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From Captive Firms to Mini Firms: The Future of In-House Departments

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By Gabriella Khorasanee, JD on October 30, 2013 7:01 AM

The use of captive firms in the insurance industry is both accepted and widespread. New legal trends in Australia and Britain indicate the expansion of the concept of captive firms to other industries like banking and construction, reports The Australian.

Will the U.S. follow the trend? Here are some things to consider.

Captive Firms Defined

In the U.S., captive law firms are predominantly used by the insurance industry, and are small pseudo-independent law firms that essentially function as the in-house legal team of an insurance company, providing legal defense to the company and its policyholders. The captive firm may have a different name, but the salaries of the lawyers are often paid by the insurance company.

Is it Ethical?

As you can imagine, many different ethics issues pop up in the scenario namely: conflict of interest, unauthorized practice of law, and public deception, according to a paper published by the Federation of Defense & Corporate Counsel ("FDCC"). However, the ABA, along with most states, allows this type of arrangement, so long as certain disclosures are made, and practices observed, notes the FDCC.

What Will Shareholders Think?

In an article on this issue, Corporate Counsel posits that expanding captive firms (referring to them as mini firms) and outsourcing their specialized talent "would be a CEO's dream come true--the in-house legal department as a profit center." However, we tend to disagree. Though generally seen as expenses, legal departments are becoming more profitable by changing certain policies, such as more aggressive policing of intellectual property.

What's more, how does outsourcing your in-house law department's expertise help further the purpose of the business? Sure, it may bring in money, but we don't even know that it would be ethical in the non-insurance fields. Conflict of interest issues will abound, as well as non-lawyers making revenue from legal services.

Finally, it seems unrealistic that a company's board, or shareholders, would be amenable to outsourcing their legal department's specialized expertise to the enemy other companies in the field.

What Will In-House Lawyers Think?

Didn't most in-house lawyers go in-house because they didn't want to deal with multiple clients and billing? We can see the mass exodus of lawyers now...

While The Australian and Corporate Counsel bring up interesting points, we're not convinced. Our distinct code of ethics and way of doing business means that to stay competitive (and ethical) companies are going to have to hire and keep their own legal departments, and leave the captive firms to the insurance industry.

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