HBA-TBM C.S.H.B. 1383 77(R)BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 1383 By: Dunnam Insurance 4/23/2001 Committee Report (Substituted) BACKGROUND AND PURPOSE Currently, insurers are obligated to provide a defense to third party claims against their policy holders. In many instances, a large number of property and casualty insurers in Texas provide that defense under a reservation of rights through the services of their attorneys. This reservation of rights may create a conflict of interest. Counsel that is under the employ of or contract to the insurer owes allegiance to the insurer, and if allowed to control the insured's defense may manipulate the defense of the case to the benefit of the insurer and the detriment of the insured. In situations in which a conflict of interest exists, an insurer is obligated to provide and pay for independent counsel to defend its insured. However, many policyholders are not aware of this obligation. C.S.H.B. 1383 requires the commissioner of insurance, in consultation with the State Bar of Texas, to adopt rules to ensure the independence of counsel provided to an insured under a casualty insurance policy. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the commissioner of insurance in SECTION 1 (Section 3, Article 21.56B, Insurance Code) of this bill. ANALYSIS C.S.H.B. 1383 amends the Insurance Code to require the commissioner of insurance (commissioner) in consultation with the State Bar of Texas to adopt rules to ensure the independence of counsel provided to an insured under a casualty or liability insurance policy. The rules must require notice to the insured of the insured's right to independent counsel and may specify circumstances in which an insurer may not offer or provide to the insured the services of an attorney with a contractual or other relationship with the insurer. In providing a defense for an insured against a claim or action under an insurance policy, an insurer is prohibited from using, or requiring an insured to use, an attorney who is an employee of the insurer or an employee, owner, partner, or shareholder of a law firm that works solely for the insurer or solely for a group of affiliated insurers. An insurer who violates this provision commits an act that constitutes a practice of law as defined by state law. The bill authorizes a person to bring an action against an insurer to recover any actual damages proximately suffered by an insured because of a violation of these provisions or a rule adopted by the commissioner and to obtain injunctive relief to prevent the threatened or continued violation of these provisions or a rule adopted by the commissioner. The bill requires a court to award reasonable and necessary attorney's fees to a person who recovers damages or obtains injunctive relief. A court, on its own motion or on the motion of any party, is required to disqualify an attorney who is representing an insured before that court in violation of these provisions or a rule adopted by the commissioner. The bill provides that in a claim asserted or an action commenced before September 1, 2001, an attorney representing the insured on September 1, 2001, is authorized to continue to represent an insured until December 31, 2001. Not later than December 31, 2001, an attorney continuing to represent an insured is required to take appropriate steps to withdraw from representation and the insurer is required to provide an attorney to the insured in accordance with these provisions. The bill applies only to an insurer that issues any form of casualty or liability insurance that is delivered, issued for delivery, or renewed in this state and is issued to or covering any resident of this state, covers liability incurred by an insured in this state, or under which the insurer provides a defense to an insured in a claim or action pending in this state. EFFECTIVE DATE September 1, 2001. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 1383 differs from the original by applying the provisions of the bill to an insurer that issues any form of liability insurance and limits the application to only an insurer that issues a casualty or liability insurance policy to or covering any resident of this state, covering liability incurred by an insured in this state, or under which the insurer provides a defense to an insured in a claim or action pending in this state. The substitute adds provisions regarding unauthorized practice of law, damages and injunctive relief, and disqualification of an attorney. The substitute adds provisions regarding an attorney continuing to represent an insured in a claim asserted or action commenced before the effective date of the bill. The substitute removes the provision requiring the commissioner of insurance to adopt rules not later than December 15, 2001.