Insurers’ Attempts to Limit Defense Costs,
Litigation Guidelines, and Related Ethical
Considerations: Balancing the
Interests of Insurers and
Policyholders
Joseph D. Jean
Nicole Bearce Albano
Barbara Sellinger
November 17, 2011
Welcome
• Joseph D. Jean, Member,
Lowenstein Sandler PC, Insurance Coverage
Group
• Nicole Bearce Albano, Member,
Lowenstein Sandler PC, Litigation Group
• Barbara Sellinger, General Counsel, artsHorizon
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Summary of Topic/Outline
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Introduction: The Nature of Insurance
Know Your Insurance Policies
Getting Your Insurer to Defend Your Claim
Insurers’ Attempts to Limit Defense Costs
Insurer Imposed Litigation Guidelines
Introduction: The Nature of Insurance
• Risk transfer mechanism
• Competing interests between insurer and insured
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Liability Coverage
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Protects the Company against loss to the Company itself
This insurance covers you against damages that you might inflict
on a third party (someone else) as a result of an accident or other
happening
Insurance covers expenses for suits brought by a third party as a
result of the policyholder's actions
Know Your Insurance Policies
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Getting Your Insurer to Defend Your Claim
• Know your policy
• Give notice early
• Develop a strategy early
 Know the issues
 Manage the defense
 Choose appropriate counsel
• Keep your insurer informed
• Is litigation necessary?
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Getting Your Insurer to Defend Your Claim
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In most jurisdictions, only one claim need be
“potentially” covered for the insurer to have a “duty to
defend” against all claims. Nat’l Union Fire Ins. Co. v. RhonePoulenc, 1992 Del. Super. LEXIS 45 (Sup. Ct. Del. 1992).
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Duty to defend is broader than duty to indemnify. See, e.g.,
Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 310, 486 N.Y.S.2d 873,
476 N.E.2d 272 (1984).
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Claims/complaints are interpreted broadly and in favor of
coverage. See, e.g., Powell v. Liberty Mut. Fire Ins. Co., 252 P.3d 668,
672 (Nev. 2011).
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The Duty to Defend in New Jersey
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New Jersey is different
Duty to defend is guided by Burd v. Sussex Mutual Insurance Co., 267 A.2d 7 (N.J.
1970)
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The policyholder fired a shotgun, injuring a third party. The victim alleged both negligent
and intentional tort claims and the insurer refused to defend.
Policyholder defended the action through his own counsel and the plaintiff was awarded
damages.
Burd held that the insurer had the option of leaving the policyholder to defend the claim by
itself; then if at the end of the case covered liability was imposed, the insurer reimburses
the insured’s defense costs.
See also, SL Indus., Inc. v. Am. Motorists Ins. Co., 607 A.2d 1266 (N.J. 1992) (holding
insurer’s initial decision not to defend fraud claims against insured was appropriate
where there was no indication at time insured forwarded complaint that insured’s
former employee had suffered emotional distress); Aetna Cas. & Sur. Co. v. Ply Gem
Indus., Inc., 778 A.2d 1132 (N.J. Super. Ct. App. Div. 2001) (holding that, absent
actual proof of damage during insured’s policy period, insurer had the right not to
defend and “risk” a duty to later reimburse insured for defense costs); Grand Cove II
Condo. Ass’n, Inc. v. Ginsberg, 676 A.2d 1123 (N.J. Super. Ct. App. Div. 1996)
(holding duty to defend “converted to a duty to reimburse pending the outcome of the
coverage litigation”).
The Tripartite Relationship
Relationship between insured, attorney and insurer.
Insurer
Defense Counsel
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Policyholder
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The Tripartite Relationship
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Standards vary by jurisdiction
Impacts communications and sharing of information
Insurer is not entitled to all information
Loyalty of counsel to insured vs. to insurer
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Continental Cas. Co. v. Pullman, Comley, Bradley & Reeves, 929 F.2d 103,
108 (2d Cir. 1991) (attorney owes duties and allegiance to insured, not to the
insurer)
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Lieberman v. Employers Ins. of Wausau, 419 A.2d 417, 424 (N.J. 1980)
(defense counsel retained to represent the insured owed his sole duty to the
insured)
Fact that an insurer is paying the bills does not alter the lawyer’s ethical obligations
to the insured.
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N.J. Adv. Comm. Prof. Eth., Opinion 502 at *1 (Sept. 23, 1982) (“The duty of
an attorney hired by the insurance company runs to the insured and the fact
that the attorney is to be paid by the carrier does not dilute that duty.”)
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Montanez v. Irizarry-Rodriguez, 641 A.2d 1079, 1084 (N.J. Super. Ct. App.
Div. 1994) (“Nonetheless, it is clear that insurance counsel is required to
represent the insured’s interest as if the insured hired counsel directly.”)
Ethics, Loyalty & The Tripartite Relationship
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The ABA Model Rules of Professional Conduct, the Third Restatement, and case law
on lawyer ethics, informed by states’ ethics opinions (not an insurance policy), define
counsel’s ethical responsibilities.
