State Bar of Arizona Ethics Opinions
99-07: Unauthorized Practice of Law; Communication with Unrepresented Party; Nonlawyers; Insurance Representation (W/DISSENT)
Lawyers ethically may not negotiate with an opposing party’s nonlawyer public adjuster if the adjuster is not supervised by a lawyer. A lawyer may communicate directly with an opposing party who is “represented” by a public adjuster if the adjuster is not supervised by a lawyer or authorized to practice law. [ER 4.2, 4.3, 5.5(b)]
The Committee is in receipt of several requests for opinions involving the conduct of nonlawyers purporting to act as public adjusters within the meaning of A.R.S. § 20-281. In some instances, nonlawyer public adjusters (including a disbarred lawyer) are attempting to negotiate settlement of claims on behalf of insureds, with lawyers acting on behalf of insurers. In other instances, the nonlawyer public adjusters intend to proceed to arbitration, examine and cross-examine witnesses at depositions and at the arbitration hearing, and to present evidence and argument on behalf of the insured. In at least one instance, a nonlawyer public adjuster is attempting to enforce an adjuster's "lien" for services performed. For purposes of this Opinion, "public adjusters" shall mean licensed adjusters under A.R.S. § 20-281 who are not employed by an insurance company or other entity that has counsel who technically would be responsible for supervising the company adjusters.
1. Whether a lawyer may negotiate with an opposing party's nonlawyer public adjuster if the nonlawyer adjuster is not supervised by a lawyer and is not authorized to practice law.
2. Whether a lawyer may communicate directly with an opposing party when the opposing party is represented by a nonlawyer public adjuster.
3. Whether a lawyer may participate in an arbitration hearing of an uninsured motorist claim where the opposing party is represented by a non-lawyer public adjuster who intends to take depositions, appear at the arbitration hearing, offer evidence, examine and cross-examine witnesses, and make legal arguments.
4. Whether a lawyer may ethically honor an independent adjuster's lien for services performed by a nonlawyer.
Applicable Ethical Rules
ER 4.2 Communication with Person Represented by Counsel
In representing a client, a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized by law to do so.
ER 4.3 Dealing with Unrepresented Person
In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.
* * * * *
ER 5.3 Responsibilities Regarding Nonlawyer Assistants
With respect to a nonlawyer employed or retained by or associated with a lawyer:
(a) a partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person's conduct is compatible with the professional obligations of the lawyer;
(b) a lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person's conduct is compatible with the professional obligations of the lawyer; and
(c) a lawyer shall be responsible for conduct of such a person that would be a violation of the rules of professional conduct if engaged in by a lawyer if:
(1) the lawyer orders or, with the knowledge of the specific conduct,
ratifies the conduct involved; or
(2) the lawyer is a partner in the law firm in which the person is
employed, or has direct supervisory authority over the person, and knows
of the conduct at a time when its consequences can be avoided or mitigated
but fails to take reasonable remedial action.
ER 5.4 Professional Independence of a Lawyer
(a) A lawyer or law firm shall not share legal fees with a nonlawyer . . ."
ER 5.5 Unauthorized Practice of Law
A lawyer shall not:
(a) practice law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction; or
(b) assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law.
1. Whether a lawyer may negotiate with a public adjuster who is not supervised by an attorney
The practice of law has been defined as "those acts, whether performed in court or in the law office, which lawyers customarily have carried on from day to day through the centuries . . ." State Bar of Arizona v. Arizona Land Title & Trust Co., 90 Ariz. 76, 95, 366 P.2d 1, 14 (1961), modified on other grounds, 91 Ariz. 293, 371 P.2d 1020 (1962). "Those acts" include, but are not limited to, assisting or advising in the preparation of legal documents, advising about legal rights and representing someone before a court or administrative entity. Even the negotiation of a contract on behalf of a client is the practice of law. In re Fleischman, 188 Ariz. 106, 933 P.2d 563 (1997).
