Embed Size (px)
Citation preview
Insurance Defense Counsel: Guidelines and Bill Review
By William T. Barker
Dentons U.S., L.L.P.
233 South Wacker Drive, Suite 7800
Chicago IL 60611
312-876-8140
Fax 312-876-7934
william.barker @dentons.com
Adapted from WILLIAM T. BARKER & CHARLES SILVER, PROFESSIONAL
RESPONSIBILITES OF INSURANCE DEFENSE COUNSEL, Chapters 10 & 11, with
permission. Copyright 2016. Matthew Bender & Company, Inc., a LexisNexis
company. All rights reserved.
Presented at ABA Litigation Section Insurance Coverage Litigation Committee
CLE Seminar
March 1-4, 2017
William T. Barker is a partner in the Chicago office of Dentons U.S. LLP, with a
nationwide practice representing insurers in complex litigation, including matters relating to
coverage, claims handling, sales practices, risk classification and selection, agent relationships,
and regulatory matters. He sometimes serves as an expert witness on matters of insurance,
professional responsibility and standard of care He is a co-author (with Ronald D. Kent) of
INSURANCE BAD FAITH LITIGATION, SECOND EDITION and (with Charles Silver) of PROFESSIONAL
RESPONSIBILITIES OF INSURANCE DEFENSE COUNSEL. He has been described as the leading
lawyer-commentator on the connections between procedure and insurance. See Charles Silver &
Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 DUKE L.J.
255, 257 n.4 (1995).
Mr. Barker is a member of the American Law Institute and an Adviser to its project on
the Restatement of the Law of Liability Insurance. He is a Special Advisor to the ABA Standing
Committee on Ethics & Professional Responsibility. He is a past Director of the Association of
Professional Responsibility Lawyers. He is Co-Chair of the Subcommittee on Ethics of the ABA
Section of the Litigation Insurance Coverage Litigation Committee and a Vice Chair of the ABA
Tort Trial & Insurance Practice Section ("TIPS") Committee on Insurance Coverage Litigation.
He is TIPS Liason to the ABA Standing Committee on Lawyers’ Professional Liability, a past
Chair of the TIPS General Committee Board, the TIPS Ethics & Professionalism Committee, the
TIPS Appellate Advocacy Committee, and the TIPS Robert B. McKay Law Professor
Committee.
102382060\V-1
- 2 -
Chapter 10 Confidentiality and Sharing of Information Among Carrier, Policyholder, and Defense Counsel
SYNOPSIS § 10.01 Confidentiality Generally and Implied Authority To Disclose
§ 10.02 General Rule for Joint Representations: No Secrets on Matters Relating to the Joint Representation
§ 10.03 Corollary: No Sharing of Information on Other Subjects
§ 10.04 Special Rules Where Information May Affect Both Defense and Coverage or Where Secrecy Is Requested
[1] Restatement Approach
[2] ABA Opinion 08-450
[3] Critique of ABA Opinion 08-450
[a] Narrow Applicability of Analysis
[b] Conflict with the Model Rules and Restatement
[c] Incomplete Consideration of Prospective Waiver
[d] Necessity of Fraud Analysis
[e] Failure to Consider Better Analysis of Duties to Carrier
[f] Implications of Critique for Defense Counsel
[4] The Special Rules Proposed by the Restatement of the Law of Liability Insurance
§ 10.05 Maintaining Confidentiality Against Third-Parties
§ 10.06 Privilege Implications of Carrier-Assigned Counsel Sharing Information with Carrier and Policyholder
§ 10.07 Outside Bill Review
[1] Defense Counsel May Provide Detailed Information in Billing Statements to Carriers
[2] Methods of Reviewing Legal Bills Using Outside Services
[3] A Sample Protocol for Outside Bill Review
[4] Disclosure of Privileged Information to an Outside Bill Reviewer Would Be Impermissible If There Were a
Reasonable Prospect That the Privilege for That Information Would Be Lost
[5] But There Is Very Little Risk That Disclosure of Privileged Information to a Confidential Outside Bill Reviewer
Would Waive the Privilege
[6] There Would Be No Risk of Waiving the Privilege If Defense Counsel Composed Billing Descriptions That Did
Not Disclose the Contents of Privileged Communications
[7] Even If the Privilege Were Lost (and With Respect to any Significant Nonprivileged Material Contained In the
Bills), the Protections of Work Product Immunity Would Be Unaffected By Disclosure to an Outside Bill Reviewer
[8] In Light of the Foregoing, a Reasonably Careful Lawyer Ought Ordinarily to Be Able to Disclose Billing
Statements under the Suggested Protocol Without Violating the Duty of Confidentiality
§ 10.08 Attorney-Client Privilege and Employment Litigation by Defense Counsel
* * * *
§ 10.07 Outside Bill Review
[1] Defense Counsel May Provide Detailed Information in Billing Statements to Carriers
Defense costs are important to insurance carriers. (See § 13.01, below) While they sometimes
reach flat fee agreements with defense counsel (see § 13.03–13.05, below), they more often agree to pay
hourly charges. When they do so, they wish to monitor the work done to assure that they are not
overpaying for inefficient or unnecessary work. Accordingly, they require detailed billing statements to
permit such monitoring by in-house personnel (usually the adjuster responsible for the claim). That
requirement has not been controversial. But examination of the propriety of various methods of bill
review must start by considering disclosure of detailed billing information to the carrier itself.
102382060\V-1
- 3 -
Whether or not the carrier is a client, disclosure of the policyholder’s confidential information
regarding the subject matter of the representation is ordinarily impliedly authorized in order to permit the
carrier to manage the defense. The same is true of billing information, which is mostly the same
information, as ABA Opinion 01-421 pointed out:
Most of the information supplied to insurers through billing records is of
a general nature, is publicly known (e.g. the lawyer’s court appearances),
or already known as a result of the insured having forwarded it to the
insurer to facilitate the defense (e.g. medical information). Although this
information may be subject to the protections of Rule 1.6(a) as
“confidential information,” its disclosure to the insurer nonetheless
would be authorized impliedly either to comply with the insurance
contract or to carry out the representation, or both.
Billing records and underlying documentation may, however, reveal the
motive of the client in seeking representation, litigation strategy, or the
specific nature of the services provided to the insured. This information
generally is protected by the confidentiality rule or the attorney-client
privilege or both. In addition to the foregoing justifications for disclosure
of otherwise confidential and/or privileged information to the insurer,
disclosure to the insurer may be appropriate when both the insured and
insurer are regarded as clients of the lawyer.1
In insurance defense matters, the policyholder client’s motive for seeking legal services is
typically obvious (the need to respond to the suit the lawyer is defending), and so is at least the general
nature of the services provided. Moreover, given the carrier’s contractual rights regarding management of
the defense, details of those services and of litigation strategy are things the carrier needs to know,
making disclosure “appropriate in carrying out the representation” unless the lawyer discerns some
concrete threat to some interest of the policyholder client. And ABA Opinion 01-421 recognizes this by
approving disclosure of almost all defense-related information to the carrier:
Informing the insurer about the litigation through periodic status reports,
detailed billing statements and the submission of other information
usually is required, explicitly or implicitly, by the contract between the
insurer and the insured and also is appropriate in those jurisdictions
where the insurer is regarded as a client and there is no conflict between
the insurer and insured. The disclosure of such information usually
advances the interests of both the insured and the insurer in the
representation and such disclosures are, therefore, “impliedly authorized
to carry out the representation.” In those relatively rare situations when
the lawyer reasonably believes that disclosure of confidential information
to the insurer will affect a material interest of the client-insured
adversely, the lawyer may not disclose such confidential information
1ABA STANDING COMM. ON ETHICS AND PROF’L RESPONSIBILITY, Formal Op. 01-421, at 4
(2001) (emphasis added, footnotes omitted), relying, inter alia, on Stephen Gillers, ETHICAL
ISSUES IN MONITORING INSURANCE DEFENSE FEES: CONFIDENTIALITY, PRIVILEGE AND BILLING
GUIDELINES, 6 (Law Audit Services, Inc. 1998).
