## Facts

- The Kentucky Bar Association (KBA) issued Ethics Opinion E-368 stating it was unethical for a lawyer to contract with an insurer to perform all defense work for a set fee, citing risks to independent judgment and adequate representation.
- The KBA issued Ethics Opinion U-36 stating insurers could not use salaried in-house attorneys to defend insureds under liability policies, citing corporate practice of law and conflict-of-interest concerns.
- The American Insurance Association and other insurers sought court review of E-368; State Farm sought court review of U-36.
- The Supreme Court of Kentucky consolidated the requests as a direct review of advisory ethics opinions under the court’s authority to regulate the practice of law.

## Issues

1. Whether fixed-fee or volume-based “panel counsel” defense contracts with insurers are per se unethical under Kentucky’s professional conduct rules.
2. Whether an insurer’s use of in-house salaried staff counsel to defend insureds is per se impermissible as corporate practice of law or as an unwaivable conflict of interest.

## Decision

- The court declined to approve categorical prohibitions in both opinions.
- As to E-368, the court held fixed-fee defense arrangements are not per se unethical and must be evaluated under existing professional conduct rules on a case-by-case basis.
- As to U-36, the court set aside the blanket ban and held insurers may use staff counsel to defend insureds if the representation complies with the professional conduct rules, including protection of the lawyer’s independent judgment.
- The court reaffirmed that bar ethics opinions are advisory and cannot impose restrictions beyond the court’s rules governing attorney conduct.

## Legal Principles

- Per se bans on insurer-lawyer defense arrangements are improper where existing professional conduct rules can address competence, diligence, loyalty, confidentiality, and independence.
- In an insured-defense relationship, the insured is the lawyer’s client; the insurer is a third-party payor whose financial interests may not control the lawyer’s professional judgment.
- Flat-fee or high-volume defense contracts are permissible if they do not materially limit the lawyer’s ability to provide competent and diligent representation to each insured client.
- Insurer staff counsel arrangements do not automatically constitute unlawful corporate practice of law; the critical constraint is that nonlawyers and corporate interests may not direct or interfere with the lawyer’s professional judgment or duties to the client.
- Conflict-of-interest concerns in insurer defense are managed through ordinary conflict rules, including required disclosure, informed consent where allowed, and withdrawal or declination when a nonconsentable conflict exists.

## Conclusion

The Supreme Court of Kentucky modified and set aside the KBA’s categorical ethics bans, holding that both fixed-fee panel counsel contracts and insurer staff counsel defense are permissible in principle, provided lawyers comply with the Rules of Professional Conduct and maintain independent, loyal representation of insured clients.


Am. Ins. Ass'n v. Ky. Bar Ass'n, 917 S.W.2d 568 (Ky. 1996)