See Prevratil v. Mohr, 678 A.2d 243, 250 (N.J. 1996) (“Plainly stated, in any litigation,
counsel for an insurer must put the insured’s interests ahead of the insurer’s.”); Purdy
v. Pacific Auto Ins. Co., 203 Cal. Rptr. 524, 533-34 (Cal. App. 1984) (noting that
lawyer retained by insurer for policyholder has primary duty to “further the best
interests of the insured”)
See also Restatement (Third) of the Law Governing Lawyers, §134 cmt. f (2000)
(holding view that “a lawyer designated to defend the insured has a client-lawyer
relationship with the insured” and that “[t]he insurer is not, simply by the fact that it
designates the lawyer, a client of the lawyer”); Model Rule 5.4(c) (prohibiting a lawyer
from allowing a third party who pays that lawyer to direct or regulate the lawyer’s
professional judgment in providing legal services); Rule 1.8(b) (prohibiting a lawyer
from using information relating to representation of a client to the client’s disadvantage
without client’s informed consent); Rule 1.7 (prohibiting representation where there is
a significant risk that representation of one client will be materially limited by
responsibilities to another client)
ABA Opinion 08-450 (Apr. 2008): “Ordinarily, when a lawyer is engaged by an insurer
to represent the insured, the substantive law precludes the lawyer from acting contrary
to the interests of the insured.”
Insurers’ Attempts to Limit Defense Costs
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Don’t just accept what the insurer offers
Insurers’ interests often diverge from yours
Insurer-imposed counsel rates – usually very low
Insurer-imposed litigation guidelines – not a part
of the insurance contract and might violate
ethical rules
• Insurer-imposed audits of invoices – can violate
ethical rules
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Reasonableness of Attorneys Fees
Are costs reasonable? The law varies. Factors include:
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Time and labor required, the novelty and difficulty of the questions involved,
and the skill required to perform the legal service properly;
Fee customarily charged in locality for similar legal services;
Efficiency of the attorney in presenting the case, and the amount involved
and the results obtained;
Nature and length of the professional relationship with the client; and
Experience, reputation, and ability of the lawyers performing the services.
 Aquino v. State Farm Ins. Co., 793 A.2d 824, 832 (N.J. Super. 2002)
 Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818
(Tex.1997)
 Kona Technology Corp v. Southern Pacific Transportation Co., 225
F.3d 595 (5th Cir. 2000).
Insurer-Imposed Litigation Guidelines
Some of the most common potential conflicts stem
from insurer-imposed litigation guidelines.
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Guidelines explain how much of the defense the carrier will NOT pay
Include restrictions on the way the defense must be conducted
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Frequently guidelines exclude reimbursement for such things as:
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discussions between members of the defense team on the case;
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emails between the defense team;
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leaving or listening to voicemails; and
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attendance of more than one attorney at hearings or meetings,
Regularly impose arbitrary restrictions on legal research; and arbitrary time
limits on drafting of pleadings, no matter how complex
Often, insurers impose guidelines retroactively – back to the beginning of the
case and before they sent them to either the insured or to defense counsel
Guidelines Must Not Impede Counsel’s Discretion
Billing guidelines have been criticized or rejected:
…by ethical opinions:
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See, e.g., ABA Standing Committee on Ethics and Professional
Responsibility (Feb. 16, 2001) (attorney must not permit
compliance with “guidelines” and other directives to impair
materially the attorney's independent professional judgment in
representing an insured); In re Rules of Professional Conduct, 2
P.3d 806 (Mont. 2000) (insurer-imposed restrictions in litigation
costs may violate insurer's duty to defend and attorneys’ ethical
responsibilities to exercise independent professional judgment).
…and by courts:
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See, e.g., Dynamic Concepts Inc. v. Truck Insurance Exchange,
61 Cal.App.4th 999 (1998) (“Insurer imposed restrictions on
discovery or other litigation costs may well violate the insurer’s
duty to defend as well as the attorneys' ethical responsibilities to
exercise their independent professional judgment in rendering
legal services”)
Insurer Audits of Defense Invoices
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Use of audit agencies to review defense counsel bills has become an
increasingly common, cost-cutting practice within insurance industry
The billing information and file materials required by audit companies
inevitably contain confidential information
To the extent that billing records or other records sought by the insurance
company’s auditors contain “secrets” or “confidences” of the insured, N.Y.
Disciplinary Rule 4:101 forbids the insured’s lawyer from disclosing them
“except with the consent of the client ... after a full disclosure.” See
N.Y.S.B.A .Opinion 716
See also ABA Comm. on Ethics and Prof’s Responsibility, Formal Op. 08450 (2008) (opining that retained defense counsel may not disclose client
confidential information of policyholder to insurer absent policyholder
consent); ABA Comm. on Ethics and Prof’s Responsibility, Formal Op. 01421 (2001) (“[A] lawyer must not permit compliance with ‘guidelines’ and
other directives of an insurer relating to the lawyer’s services to impair
materially the lawyer’s independent professional judgment in representing an
insured.”)
What if Your Insurer Won’t Pay Defense Costs?
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Do what is best for your company
Continue to paper the insurers’ file
Leverage a potential bad faith claim
Litigation vs. ADR
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Timing
Causes of action: declaratory judgment, breach of contract
Legal vs. factual issues
What jurisdiction?
Don’t get jumped
Choose and manage your defense counsel wisely
Manage Your Defense
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Establish a strategy early
Know your budget and keep an eye on it
Request budgets
Review bills
Conserve your limits
Insurers don’t always pay for everything
Use litigation management tools
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Guidelines
Litigation plans
Task code billing
No block billing
Regular monthly billing
Proper work allocation—partners don’t have to do everything
Choosing Defense Counsel
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Referrals/Panel Counsel
Do your own research
Interview several firms
Loyalty
Experience
Strategy—how will they handle this case?
Rates
Cheapest isn’t always best
Best Practices
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Read your policy and know your policy
Know your claims
Develop an early strategy
Know your lawyers and seek out loyalty and team approach
Watch out for the tripartite relationship
Know the ethical rules
Comply with policy provisions & Keep Your Insurer Informed
Stay involved and manage the litigation to your strategy
Know your end game and don’t just take “no” for an answer
Never assume there is no coverage
Coverage tail doesn’t wag the defense dog
Question
and Answer
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