102382060\V-1
- 4 -
without first obtaining the informed consent of the client-insured.2
In the judicial opinion most hostile to disclosure to third parties assisting a carrier in bill review,
the Montana Supreme Court noted that the propriety of disclosure to the carrier itself was undisputed.3 So,
all agree that disclosure to the carrier is ordinarily authorized. The controversy concerns possible
disclosure of confidential information to an outside service.
[2] Methods of Reviewing Legal Bills Using Outside Services Some carriers have attempted to require submission of billing statements to outside bill reviewers,
which flag questionable charges for possible disallowance by the adjuster responsible for paying the bill.
That has been very controversial, and generated a plethora of ethics opinions and one judicial decision,
almost all concluding that such submission, without informed policyholder consent, breaches
confidentiality duties to the policyholder.4 Most carriers do not currently seek to impose such
requirements. But some have substituted requirements that bills be submitted through an outside service
that, without any human review of a bill’s contents, processes the information in the bill and flags
questionable charges for possible disallowance. There is no significant authority addressing the propriety
of that sort of requirement.
At least at one time, some carriers went beyond outside review of billing statements to have the
outside service review lawyer file materials concerning the work reflected in the billing statements. Only
review of this type could accurately be described as involving an audit, though even bill reviewers who
never looked at underlying records were commonly described as “auditors.” That sort of auditing raises
problems going beyond mere bill review, because the auditors would require access to more and more
sensitive material than the bills. Just as carriers generally do not attempt to use outside bill reviewers on
insurance defense matters, so, too, do they not use outside fee auditors.
[3] A Sample Protocol for Outside Bill Review In light of the controversies over outside bill review and the issues identified by opinions
questioning its propriety, carriers who wished to continue any involvement of outside services have
developed protocols regarding the billing and review process by which they seek to obviate any problems
with that process. Because few, if any, carriers now use outside human reviewers, these protocols
generally contemplate only computer processing of the bills. But it would be theoretically possible to
apply similar protocols with outside human review, arguably with similar results.
Under a typical program using computer processing, the outside service would exercise no
2ABA, Op. 01-421, at 5. (footnotes omitted). 3
MT— In re Ugrin, Alexander, Zadick & Higgins, P.C., 2000 MT 110, 75. 4
MT— 2000 MT 110, ¶¶ 55–78;
see ABA STANDING COMM. ON ETHICS & PROF’L RESPONSIBILITY, Formal Op. 01-421, at 5 n.27
(citing state and local ethics opinions).
102382060\V-1
- 5 -
discretion regarding the bills. Lawyers submitting bills would be instructed along the following lines:
The bill must be prepared with daily entries … showing (a) the date the
work was performed; (b) the UTBMS task or expense code; (c) the
UTBMS activity code; (d) the timekeeper ID; (e) a description of the
work performed (single activities must be described such that no client
confidential information is contained in written descriptions; entries
should be limited to strategic tasks); (f) the actual time in tenths of an
hour and (g) line item total.
In the event that documentation of lawyer work is necessary to support billing entries, that
information would be submitted directly to the carrier by the law firm, and the carrier would not share
that information with the outside service. The service would promise to maintain the confidentiality of all
information submitted to it and would agree that lawyers submitting information to it would have third-
party beneficiary rights to enforce that promise with respect to the information they submit.
Review by outside services is most commonly done with lawyers retained and directed by the
carrier. Independent counsel present somewhat different privilege problems, discussed in § 14.04[3],
below. The risk that privilege might be lost by disclosure to an outside service is the primary constraint on
use of such a service. So, the discussion here deals only with carrier-assigned counsel.
[4] Disclosure of Privileged Information to an Outside Bill Reviewer Would Be Impermissible If There Were a Reasonable Prospect That the Privilege
for That Information Would Be Lost Implied authority to disclose is, of course, negated by any known substantial risk of adverse effect
on the client. (See § 10.01, above.) ABA Opinion 01-421 addressed disclosure to outside legal auditors. It
dealt with a broader range of possible disclosures than simple bill review, possibly extending to review of
attorney work product. As noted in § 10.05[1], above, the opinion broadly approved disclosures to the
carrier, forbidding only those where the lawyer, based on the particular facts, determined that there would
be some risk to the interests of the policyholder client. The ABA Opinion painted with a much broader
brush when it opined that disclosure to third-party bill reviewers is generally prohibited, absent informed
consent by the policyholder:
Nor may the lawyer disclose the insured’s confidential information to a
third-party auditor designated by the insurer without the insured’s
informed consent.[5] Unlike the disclosure of the insured’s confidential
5“A majority of jurisdictions have concluded that it is not ethically proper for a lawyer to
disclose billing information to a third-party billing review company at the request of an insurance
company unless he has obtained the client’s consent. See, e.g., Office of the General Counsel of
the Ala. State Bar Op. RO-98-02 (1998); Alaska State Bar Ass’n Ethics Comm. Op. No. 99-1
1999, 1999 WL 1494993 (1999); Ariz. State Bar Formal Op. 99-08 (1999); Cincinnati, Ohio Bar
Ass’n Op. 98-99-02 (1999): Colo. Bar Ass’n Ethics Comm. Formal Op.107 (1999); Conn. Bar
Ass’n Comm. on Prof’l Ethics Informal Op. 00-20 (2000); D.C. Legal Ethics Comm. Op. No.
290 (1999); Fla. Bar Prof’l Ethics Comm. Proposed Advisory Op. 99-2 (1999); Fla. Bar Staff
Op. 20762 (1998); Fla. Bar Staff Op. 20591 (1997); Ga. State Bar Proposed Advisory Op. No.
99-R2 (2000); Haw. Bar Office of Disciplinary Conduct Op. 36 (1999); Idaho State Bar Ass’n
Formal Op. 136 (2000); Ind. State Bar Ass’n Op. 98-4 (1998); Iowa Sup. Ct. Bd of Prof’l Ethics
and Conduct Op. 99-01 (1999); Ky. Bar Ass’n Op. E-404 (1998); La. State Bar Ass’n Ethics
102382060\V-1
- 6 -
information to secretaries and interpreters, the disclosure of such
information to a third-party auditor, a vendor with whom the lawyer has
no employment or direct contractual relationship,[6] may not be deemed
essential to the representation and may, therefore, result in a waiver––
albeit unintended––of the privilege.[7] Therefore, since such disclosures
always involve the risk of loss of privilege, the lawyer must obtain the
insured’s informed consent before sending bills with such information to
a third party hired by the insurer to audit the bills.[8]9
Advisory Service Comm. Op. 45, as reported in La. B. J. 438 (1998); Maine Prof’l Ethics
Comm’n of the Bd of Overseers Op. 164 (1998); Md. State Bar Ass’n Comm. on Ethics Op. No.
99-7 (1999); Mass. Bar Ass’n Comm. on Prof’l Ethics Op. 2000-4 (2000); Miss. State Bar Ass’n
Ethics Op. 246 (1999); Chief Disciplinary Counsel of the Sup. Ct. of Mo. Informal Advisory Op.
