required him to use an interpreter who, unbeknownst to Ricketts, reported some privileged conversations to the insurer. "They [Farmers] used the interpreter to get around the attorney-client privilege, and they used the information they got to void coverage," Ricketts says.

Ricketts complained to his supervisors that Farmers should not apply billing guidelines administered by non-lawyer claims adjusters to attorneys' determinations of their clients' needs. The court found that Price dismissed Ricketts' complaints. And more seriously, the court agreed with Ricketts that when he formally submitted to management documents detailing his concern and recommending changes, "Mr. Price decided and acted with intent to immediately begin a memo trail required by human resources to justify termination."

Early, Maslach and Farmers fired Ricketts in 1996, after a period during which his caseload was doubled. He sued for wrongful termination.

Daniel Whalen of Los Angeles' Engstrom, Lipscomb & Lack represented Ricketts and won $140,000 in general damages plus $2.5 million in punitives. As Whalen explains it, case law did not require the court to find that Ricketts' whistle-blowing was accurate -- only that he had a reasonable basis for his concerns and, as a matter of public policy, his retaliatory firing chilled other complaints.

"But Farmers challenged that, maintaining against clear precedent that the judge had to make a finding as to the truth of his allegations," Whalen recalls with relish. "So she did."

In an April 13 order denying Farmers' request for a new trial, Judge Bruguera wrote "the court, in response to repeated requests by defendants that it do so, finds that defendants Farmers Insurance Exchange and Early, Maslach & Price, by their use of non-attorney personnel to control the defense of insureds did engage in the illegal practice of law, and that supervising attorney-employees of defendants, including Stephen Price, engaged in the illegal practice of law and/or assisted in the illegal practice of law."

Price responds that he has been a trial lawyer for 20 years, and has served not only as a special master in State Bar matters but as a judge pro tem. "I consider myself a very competent and ethical lawyer," he says. Farmers' use of wholly owned law firms and billing guidelines administered in-house is not any different from what the rest of the insurance industry does, he says. "We are acting in the best interest of the policyholders and the public," he explains. "It is how we are able to keep rates down."

Early, Maslach -- now known as Early, Maslach, Price & Baukol -- has some 40 lawyers and was established in 1948. Price says that from the start it has been a creature of Farmers, working for the insurance carrier exclusively and a "captive law firm" variation on in-house counsel. Farmers has about 30 such firms nationwide, he added.

Price confirms that Early, Maslach has become more open about that relationship in recent years, changing its letterhead from one just like that of an independent law firm to one that stated the firm was not a legal partnership to, most recently, a line that explains Early, Maslach is a subsidiary of Farmers. He had no comment on Ricketts' statement that the evolution coincides with his suit, and also says he knows nothing about Ricketts' assertion that he tried to settle the case for $70,000 before trial.

David Freedman of the L.A. office of Oakland's Crosby, Heafey, Roach & May represents Farmers. Neither he nor Farmers' general counsel Jason Katz returned calls Friday.

Since the 1980s, insurance companies have expanded their use of inhouse counsel and captive firms to lower what they paid out in legal fees and the outside firms that lost the work have been fighting back. In 1987, the State Bar of California issued an advisory opinion cautioning that such firms need to work at an arm's length to insure independent representation for policyholder defendants.

In recent years, Kentucky and North Carolina have outlawed the use of insurance company lawyers for such defenses, finding there is an inherent conflict. The Indiana Supreme Court in October explicitly declined to make such a finding, although the court also said, in Cincinnati Insurance Co. v. Wells, 717 N.E.2d 151, that it found "deceptive advertising" in the way a captive law firm presented itself as independent.

The issue is pending before the Montana Supreme Court, in In the Matter of the Rules of Professional Conduct and Insurer-Imposed Billing Rules, 98-612. And last month, the Board of Governors of the Florida State Bar took up a proposed advisory opinion that would require insurance company lawyers to reject claims control practice that might impinge on lawyers' professional judgment.