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LAFAYETTE, Ind. -- While insurance interests want the ruling overturned, policyholders don't anticipate much effect from a trial court decision that prohibits insurers from using their own salaried defense lawyers to defend policyholders.

The Indiana Supreme Court last week said it would hear the appeal of a trial court case that disqualified one insurance company from using an in-house attorney to defend a policyholder and another insurance company from using its captive law firm. Oral arguments are set for Oct. 14.

Celina Insurance Group and Cincinnati Insurance Co. were found to be engaging in "the unauthorized practice of law," according to the June ruling from Tippecanoe Superior Court in Lafayette, Ind.

In 1996 and 1997, Celina, Ohio-based Celina Insurance had used an in-house lawyer, Keith Faber, to defend a policyholder and subsequently represent her in mediation. The plaintiffs, displeased with the meditation, filed a motion to disqualify Mr. Faber, attacking his in-house role in the case.

At that time, Fairfield, Ohio-based CIC filed a motion to join the case, "claiming a direct and material interest," according to the trial court ruling. CIC owns and operates a captive law firm, Berlon & Timmel, that it uses to defend its policyholders.

The trial court's June ruling disqualified Mr. Faber from representing Celina's policyholder and required Celina to stop using staff lawyers rather than counsel hired from professional corporations to defend policyholders. The court also found that CIC, by running its captive law firm, was "engaging in the unauthorized practice of law," and had to stop this practice.

The ruling cited the Professional Corporations Act in Indiana, which allows "one or more attorneys (to) form a professional corporation to render services that may legally be performed only by an attorney." The ruling noted that the state Supreme Court issued a regulation in keeping with that act, which "leads to the inference that non-professional corporations may not practice law."

CIC's captive was found to purport "to be an independent law firm when it is an office for in-house counsel," the ruling stated.

Kentucky and North Carolina have similar laws.

Most insurance policies say the insurer must defend a policyholder against a lawsuit and that the insurers are allowed to choose the lawyers, said Mark Huller, senior counsel and general manager of CIC's legal department-trial division. The trial division is the Berlon & Timmel firm.

Mr. Huller criticized the trial court's decision. "Whether you pay an attorney a salary or hire him from the outside doesn't change anything," he said. "The individual attorney is practicing law, not the insurance company."

The American Insurance Assn., the American International Group Inc., and the National Assn. of Independent Insurers were among many who have filed amicus briefs in support of the insurers.

"The only other way (to defend a policyholder) would be to hire a licensed outside attorney," said Stef Zielezienski, senior counsel for the AIA in Washington. It would be nearly impossible to do that in a cost-effective way that would ensure a hired lawyer's expertise in insurance issues, he said.

But risk managers have showed little concern.

"If we have large claims, we have our own in-house counsel," said David L. Lancey, manager-corporate risk management at Columbus, Ind.-based Arvin Industries Inc., a manufacturer of automotive parts. "We wouldn't rely on the insurance company's attorneys."

Lawrence Cistrelli, director of risk management at Ball State University, said he did not expect the court ruling to affect policyholders.

"I can't see where it would make any difference for a policyholder," he said. Because all lawyers, whether in-house or outside, must follow certain ethics rules, the ruling would not affect the quality of representation, he said.

One risk manager, however, applauded the trial court finding.

"I would be in favor of that (court) ruling," said Coral Hostetler, who is responsible for risk management at The Commodore Corp., a Goshen, Ind.-based manufacturer of mobile homes. "We have an agreement with our insurer that they can't use" their lawyers, he said. While "they have expertise with insurance and liability issues," they do not have expertise in manufacturing, or when it comes to defending a case on its merits, he said.

Kent D. Syverud, dean and Garner Anthony professor at the Vanderbilit University Law School, said he thinks staff counsel are "the most economical way to handle routine insurance cases. It is troublesome to impose one form of economic organization on the delivery of legal services."

The real reason behind legal disputes about staff counsels is a "distrust that they might not exercise independent judgment," but might be controlled by insurers, Mr. Syverud said. "But in most cases, there are no conflicts."

Cincinnati Insurance Co. vs. Wills, Indiana Supreme Court, No. 79S00-9808-CV458.