980188 (1998); N.M. State Bar Formal Advisory Op. 2000-02 (2000); N.Y. State Bar Ass’n
Comm.on Prof’l Ethics Op. 716 (1999); N.C. State Bar Proposed Formal Ethics Op.10, 1998 WL
609887 (1998); Okla. Bar Ass’n Bd. of Governors Legal Ethics Advisory Op. No. 309 (1998)
(representation of policyholders by lawyers who are employees of a liability insurer); Or. State
Bar Ass’n Ethics Op. 1999-157, 1999 WL 521543 (1999); Pa. Bar Ass’n Comm. on Legal Ethics
and Prof’l Responsibility Informal Op. No. 97-119, 1997 WL 816708 (1997); R.I. Ethics
Advisory Panel Op. 99-17 (1999); S.C. Bar Ethics Advisory Committee Op. 97-22; 1997 WL
861963 (1997); State Bar of S.D. Ethics Op. 99-2 (1998); Bd. of Prof’l Responsibility of the Sup.
Ct. of Tenn. Ethics Op. 99-F-143, 1999 WL 406886 (1999); Utah State Bar Ethics Advisory Op.
No. 98-03 (1998); Vt. Bar Ass’n Ethics Op. 98-7 (1998); Va. Bar Legal Ethics Op. 1723 (1998);
Wash. State Bar Ass’n Formal Op. 195 (1999); W.Va. Lawyer Disciplinary Bd. Op. LEI 99-02
(April 30, 1999); Wis. State Bar Ethics Op. E-99-1 (1999).” (ABA Comm. Footnote,
renumbered). 6“In ABA Formal Opinion 95-398, this Committee recognized that “in this era of rapidly
developing technology,” lawyers frequently use outside agencies for numerous functions such as
accounting, data processing, photocopying, computer servicing, storage and paper disposal and
that lawyers retaining such outside service providers are required to make reasonable efforts to
prevent unauthorized disclosures of client information. FORMAL AND INFORMAL ETHICS
OPINIONS 1983–1998 at 367. The present inquiry is clearly distinguishable because the lawyer
has neither a contract with nor any right to control the conduct of the third-party auditor retained
by the insurer.” (ABA Comm. footnote renumbered). 7“In the Matter of the Rules of Prof’l Conduct, 2 P.3d at 817–22; United States v. Massachusetts
Inst. of Tech., 129 F.3d 681, 684–687 (1st Cir. 1997) (‘an intent to maintain confidentiality is
ordinarily necessary to continued protection, but it is not sufficient’).” (ABA Comm. footnote
renumbered). 8“In the Matter of the Rules of Prof’l Conduct, 2 P.3d at 818–19 (The relationship between the
insured and third-party auditor does not involve the kind of common interest in which
information can be exchanged without loss of privilege. Disclosure to persons needed in the
representation or appropriate to a consultation also does not justify disclosure to a potential
adversary.) (citing [Indian Law Resources Center v. Department of Interior, 477 F. Supp. 144
(D.D.C. 1979)]); [authorities rejecting selective waiver omitted].” (ABA Comm. footnote
renumbered). 9ABA STANDING COMM. ON ETHICS & PROF’L RESPONSIBILITY, Formal Op. 01-421, at 5 nn.27–
30.
102382060\V-1
- 7 -
On this analysis, the risk that privilege might be lost is the harm that negates implied authority to
disclose to the outside service. One thing that is missing from ABA Opinion 01-421 is any direct
assessment of the magnitude of the risk to privilege thought to be posed by disclosure to the bill reviewer.
In terms of need for an informed consent, the threshold under the implied authority standard is low, but it
is not satisfied by a mere hypothetical or speculative risk. As the Restatement explains, there must be at
least a reasonable prospect of adverse effect:
What constitutes a reasonable prospect of adverse effect on a material
client interest depends on the circumstances. Whether such a prospect
exists must be judged from the perspective of a reasonable lawyer based
on the specific context of the client matter … . [T]he relevant inquiry is
whether a lawyer of reasonable caution, considering only the client’s
objectives, would regard use or disclosure in the circumstances as
creating an unreasonable risk of adverse effect either to those objectives
or to other interests of the client … . If there is a reasonable ground to
doubt whether use or disclosure of a client’s confidential information
would have the described effect, the lawyer should take reasonable steps
to ascertain whether adverse effect would result … .10
The ABA Opinion appears to find this reasonable prospect of harm, implicitly, in the lack of any
“employment or direct contractual relationship” giving the lawyer “any right to control the conduct of the
third-party … retained by the insurer.”11 The protocol described in § 10.04[3] would give the lawyer such
a right, seemingly rendering the analysis of ABA Opinion 01-421 on this point inapplicable.
[5] But There Is Very Little Risk That Disclosure of Privileged Information to a Confidential Outside Bill Reviewer Would Waive the Privilege
A communication is not privileged unless it is made “in confidence.”12
A communication is in confidence within the meaning of § 68 if, at the
time and in the circumstances of the communication, the communicating
person reasonably believes that no one will learn the contents of the
communication except a privileged person … or another person with
whom communications are protected under a similar privilege.13
Moreover, “[t]he attorney-client privilege is waived if the client, the client’s lawyer, or another
authorized agent of the client voluntarily discloses the communication in a non-privileged
communication.”14 But disclosure is not a waiver if made to what the Restatement refers to as “privileged
persons,” which includes the carrier. (See § 10.06, above.) That point is not controversial. Whether
disclosure to a legal bill reviewer or a legal bill processor alters the privilege analysis has been more
controversial.
10RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 60 cmt. c(i) (2000) (emphasis
added). 11ABA, Formal Op. 01-421, at 5. 12RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 68(3) (2000). 13RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 71. 14RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 79.
102382060\V-1
- 8 -
The most extensive analysis of the question has been offered by Prof. Stephen Gillers.15 He
alternately assumes that the carrier is or is not a client. On the latter assumption, he concludes that
sending billing statements to a legal auditor still does not risk the privilege for several reasons. First, the
carrier is a party of common interest, entitled to share privileged information with its own agents.16
Indeed, because it is an organization, it can only act through agents, who are privileged persons if they
“reasonably need to know of the communication in order to act for the organization.”17 For this purpose, it
does not matter whether the bill reviewer is an employee of the carrier or an independent contractor, so
long as it is obliged to maintain confidentiality:
No rule surrounding the preservation of privilege requires [the privileged
person] to act through one kind of agent rather than another. Quite the
contrary. For purposes of the privilege, “[t]he concept of agent …
includes independent contractors with whom the corporation has a
principal-agent relationship and extends to agents of such persons when
acting as subagents of the organization[].”18
Prof. Gillers also concludes that the privilege would be preserved because “[t]he work of the
auditing company is to facilitate the insurer’s provision of legal services to the [policyholder].”19 Again,
this can be done through independent contractor agents.
Prof. Gillers’ conclusion is also supported by Indian Law Resource Center v. Department of the
Interior.20 The Government had provided funding for legal services to the Hopi Tribe, and all bills were
audited by it prior to payment. In that Freedom of Information Act case, disclosure to the Government
auditors was held not to be a waiver of the attorney-client privilege. The court reasoned that the audit was
conducted, in confidence, for the benefit of the Tribe.21 So long as the beneficiary of the audit is a
privileged person, use of a confidential auditing service does not jeopardize the privilege.