"The practice of law is a matter exclusively within the authority of the judiciary." Hunt v. Maricopa City Employees Merit System Commission, 127 Ariz. 259, 261, 619 P.2d 1036 (1980). The Arizona Supreme Court noted in Hunt that "the determination of who shall practice law in Arizona and under what condition is a function placed by the Arizona Constitution in this Court." Article 3 of the Arizona Constitution places authority within the Judiciary to regulate the practice of law.
Two Supreme Court Rules define who may practice law and who may appear in Arizona courts:
Arizona Supreme Court Rule 31(a)(3) provides that:
Except as hereinafter provided in subsection 4 of this section (a),
no person shall practice law in this state or hold himself out as one
who may practice law in this state unless he is an active member
of the state bar, and no member shall practice law in this state or
hold himself out as one who may practice law in this state, while
suspended, disbarred, or on disability inactive status.
[Subpart 4 of section (a) of Rule 31 specifies 10 exceptions to
the aforementioned requirements that only State Bar of Arizona
members may practice law in Arizona. Those 10 exceptions
cover very limited situations, none of which permits a nonlawyer,
charging a fee, to represent anyone in a Superior Court case or to
otherwise give legal advice.]
Arizona Supreme Court Rule 33(c) provides that:
No person shall practice law in the State of Arizona without being
admitted to the bar by compliance with the following rules, provided
that an attorney practicing in another state or territory or insular
possession of the United States or the District of Columbia may be
permitted by any court to appear in a matter pro hac vice, in accordance
with the procedures set forth in subpart (d) of this Rule.
But, A.R.S. § 20-281 provides as follows:
A. An 'adjuster' is any person who, for compensation as an independent
contractor or as the employee of such an independent contractor, or for
fee or commission investigates and negotiates settlement of claims
arising under insurance contracts, on behalf of either the insurer or the
B. A licensed attorney at law who is qualified to practice law in this state,
or a salaried employee of an insurer or of a managing general agent, or a
licensed agent or broker who adjusts or assists in adjustment of losses
arising under policies procured through such broker, or issued by the
insurer represented by such agent, is not deemed to be an 'adjuster' for
the purposes of this article.
A.R.S. § 20-281 provides that an "adjuster" may be a nonlawyer and, in that capacity, may investigate and negotiate settlement of claims under insurance contracts. The Legislature has apparently permitted nonlawyers to engage in what would otherwise be the unauthorized practice of law. In re Fleischman, 188 Ariz. 106, 933 P.2d 563 (1997) (even the negotiation of a contract is the practice of law.).
The Committee struggled with the impact of A.R.S. § 20-281 in the ongoing debate about what constitutes the unauthorized practice of law. The Supreme Court is vested with the sole authority under Articles of the Constitution to regulate the conduct of lawyers and to define the parameters of the practice of law - both unauthorized and authorized. Yet the Legislature is vested with the exclusive authority to enact legislation, subject always, of course, to judicial review by the Supreme Court in the event that a justiciable case or controversy implicating a statute comes before the Court.
The Committee believes that § 20-281 may be read as allowing nonlawyers to earn their living in a manner that the Supreme Court would deem to be the unauthorized practice of law. Nevertheless, since § 20-281 is the law, and remains so until (if ever) challenged in court, the Committee is powerless to ignore, nullify, or alter the law. Thus, under the current state of affairs, the Committee is without authority, power, or jurisdiction to declare that nonlawyers are engaged in the unauthorized practice of law when they exercise rights granted to them by the Legislature.
Nevertheless, lawyers are subject not only to the laws of the State, but to the rules of practice imposed upon them by the Supreme Court. The Committee believes that the Supreme Court's fairly clear and straightforward dictates about what acts constitute the unauthorized practice of law, including rules against assisting nonlawyers in the practice of law (ER 5.5), have been drawn in such a way to qualify negotiations with an adjuster under § 20-281 as assisting the unauthorized practice of law by the lawyer. Several states have found such similar licensed public adjusters to be engaged in the unauthorized practice of law and have struck down the licensing statutes where the statutes permitted the adjusters to negotiate settlement of insurance claims on behalf of their clients. See, e.g., Prof. Adjusters Inc. v. Tandon, 433 N.E.2d 779 (Ind. 1982); Meunier v. Bernich, 170 So. 567 (La. App.1936). One case even noted the distinction between independent adjusters engaged in the unauthorized practice of law and adjusters hired by insurance companies. The latter form of adjuster properly acts as an agent of the insurance company and works under the supervision of the insurance company's attorney. See Rhode Island Bar Assn. v. Lesser, 68 R.I. 14, 26 A.2d 6 (1942).