The Montana Supreme Court and numerous bar opinions concluded that there is nonetheless a risk
that, in some unspecified hypothetical case, the privilege might be waived by disclosure of bills to a legal
auditor.22 They relied on United States v. Massachusetts Institute of Technology,23 where disclosure of
15STEPHEN GILLERS, ETHICAL ISSUES IN MONITORING INSURANCE DEFENSE FEES:
CONFIDENTIALITY, PRIVILEGE AND BILLING GUIDELINES (Law Audit Services, Inc. 1998). 16GILLERS, at 9. 17RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 123 (Proposed Final Draft No. 1
1996), quoted and relied upon in GILLERS, at 8–9. In transition from the draft quoted by Prof.
Gillers, § 123 became § 73 in the final version. 18GILLERS, at 9, quoting former § 123. 19GILLERS, at 9. 20
US— Indian Law Resources Center v. Department of Interior, 477 F. Supp. 144 (D.D.C. 1979). 21
US— Indian Res. Law Ctr., 477 F. Supp. at 148. 22
102382060\V-1
- 9 -
legal bills to a defense contract auditor had waived the attorney-client and work product privileges as to
those bills. But the opinion in that case must be read in light of the facts before the court, facts not fully
explicated by the opinion. Review of the briefs and appendix on appeal reveals the following.
MIT was a defense contractor, and it submitted legal bills to an auditing agency in support of its
claims for contractual payments. The bills in question were not those for specific proceedings in which
the Government might have had an interest (e.g. as indemnitor or as co-party to a transaction). Rather,
they were an entire year’s bills for all legal services rendered to MIT.24 In addition to general corporate
work, the legal services included those rendered in matters where the United States was MIT’s adversary,
notably a Justice Department antitrust investigation.25
The bills were audited because MIT’s defense contracts entitled it to payment of a fraction of its
overhead (or “indirect”) costs in addition to its direct costs of performing the contract services.26 The First
Circuit held that production of the bills to the defense auditors waived the privilege against a later IRS
request for the same bills to review MIT’s tax exempt status. MIT argued that the Government’s desire
for continued performance of MIT’s defense contracts gave it a “common interest” in the legal services to
which the bills related, permitting disclosure without waiver.27 The First Circuit disagreed. This is
unsurprising, as the Government could hardly have a “common interest” in such matters as deflecting its
own antitrust investigation.
Not only did the United States lack any common interest in the underlying matters which were the
subjects of MIT’s legal bills, but the relationship was adversarial in another way. MIT sought to
maximize the contractual payments from the United States, and the auditors sought to assure that they did
not exceed the amounts the United States was actually obligated to pay. In contrast, a policyholder usually
has no direct interest in how much the lawyers hired by the insurance carrier get paid. The policyholder
MT— In re Ugrin, Alexander, Zadick & Higgins, P.C., 2000 MT 110, 7071. Mr. Barker represented
three of the respondents in that case. Prof. Silver filed an amicus brief. (See also discussions in
§ 4.06, above, and § 11.04[4], below.) 23
US— United States v. Mass. Inst. of Tech., 129 F.3d 681 (1st Cir. 1997). 24MIT, Appendix to Brief of Respondent-Appellant/Cross-Appellee (“Appendix”), 12
(reproducing copy of the summons at issue). 25MIT, Appendix at 28–29 (describing the bills and the redactions made from MIT board minutes
regarding the same legal services). 26MIT, Appendix at 47 (transcript of argument to the district court, in which MIT’s lawyer
explained that contracts “provide reimbursement to MIT on a cost basis … for so-called
overhead costs that include things like legal fees”); see 48 C.F.R. 31.201-1 (1998) (authorization
to charge indirect costs allocable to contract), 31.205-33 (allowing inclusion of professional and
consulting fees for services acquired by contractors to “enhance their legal … positions”). See
generally U.S. v. Newport News Shipbuilding & Dry Dock Co., 862 F.2d 464, 465 (4th Cir.
1988) (describing system). The auditors are entitled to examine even information relating to
costs not relied upon in charging the Government, for the purpose of corroborating the costs
actually charged. Id. 27MIT, Brief of Respondent-Appellant/Cross-Appellee, 32–34; Reply Brief of Respondent-
Appellant/Cross-Appellee, 19.
102382060\V-1
- 10 -
would not be out of pocket for any reduction resulting from the audit.
The MIT court reasoned that
MIT’s disclosure to the audit agency was a disclosure to a potential
adversary. The disclosures did not take place in the context of a joint
litigation where the parties shared a common legal interest. The audit
agency was reviewing MIT’s expense submissions. MIT doubtless hoped
there would be no actual controversy between it and the Department of
Defense, but the potential for dispute and even litigation was there.28
The Montana court attempted to analogize insurance auditors by asserting that the auditors’
interest, like that of the defense auditors, was purely in cost control and that “there is always the
possibility of disputes between auditors, defense counsel, and their [policyholder] clients.”29 That court
studiously ignored the presence in the insurance context of exactly what the First Circuit said was lacking
in MIT: “a joint litigation where the parties shared a common interest.” The carrier had every reason to
see that an adequate defense was provided, because it would (or at least might) be liable, up to policy
limits, for any judgment or settlement. The Montana court also ignored the fact that the policyholder
would ordinarily have no involvement in any fee dispute between carrier and defense counsel. The MIT
case was the centerpiece of the legal analysis in the Montana Opinion, and it offers no support for the
Montana approach.
Regardless, the Montana case is distinguishable from the situation presented by computerized bill
review. The outside service will not be acting as an auditor, but will only be processing and organizing
the information in the billing statements to facilitate efficient review by the carrier. The service will have
no interest of its own in the process or its outcome.
While the Montana court found against implied authorization for further disclosure to auditors
primarily on the ground that such disclosure risked waiver of privilege, it also suggested that disclosure is
not impliedly authorized because it does not assist in defending the policyholder.30 But that is an unduly
narrow view of the types of disclosure that are impliedly authorized. For example, the Restatement
permits disclosure to confidential agents “for the purpose of facilitating the lawyer’s law practice, where
no reasonable prospect of harm to the client is thereby created and where appropriate safeguards against
28MIT, 129 F. 3d at 687, quoted 2000 MT 110, ¶ 61 (emphasis by the Montana court).
US— Another case where disclosure to auditors was held to waive the privilege is U.S. v. South Chi.
Bank, 1998 U.S. Dist. LEXIS 17445 (N.D. Ill. Oct. 30, 1998). There, the auditors in question
were year-end financial auditors whose task was to assure that the company’s financial
statements were properly presented. As in M.I.T., the work product of the auditors was not to be
used in any way in connection with the representation in which the privileged documents were
generated. So, like M.I.T., it is inapposite here. 29
MT— In re Ugrin, Alexander, Zadick & Higgins, P.C., 2000 MT 110, 70. 302000 MT 110, ¶ 75.
102382060\V-1
- 11 -
impermissible use or disclosure are taken.”31 Examples include “computer technicians, accountants,
bookkeepers, law-practice consultants, and others who assist in furthering the law-practice business of the
lawyer.”32 Similarly, the ABA has opined that a lawyer may disclose to an outside computer service used
in maintaining client files or in generating bills to clients.33
The practice of reviewing defense lawyers’ bills also benefits policyholders, despite the Montana
Supreme Court’s assertion to the contrary. Whether conducted in-house or by third party contractors,
audits help insurance carriers monitor the quality of defense lawyers’ efforts, including their compliance
with insurers’ instructions and litigation management guidelines. Knowing that their work will be audited
when lawsuits conclude, defense lawyers are more likely to deliver consistent, high quality service
throughout their engagements. Other businesses audit employees, franchisees, and third party providers of
goods and services for the same reason, namely, to ensure consistent performance according to their
wishes and needs.
Thus, we agree with Prof. Gillers’ conclusions. In particular, we conclude that, under the sample
protocol we have described, disclosure to an outside service of even privileged information would be
quite unlikely to waive the attorney-client privilege. This ground alone is arguably sufficient to conclude
(as Prof. Gillers did with regard to outside auditors) that such disclosure ordinarily creates no reasonable
prospect of adverse effects on the policyholder client, allowing defense counsel to proceed on the basis of
implied authority to disclose.
The risk of harm to the policyholder, even were privilege for the bills themselves lost, is further
mitigated by the authority that an extrajudicial disclosure of privileged information is limited to the actual
information disclosed, and does not extend to other privileged communications on the same subject.34 But
there is contrary authority on this point,35 so that argument cannot be relied upon, unless other arguments
reduce any risk to a level only slightly above the threshold.
Moreover, the foregoing analysis of risk to privilege has not been tested judicially, so there cannot
31RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 60 cmt g. (2000). 32RESTATEMENT, § 60 cmt g. 33ABA STANDING COMM. ON ETHICS & PROF’L RESPONSIBILITY, Formal Op. 95-398 (1995). 34
US/NY— In re von Bulow, 828 F.2d 94, 101–03 (2nd Cir. 1987) (publication of some attorney-client
communications in book did not waive privilege as to other parts of the same communications);
IL— Ctr. Partners, Ltd. v. Growth Head GP, LLC, 2012 IL 113107, ¶ 64 (2012) (disclosure of
privileged communications in a business negotiation does not waive privilege as to matters not
disclosed unless later the disclosed communications are used to gain an advantage in litigation). 35
US–– U.S. v. South Chi. Bank, 1998 U.S. Dist. LEXIS 17445 (N.D. Ill. Oct. 30, 1998).
US— In re Sealed Case, 877 F.2d 976 (D.C. Cir. 1989).
102382060\V-1
- 12 -
be any real certainty on the point, even when adding consideration that any waiver might affect only the
bills themselves. Accordingly, carriers and counsel would be wise to look to additional means of assuring
that there would be no reasonable prospect of adverse impact on the policyholder.
[6] There Would Be No Risk of Waiving the Privilege If Defense Counsel Composed Billing Descriptions That Did Not Disclose the Contents of
Privileged Communications Disclosure of billing statements runs no risk of waiving the privilege if those billing statements are
not themselves privileged (at least in part). To be privileged, the billing statements would have to reflect
the content of a privileged communication in a way that allowed that to “be traced to a privileged person
as its expressive source.”36 Most bills do not allow such tracing, and deciding whether a particular bill
does so requires specific analysis of that bill.
But there is no need for an attorney to engage in line-by-line analysis of completed bills if the
attorney exercises care in composing billing descriptions that do not disclose the contents of privileged
communications. The protocol described in § 10.07[3], above, requires lawyers to do exactly that. Neither
the Montana case nor any of the bar opinions have considered this method of avoiding the risk they
perceived. Most appear to have either expressly or silently presumed that it would not be possible to
compose adequately detailed billing statements that did not disclose privileged communications or that
the auditor’s review would extend to other materials which would disclose the contents of privileged
communications.
In the context of insurance defense, and even apart from the protocol described in § 10.07[3],
above, bills are particularly unlikely to disclose the contents of privileged communications. The
policyholder’s motive in seeking legal counsel is not confidential, but open and obvious: the need to
respond to the suit. Much of the activity reflected in the bills will result from the need to respond to
actions of the plaintiff (e.g., researching the law on issues raised by the suit) or will result from
interactions with witnesses or information sources other than the client. Even if they do reflect
communications with the client, it will usually be impossible for an outside observer to determine that,
given the other possible sources.
And the bills will be directed to an adjuster familiar with the lawsuit and the agreed plan of
defense. As a result, what is adequate detail for the adjuster may be relatively uninformative to an outside
36RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS §69 cmt h (2000).
CA— While that is true in general, California's privilege statute has been held to make lawyers' bills
themselves subject to the privilege, even if they do not disclose the content of any other
privileged communication. Los Angeles Cnty. Bd. of Supervisors v. Super. Ct., 235 Cal. App.
4th 1154, 1174–76 (2015). However, if the bills do not disclose the content of any other
privileged communication, disclosure of the bills seems quite unlikely to waive the privilege
applicable to other privileged communications, even if the privilege for the bills themselves were
waived. (See § 11.07[5], above.) And work product immunity would remain applicable. (See
§ 11.07[7], below.) So, there still seems no substantial risk of harm to the policyholder. And the
California court notes that other jurisdictions generally do not privilege bills. 235 Cal. App. 4th
at 1168 n.3 (collecting cases).
102382060\V-1
- 13 -
observer (at least as regards the contents of privileged communications). Indeed, the protocol described in
§ 10.07[3], above, requires this, by directing that client confidential information not be included. On this
point, a program utilizing that protocol is different from the legal auditing that was the subject of ABA
Opinion 01-421, the Montana case, and a host of other bar opinions. In the legal auditing context, the bills
were to be reviewed by an auditor who would generally not be familiar with the case. So the bills would
have had to be more detailed to give the auditor a basis to decide whether the work reflected was proper.
That is also why the auditors would sometimes have found it necessary to go behind the bills and look at
the actual work product. Even if the bills submitted to auditors would necessarily have revealed privileged
communications (which we don’t think would have been the case), that would not mean that bills in a
program utilizing the described protocol would do so.
To repeat, the fact that bills are detailed does not necessarily mean they are privileged. When a
county’s environmental litigation bills were sought under the Freedom of Information Law, the court
found it necessary to engage in an in camera review to decide what, if anything, was privileged.37 If
defense counsel has exercised care to avoid disclosing privileged communications in the billing
statements, it should ordinarily be the case that they will not be privileged at all. (Even though we have no
reason to exclude the content of privileged communications from my own billing descriptions, we believe
that those descriptions rarely, if ever, reflect such content, especially in matters where we became
involved after litigation was under way.) If the bills are not privileged to begin with, disclosing them
cannot implicate the special confidentiality protections of “confidences” and there can be no risk that
disclosing them would waive any privilege.
[7] Even If the Privilege Were Lost (and With Respect to any Significant Nonprivileged Material Contained In the Bills), the Protections of Work
Product Immunity Would Be Unaffected By Disclosure to an Outside Bill Reviewer
A carrier would have no occasion to assign counsel to a policyholder unless the policyholder had
been sued or, at least, was faced with a claim likely to result in a suit (absent a pre-suit settlement). So all
of counsel’s services will be in anticipation of litigation or for trial.
If the litigation is brought in federal court, all documents reflecting counsel’s activities (including
the bills) will be subject to a qualified immunity from discovery, requiring a showing of substantial need
and undue hardship to obtain discovery.38 Moreover, even if the necessary showing is made to obtain
discovery, “the court shall protect against disclosure of the mental impressions, conclusions, opinions, or
legal theories of an attorney or other representative of a party concerning the litigation.” Such “opinion
work product” is given nearly absolute protection.39
If litigation is brought in state court, almost all states provide similar protection, though details
vary.40
37
NY— Orange County Publs. v. County of Orange, 637 N.Y.S.2d 596, 60103 (N.Y. App. Div. 1995). 38FED. R. CIV. P. 26(b)(3). 398 Charles Alan Wright, Arthur Miller & Richard L. Marcus, FEDERAL PRACTICE & PROCEDURE
§ 2026 (1994). 40See, e.g.,
102382060\V-1
- 14 -
Litigation bills should ordinarily be protected by these immunities, unless they are so general as to
be useless. Bills might reveal witness identities, but these are discoverable by interrogatory without
requiring any showing of need or hardship. It is hard to see how there could be substantial need for any
information shown in the bills that is not either freely discoverable in other ways or almost absolutely
protected as “opinion work product” or its state counterpart.