Thus, unless the Legislature or the judiciary modifies or overrules § 20-281, it appears that the Legislature has authorized nonlawyers functioning as public adjusters to engage in certain practices and activities that the Supreme Court has defined as the practice of law. Lawyers still are bound by the Supreme Court dictates which prohibit lawyers from assisting nonlawyers in the unauthorized practice of law, and the Committee believes that negotiating by lawyers with independent public adjusters constitutes the "assistance" of nonlawyers in the unauthorized practice of law.
"Assisting" someone in the unauthorized practice of law most commonly has been applied to situations where a lawyer has a business relationship with the nonlawyer who is engaged in the unauthorized practice. See, e.g., FL. Bar v. Bowles, 480 So.2d 636, 11 F.L.W. 5 (1985)(lawyer disbarred); People v. Cassidy, 884 P.2d 309 (CO 1994)(lawyer suspended); Shaw v. State Bar of CA, 212 Cal. 52, 297 P. 532 (1931)(lawyer disbarred for assisting licensed adjuster). However, at least one ethics treatise finds that an opposing attorney who negotiates with a lawyer not admitted in the state (and thus engaged in unauthorized practice) "has assisted this violation, and has violated both Rule 5.5(b) and Rule 8.4(a)". Geoffrey C. Hazard, Jr. and W. William Hodes, The Law of Lawyering, 2d Ed., § 5.5:203 (1993 Supp.). Thus, an attorney who participates in negotiations with someone engaged in the unauthorized practice of law facilitates the unauthorized practice in violation of ER 5.5(b). The Supreme Court may be encouraged to expand the exceptions contained in its Rule 31(a)(4) to except the negotiation of claims by lawyers with independent public adjusters.
For now, the Committee must fall back on ER. 5.5 which provides that lawyers are prohibited from assisting the unauthorized practice of law. Negotiating with an opposing party's nonlawyer representative, who may be an adjuster, but who is not supervised by an attorney and who is not authorized to practice law, is ethically impermissible. See In re Fleischman, supra. Nonlawyers include individuals who have graduated from a law school but are not admitted to practice anywhere, disbarred lawyers, document preparation services, independent adjusters, and independent paralegals not supervised by an attorney.
2. Communication with an opposing party "represented" by an adjuster
It would appear ethically proper for a lawyer to communicate directly with an opposing party when the opposing party is "represented" by a nonlawyer adjuster. ER 4.2 may be interpreted to provide that, if a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, he should be able to communicate about the subject of the representation with a party the lawyer knows to be represented by a nonlawyer. ER 4.2 only precludes an attorney from communicating with someone who is represented by an attorney.
3. Participation in arbitration with an adjuster
A lawyer may not participate in an arbitration hearing on an uninsured motorist claim where the opposing party is represented by a nonlawyer who is to take depositions, appear at the arbitration, offer evidence, examine and cross-examine witnesses, and make legal arguments. Each of these are "acts which lawyers customarily have carried on from day to day through the centuries." Arizona Land Title, 366 P.2d at 14, supra. Thus, a lawyer may not "assist" a nonlawyer adjuster in the unauthorized practice of law by participating in an arbitration hearing with the adjuster.
4. Public adjuster liens
The Committee can take no position as to whether an adjuster's lien for services performed is valid as a matter of substantive law. The easy response is to suggest that the client pay under protest the previously incurred nonlawyer adjuster services and thereafter the client's new lawyer may obtain the adjuster's file. If the adjuster's file contains only those matters which would not constitute the unauthorized practice of law, but rather factual information only, the question may be resolved in favor of honoring the so-called lien. However, if the adjuster's file contains information traditionally cognizable as the practice of law, it would appear unethical for a lawyer to honor the adjuster's lien for services which only a lawyer could have provided in the first instance.