Work product immunity is less easily waived than attorney-client privilege. Work product
protection is not waived by disclosure to a third party unless that party is an adversary of the client for
whom the work product was generated (or likely to disclose to such an adversary).41 The service that
processes the bills is not an adversary of the policyholder, nor, given its confidentiality obligations, is it
likely to disclose to such an adversary. So, even if the attorney-client privilege were waived by disclosure
to the service, the work product immunity would not be affected.
[8] In Light of the Foregoing, a Reasonably Careful Lawyer Ought Ordinarily to Be Able to Disclose Billing Statements under the Suggested
Protocol Without Violating the Duty of Confidentiality Under the protocol described in § 10.07[3], above, there should ordinarily be no risk to the
policyholder client’s interests from disclosing to the outside service information which the lawyer is
properly disclosing to the carrier. Prof. Gillers’ opinion agrees. Assuming that the information is being
properly shared with the carrier, and even if the carrier is not a client,
[t]he lawyer may then forward the confidential information to an agent of
the insurer, including an agent who is an independent contractor in a
AK— Langdon v. Champion, 752 P.2d 999, 1007 n.17 (Alaska 1988);
ME— Stone v. H.A. Stone & Sons, 2002 Me. Super. LEXIS 124 (Me. Super. Ct. June 10, 2002), but
see.
IL— Monier v. Chamberlain, 35 Ill. 2d 351, 360–61(1966) (providing no protection to ordinary work
product, but virtually absolute protection to opinion work product). 41E.g.,
US— Permian Corp. v. U.S., 665 F.2d 1214, 1219 (D.C. Cir. 1981) (only disclosures “inconsistent
with the adversary system” waive work product protection);
NY— In re Will of Pretino, 567 N.Y.S.2d 1009, 1012 (N.Y. App. Div. 1991) (“[t]o constitute a waiver,
disclosure must be inconsistent with maintaining secrecy as against an adversary and it must
significantly increase the possibility that the opposing party will obtain the information”);
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 91(4) & cmt. b (2000).
102382060\V-1
- 15 -
principal-agent relationship to the insurer, without violating a duty to the
policyholder. Doing so will not violate the lawyer’s confidentiality duty
because a corporation can act only through its agents, whether those
agents are employees of independent contractors.42
As Prof. Gillers explains
Moreover, an insurer’s decision to give an independent contractor access
to the insured’s confidential information to assist it in exercising its
contractual right to control the defense should stand on no different
footing from a law firm’s decision to give an independent contractor
access to a much greater volume of confidential information to aid it in
representing clients. ABA Opinion 95-398 specifically authorizes law
firms to use a computer maintenance company that “would have access
to the firm’s clients’ files.” The Opinion recognizes that law firms “now
use outside agencies for numerous functions such as accounting, data
processing and storage, printing, photocopying, computer servicing, and
paper disposal.” Just as lawyers have duties to protect client information,
so do insurers. And just as law firms can give independent contractors
confidential information subject to controls that ensure protection for the
information—the ABA Opinion recommends a “written statement of the
service provider’s assurance of confidentiality”—so can insurers. Of
course, the duties of insurers and lawyers emanate from different
sources. The point here is that the lawyer’s duties with regard to client
information are at least as stringent if not more so than insurers’ duties,
yet the ABA has recognized the legitimacy of law firms giving
independent contractors access to extensive confidential information
with appropriate safeguards. There is no doctrinal basis for a different
result here.43
Prof. Gillers also relies upon a letter opinion from the Massachusetts Bar Ethics Committee
rendered by Prof. Andrew Kaufman of the Harvard Law School, also reaching the conclusion that
information may be disclosed to the auditing company if it may be disclosed to the carrier:
To the extent that disclosure to the insurer would be permissible … , the
Committee believes that you may make such disclosures to the auditor so
long as you satisfy yourself that the auditor has taken reasonable steps to
protect the confidentiality of the disclosed information. If disclosure to
the insurer would be permissible, the Committee does not believe that
DR 4-101 is designed to interfere with an insurer’s desire and ability to
outsource its payment functions so long as client confidences are
42Stephen Gillers, ETHICAL ISSUES IN MONITORING INSURANCE DEFENSE FEES:
CONFIDENTIALITY, PRIVILEGE AND BILLING GUIDELINES, at 12 (Law Audit Services, Inc. 1998)
(footnotes omitted). In an omitted footnote, Prof. Gillers comments that “insurers outsource other
functions, too, and that the work of these independent contractor-agents has not drawn attention
or controversy. Among these are outside auditors who review the quality of defense lawyers’
work; management consultants who conduct analyses of claim operation and have access to
claim files; independent adjusters; third-party administrators and other claim services; and
insurance brokers who have access to claim files.” GILLERS, 12 n.14. 43GILLERS, at 13.
102382060\V-1
- 16 -
preserved and respected.44
Absent some unanticipated, currently hypothetical situation where the lawyer is unable to
compose adequately detailed billing descriptions that do not disclose the contents of privileged
communications, it should always be possible to participate in a program of computer bill processing
while fully complying with the duty of confidentiality. Even if such information accidentally found its
way into billing descriptions, the high probability that there would be no waiver and the independent
protections of the work product immunity should still protect the policyholder from any further disclosure
that might cause adverse effects.
Should the lawyer find it impossible to compose adequately detailed billing descriptions that do
not disclose the contents of privileged communications, it would then be necessary to give further
consideration to whether disclosure would be impliedly authorized. If not, disclosure would be forbidden
and the lawyer would need to seek another way of submitting the bills (perhaps with a “dummy”
description in the bill and an accurate one provided directly to the carrier. But there is no need to reach a
final conclusion on those questions unless and until the lawyer actually faces that problem.
44Letter from Prof. Kaufman to Robert B. LaHait, Esq., dated November 20, 1997, quoted in
GILLERS, at 13.
102382060\V-1
- 17 -
Chapter 11 Adjuster Involvement in Defense Planning and Decision Making
SYNOPSIS § 11.01 Routine Communications and Status Reports
§ 11.02 Consultation with Adjuster About Investigation, Case Planning, Strategy, Tactics, and Expenditures
§ 11.03 Company Budgetary Decisions Do Not Interfere with Defense Counsel’s Duty of Competent Representation
[1] Competence Does Not Require That the Lawyer Be Given Some Minimum Level of Resources
[2] The Conflict Rules, Rather Than the Duty of Competent Representation, Protect Policyholders from Improper
Budgetary Restraints
[3] But the Lawyer Must Always Comply with the Requirements of Court Rules
§ 11.04 Dealing with Company Guidelines and Refusals to Authorize Recommended Services
[1] Issue: Company Rejection of Defense Lawyer Recommendations
[2] The Logic of Prior Approval Requirements
[3] ABA Opinion 01-421
[4] In re Rules of Professional Conduct
[a] Requirements of Prior Approval for Defense Activities Are Forbidden in Montana
[b] Even Insurers in Montana May Still Require Consultation Before Counsel Takes Significant Action
[c] Other Jurisdictions Ought Not To Follow Montana on the Guidelines Issue
[i] The Montana Court Distorted the Relationships among the Parties to the Insurance Defense Relationship
[ii] The Decision Subjects Insurers to Unjust Vicarious Liability
[iii] The Montana Court Misused the Rules of Professional Conduct
[iv] The Montana Court Rejected Normal Conflict Management Methods
[v] The Montana Court Made Up the Facts (or Accepted the Facts Made Up by Petitioners)
§ 11.05 Involvement of the Adjuster Neither Interferes With Counsel’s Independent Judgment Nor Relieves Counsel
of the Obligation To Exercise That Judgment
[1] The Concern and One Proposed Solution
[2] Response
§ 11.06 Is the Company Liable for Defense Counsel’s Errors?
[1] Overview
[2] Whither Texas?
[a] Taylor v. Allstate Insurance
[b] Analysis
[i] No Vicarious Liability: State Farm Mutual Automobile Insurance Co. v. Traver
[ii] No Duty of Good Faith and Fair Dealing: Maryland Insurance Co. v. Head Industrial Coatings & Services, Inc.
[iii] No Stowers Claim or Negligence Tort Claim
[A] Stowers
[B] Ranger Insurance and American Physicians Insurance
[C] Taylor’s Other Authorities
[iv] Contract Liability
[v] Later Cases
[c] Summary
§ 11.07 Hypo: Adjuster Instruction Not To Evaluate
* * * *
§ 11.04 Dealing with Company Guidelines and Refusals to Authorize Recommended Services
[1] Issue: Company Rejection of Defense Lawyer Recommendations Adjusters sometimes decide not to authorize defense activities recommended by defense counsel.
102382060\V-1
- 18 -
What issues are posed when that occurs?
A carrier may have many reasons for wanting a less expensive defense than a lawyer
recommends.1 Its object may be to settle quickly, thereby exhausting its limits and extinguishing its duty
to defend.2 It may believe that damages will exceed the limits in any event and see no benefit to itself in
attempting to reduce the loss. Or, it may simply disagree with a lawyer’s assessment that a particular
course of action makes good economic sense. Does it matter why a carrier rejects a defense lawyer’s
recommendation, or, once a carrier makes up its mind, can a defense lawyer simply go along?
Clients frequently refuse to spend money that lawyers think ought to be spent. Ordinarily, their
decisions create no problems of legal ethics for lawyers. A lawyer’s job is to advise and educate a client.
Having done that, and speaking generally, a lawyer is free to do what a client wants. A client may pursue
a more expensive course of action than a lawyer recommends. A client may also choose an option that is
less expensive. A client may even decide to do nothing at all. When a client’s money will be used to pay
for a service, the client makes the call.
This suggests that a carrier’s decision to reject a defense lawyer’s recommendation or to severely
limit the defense budget creates no ethical difficulties for a retained defense lawyer. The carrier is the
client whose money is involved. Consequently, the carrier is entitled to decide how much to spend and
what to spend it on. The defense lawyer’s job is to make the most prudent recommendation and, having
done that, to do what the client asks.
But, of course, the policyholder is also a client, and the policyholder’s interests may be affected by
the company’s decisions regarding the defense. That poses issues that have been most extensively dealt
with in the context of company guidelines requiring prior approval for various types of defense activities.
[2] The Logic of Prior Approval Requirements Before examining the authorities on company guidelines and prior approval requirements, it is
useful to discuss why insurers require prior approval. They do not do so in the expectation of refusing
approval for many recommended activities. Adjusters are usually not lawyers and, so, cannot make case-
specific legal judgments about what is and is not necessary to defense of an action.3 Insurers hire lawyers
whose competence and judgment they trust and rely heavily on the advice of those lawyers. Moreover, if
the case involves the potential for exposure in excess of limits or non-covered liability, the company
would face a serious bad faith risk were it to reject counsel’s recommendation and the policyholder later
suffer a judgment imposing personal liability. (If the policyholder’s interests are not at risk, the
consequences of any shortsighted refusal to approve will fall solely on the company itself.) When
particular services are recommended by a lawyer retained by a company, approval for those services is
rarely denied.
1An insurer can also demand a more vigorous and costly defense than a lawyer thinks wise. This
sort of decision has not been identified as raising ethical problems for a lawyer. The concern is
always that a carrier wants to spend too little, not too much. 2A carrier with this goal in mind may even hire a lawyer with the understanding that the lawyer
will only take steps that are absolutely needed to avoid default. 3Adjusters, or claims managers, may be able to make generalized judgments that, for example,
pleading motions are rarely cost-effective in auto collision cases. Such cases depend primarily on
facts and any success on a motion would likely only result in an amended pleading, with no
ultimate benefit to resolution of the case.
102382060\V-1
- 19 -
The primary purpose of preapproval requirements is to require the lawyer and the adjuster to
discuss the case and the way in which the proposed activities relate to the strategy for the case. Adjusters
see a great many cases and may have insights and perspectives that can inform the lawyer’s thinking
about a case. In considering whether to fund particular activities at a particular time, the adjuster can also
revise the adjuster’s own strategy for trying to settle the case. If new settlement efforts are indicated, then
expensive defense activities may be deferred until the results of those efforts are known.
Perhaps the most important benefit of the consultation required by preapproval requirements is to
force the lawyer to think harder about the need for particular services. Lawyers paid by the hour make
more money by rendering more services. Being human, they have a tendency to see benefits in additional
services that they would like to render and to discount the costs of those services to the client. That
tendency, if unchecked, would inflate defense costs beyond what a lawyer with no self interest would
prescribe. (This is one reason why companies like fixed fees, which create incentives to the most efficient
defense possible.) The need to justify the lawyer’s recommendations and to discuss them with the adjuster
forces the lawyer to examine those recommendations more carefully and critically, in terms of the value
to the case of doing that work and doing it now, as opposed to deferring it.
None of that resolves the ethical questions the lawyer must address. But a court or committee
considering an abstract or hypothetical question about prior approval is likely to look at such a question
differently if it fails to understand why such requirements are imposed and how they are administered.
Many of the opinions rendered on that subject suggest that those rendering the opinions did not have such
an understanding.
One other preliminary point should be made. Even if approval were denied, that usually would not
forbid the lawyer to proceed as recommended. Rather, denial of approval would usually mean that the
company does not wish to pay for those services at this time. (Adjusters could, in theory, decide that the
proposed activities would be counterproductive and instruct that they not be conducted, but this would
occur, if ever, much less frequently than simple denial of payment.) The lawyer would still have the
option of performing those services and (1) not charging for them, (2) asking the policyholder to pay for
them, or (3) insisting that the company was obliged under the insurance contract to pay for them and
seeking to enforce that right, as the policyholder’s subrogee. The point here is not to say that these are
practical or attractive options. The point is that those options exist and none of them is ethically
forbidden.
And, as discussed in §§ 9.02[4] and 11.03[3] above, there is another option.