Special Note: The Committee specifically limits this Opinion to the inquiries before it. The Committee reaches no conclusion respecting any commercial transactions including, without limitation, negotiations by lawyers with nonlawyer accountants, real estate brokers, and title companies. Moreover, the Opinion only addresses negotiations with public adjusters who are not supervised by an attorney.
1. A lawyer may not ethically negotiate with an opposing party's nonlawyer adjuster representative, if the nonlawyer adjuster is not supervised by an attorney and is not authorized to practice law.
2. A lawyer may ethically communicate directly with an opposing party when the opposing party is represented by a nonlawyer adjuster if the nonlawyer adjuster is not supervised by an attorney and is not authorized to practice law.
3. A lawyer may not ethically participate in an arbitration hearing of an uninsured motorist claim where the opposing party is "represented" by a nonlawyer adjuster who intends to take and attend depositions, appear at the arbitration hearing, offer evidence, examine and cross-examine witnesses, and make argument.
4. A lawyer may ethically honor an independent adjuster's lien for services performed if the services are those which any nonlawyer could lawfully perform. (This opinion may not be relied upon as to the validity of any such independent adjuster's liens as a matter of substantive law.)
We share the Committee majority's concerns about unregulated public adjusters. The public has no assurance of a public adjuster's competence or honesty. In some instances, disbarred lawyers are continuing to represent clients by holding themselves out as public adjusters. We agree with the majority that the steps ought to be taken to protect the public.
We are not convinced, however, that the ethical rules address these concerns in the manner that the Committee majority proposes. We agree that attorneys are not required to treat adjusters like attorneys by refraining from direct communication with a "represented" opposing party under ER 4.2. But we question whether ER 5.5 prohibits lawyers from dealing with public adjusters adversely on behalf of clients. The Committee majority reaches that conclusion by interpreting several elements of ER 5.5. The Committee debated at least three of these issues in length. We think it is important to publish the minority view on these issues.
The first issue is the scope of the phrase "the practice of law" as used in ER 5.5. In the portion of the opinion that addresses negotiation of claims settlements, the Committee majority arrives at a broad definition of "the practice of law". The Committee majority concludes, based on a broad reading of In re Fleischman, that negotiation and settlement of an insurance claim by a nonlawyer public adjuster is "the practice of law."
The Supreme Court's expression of its holding in Fleischman suggests a considerably narrower interpretation. The Court said:
We find that respondent's effort and work [negotiating a contract for a client] constitute acts that are customarily performed from day to day in the ordinary practice of members of the legal profession. That they also may be performed in part or in whole by nonlawyers from time to time does not exclude them from the practice of law.
188 Ariz. 106, 111, 933 P.2d 563 (1997) (emphasis added). The emphasized language implies that "the practice of law" by a member of the Bar (including a judge) includes activities that do not constitute "the practice of law" when engaged in by a nonlawyer. To put it in another way, not every activity that is "the practice of law" for a lawyer--negotiating a contract, for example--is reserved exclusively for lawyers.
The Committee majority expresses some trepidation before wading into the controversy over nonlawyers performing arguably legal tasks. This caution is well-founded. Defining the "practice of law" that is the exclusive province of the Bar is an exercise in law, not ethics. The issue has implications far beyond the scope of this Committee's jurisdiction. The jurisdiction policies of this Committee prohibit us from expressing an opinion on a "pure" question of law. We may express an opinion on a "mixed question of law and ethics," which the interpretation of ER 5.5 arguably is. But we have previously declined to decide what constitutes the practice of law in the context of ER 5.5. See Ariz. Op.93-05 at 5, n.4. Perhaps in the present case also we should abstain. The Supreme Court can interpret, in the first instance, its own rules about "unauthorized practice of law."
A second point of controversy is whether the public adjuster's practice is "unauthorized." The Committee majority notes that A.R.S. § 20-281 sanctions the activities of public adjusters. This conflicts with the majority's view of what constitutes that "practice of law" under Fleischman. The majority resolves this dilemma by observing that lawyers are bound by the dictates of the Supreme Court. This observation may be restated as a conclusion that we must interpret the ethical rules--including the term "unauthorized" in ER 5.5--according to Supreme Court precedent. The Court, the majority says, has not "authorized" the independent adjusters; so ER 5.5 prohibits lawyers from dealing with them.
This conclusion is difficult to square with the relatively clear terms of A.R.S. § 20-281. Regardless of whether the independent adjusters' activities amount to the "practice of law," the Legislature has "authorized" those activities. The Supreme Court has not held the statute unconstitutional or otherwise invalid. A substantial number of lawyers have, or will have, clients who must deal with public adjusters in the course of their lawful affairs. The majority's interpretation of ER 5.5 leaves these clients--insurance companies and insureds alike--without legal representation. The prospect that some public adjusters will act unscrupulously makes this abdication all the more troubling.
A third issue that generated Committee debate is the meaning of the term "assisting" in ER 5.5. The Committee majority interprets "assisting" expansively to include a lawyer who negotiates or otherwise deals adversely with a public adjuster. That lawyer, the majority believes, is "assisting" the public adjuster by enabling him to ply his trade.
The ordinary meaning of the word "assist" is not so broad. Ordinarily the word connotes cooperation or affirmative aid of some kind. The Committee majority cites cases that apply ER 5.5 and similar rules where a lawyer has a business relationship with a nonlawyer engaged in unauthorized practice. Nothing in the text of ER 5.5 or the commentary provides a basis for expanding that common-sense interpretation.
The Committee majority's conclusion has immense implications. If negotiating an agreement for another party is "the practice of law", then real estate brokers, sports agents, and accountants (to name only a few of the most obvious examples) are "practicing law". The Committee majority's opinion would prevent a lawyer from negotiating on behalf of a client with any of these professionals. The Committee majority tries to avoid this startling conclusion by declaring that its opinion applies only to the public adjusters, not to professionals in other fields. But the Committee does not explain why its reasoning should not apply elsewhere. There is no evident non-arbitrary limiting principle.
We think the real distinction, between some public adjusters and those in more established and better regulated occupations, is the prevailing level of trustworthiness and competence. We believe that the appropriate authorities should act as soon as possible, to ensure that public adjusters do not give advice beyond their lay knowledge or treat their clients and adversaries unfairly or dishonestly. The Legislature can amend § 20-281; the Supreme Court can decide the statute's constitutionality and its scope. We respectfully disagree with the Committee's commendable effort to craft a solution from ER 5.5.
I join the dissent to the Committee's opinion, but wish to supplement one of the points addressed in that dissent with the following comments.
The Committee's opinion recites that the legislation embodied in A.R.S. § 20-281 is valid until the Supreme Court says otherwise. The Supreme Court has not said otherwise. Thus, public adjusters are presently authorized to do what they do, but the Committee has concluded that lawyers cannot negotiate with them, apparently because what adjusters do is the unauthorized practice of law. As the Committee struggled with this conundrum, I too have struggled, but cannot accept the Committee's solution to it.
Until the Supreme Court determines that § 20-281 is not a valid exercise of legislative power, the Committee must regard the statute as valid. If the statute is valid, then public adjusters have the authority to conduct the activities the Legislature has prescribed. I have been unable to determine how such authorized conduct becomes unauthorized, without determining, as a matter of law, that the Legislature did not have the power to do what it did. Of course, pure legal questions, which I believe this one is, are beyond the jurisdiction of the Committee. There are good legal arguments for the proposition that the Legislature was without authority to empower public adjusters as it has, but until such time as those arguments have carried the day before the Supreme Court, I respectfully submit that the legislative exercise must stand. I continue to believe that the Committee, despite its efforts at explication, is only guessing at what it believes the Supreme Court will do if the statute is challenged (as admittedly other courts in other jurisdictions have done). I may even agree with that guess, but I believe it is also possible the Supreme Court may try to reconcile its own authority to regulate the practice of law with the Legislature's authority to regulate the business of insurance. The Supreme Court may find yet another means of reconciliation to uphold the legislation. But until such time as the Court has ruled to the contrary, I believe the Committee is bound to accept the legislative enactment authorizing public adjusters. For this reason, and others addressed in the dissent, I have not joined the Committee's majority.