[3] ABA Opinion 01-421 Of course, the policyholder must be advised at the beginning of the representation about the
company’s involvement in defense decisions and about any guidelines requiring company approval of
defense activities. (See §§ 9.02[3] & 9.02[4] above.) As explained in ABA Opinion 01-421,4 if the
adjuster rejects a recommendation from counsel or directs a course of action contrary to counsel’s advice,
and counsel believes that taking or omitting actions as directed by the adjuster may be detrimental to the
policyholder’s interests, counsel must seek reconsideration, explaining the dangers counsel sees to those
interests and possibly seeking review by the company’s supervisory personnel. (See § 9.02[4] above.) If
the company remains unmoved, counsel must consult with the policyholder, to determine whether the
policyholder will consent to the proposed action or omission, perhaps reserving the right to claim against
4AMERICAN BAR ASS’N STANDING COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY,
Formal Opinion 01-421 (Ethical Obligations of a Lawyer Working Under Insurance Company
Guidelines and Other Restrictions).
102382060\V-1
- 20 -
the company if result is unfavorable. (See § 9.02[4] above.)
Opinion 01-421 concludes that, if the policyholder consents, counsel may proceed as the company
requests; if not, and if the company still refuses to proceed as the policyholder demands, counsel must
seek leave to withdraw.5 (See § 9.02[4] above.) This procedure fully protects policyholders in the
infrequent cases where company guidelines or direction might create problems, while allowing such
guidelines and direction to operate in the multitude of cases where they do not cause problems. Counsel
will never act (or fail to act) contrary to the policyholder’s interests unless the policyholder gives
informed consent.
After hearing from the defense lawyer, the policyholder may well ask the defense lawyer for
advice on whether to consent to the company’s decision. We recommend that the lawyer advise the
policyholder to get separate counsel if the policyholder wants legal advice on that point. A defense lawyer
is free to tell a client anything the client wants to know about the predicted impact of a decision on the
outcome of a liability suit. But a defense lawyer should not help a client decide whether or not to waive a
disagreement over the course of action to be pursued. By doing so, a lawyer not only goes beyond the
scope of the representation, but also puts at risk the very protection he or she seeks to gain, for the client
can always claim to have been unduly influenced by the lawyer when making the decision.
The claim of undue influence will seem more plausible when one considers that a policyholder’s
refusal to waive a conflict forces a defense lawyer to withdraw from representation. Withdrawal ends the
flow of fees from the carrier. Moreover, waiver obviously serves the company’s interest, and counsel
typically has a long-term relationship with the company. Consequently, a lawyer who encourages an
insured to waive a conflict can be painted as having acted for selfish reasons in a subsequent action
alleging disloyalty.
A final reason for maintaining distance is that the decision to waive the conflict may have
coverage-related implications. Although few cases address the relevant points, the insured’s duty to
cooperate and the carrier’s right to control the defense usually relegate the insured to a passive position.
By objecting to the company’s defense decisions and preventing counsel from executing them, an insured
may be found by a court to have become active, in breach of the insurance agreement. (See §§ 2.03[2],
2.05 above.) Obviously, the consequences of violating the insurance agreement can be severe.
A policyholder may not understand the possible coverage-related implications of a refusal to
waive a conflict. This is a subject about which an insured should receive advice from a coverage attorney,
not a defense lawyer. However, a defense lawyer should alert a policyholder to the need for coverage
advice, as required by the duty to warn.
What if the policyholder not only refuses to waive the conflict but instructs the defense lawyer to
take the depositions the company has refused to authorize and even agrees to pay for them? Although the
policyholder’s willingness to pay may seem to resolve the deadlock, it really just puts the conflict in a
different form. Now, instead of being asked to defend the case in a manner that endangers the insured, the
defense lawyer has conflicting orders. The carrier has instructed the lawyer not to depose the witnesses;
the policyholder has given the opposite instruction.
Before taking the depositions as the policyholder wishes, then, a defense lawyer must obtain a
carrier’s approval. This may or may not be forthcoming because the decision turns on more than just the
opportunity to obtain additional evidence for free. First, the carrier may worry that the witnesses’
statements will provide ammunition for the claimant in the liability case. Not every witness whose
5ABA Formal Op. 01-421, at 7.
102382060\V-1
- 21 -
testimony is expected to strengthen the defense turns out to make a positive contribution. Second, the
carrier may fear that the policyholder is setting it up for a bad faith claim. If the depositions turn out to
have some value, as in all likelihood they will, this will strengthen the insured’s argument that the carrier
should have paid for them. In a bad faith action, its record of having refused to pay will be a black mark.
Third, the carrier may believe that the policyholder is seeking to use the defense to improve its prospects
in the coverage dispute. When the liability suit overlaps with the coverage case, in principle both clients
can use control of the defense strategically. Needless to say, a defense lawyer should not help a carrier
weigh these considerations.
If the policyholder and the company cannot reach agreement, the lawyer will need to move to
withdraw.
[4] In re Rules of Professional Conduct
[a] Requirements of Prior Approval for Defense Activities Are Forbidden in Montana
At a time before the ABA had issued Opinion 01-421,6 the Montana Supreme Court took a
different view of company requirements of advance approval in In re Rules of Professional Conduct.7 The
Montana case was extraordinary. Montana defense lawyers filed an ex parte petition for the court to
exercise original jurisdiction and opine on this question:
1. May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree to abide
by an insurer’s billing and practice rules which impose conditions limiting or directing the scope
and extent of the representation of his or her client, the insured?8
The court granted the petition and directed company respondents selected by petitioners to file
copies of their litigation guidelines. The court inquired whether the parties thought it necessary to develop
a factual record. Petitioners urged that the issues be addressed in a factual vacuum (apart from the filed
copies of the guidelines). The insurers asserted that factual proceedings were essential and stated an intent
to prove that policyholders usually do not have personal interests at stake in insured litigation, that
insurers interests in defending such litigation are almost always closely aligned with the policyholders’
interests, and that the guidelines were administered in ways that protect policyholders from any risk of
harm to personal interests they may have. The court refused to consider the evidence the insurers sought
6AMERICAN BAR ASS’N STANDING COMMITTEE ON ETHICS & PROFESSIONAL RESPONSIBILITY,
Formal Opinion 01-421 (Ethical Obligations of a Lawyer Working Under Insurance Company
Guidelines and Other Restrictions). 7
MT— In re Ugrin, Alexander, Zadick & Higgins, P.C., 2000 MT 110. Mr. Barker represented one of
the insurers in that case and Professor Silver filed an amicus brief. 8
MT— 2000 MT 110 ¶ 3. There was also a question about submission of detailed billing information to
outside bill reviewers. (See § 10.07).
102382060\V-1
- 22 -
to present.9 The insurers were permitted to file one expert opinion, and submitted one by Professor
Geoffrey C. Hazard, Jr.10 As part of the basis of that opinion, the insurers provided Professor Hazard
factual materials about the use of the guidelines, the manner in which they are administered, and the way
in which bill reviews are conducted (with specific protections of confidentiality of the information
reviewed). This factual material was filed with Professor Hazard’s opinion. Petitioners moved to strike
those exhibits to his opinion. The court did not strike the exhibits, but took no account of them.
The central feature of all but one of the sets of guidelines was a requirement that counsel obtain
prior approval from the adjuster before engaging in any of a wide range of defense activities. Failure to
obtain such approval (and to so state on the bill) would result in nonpayment for the unapproved
activities. The one exception was Allstate’s set of guidelines. Allstate required that counsel consult with
the adjuster before conducting various activities, but left all decisions about them to counsel once the
consultation had occurred. All of the guidelines required detailed descriptions of the services rendered.
Most of them required submission of the bills to outside reviewers.
The court treated the guidelines filed by St. Paul as representative of those before it.11 The court
described St. Paul’s declared philosophy as follows:
St. Paul promotes a “team” approach to litigation in which each member
has distinct responsibilities. The claim professional is “responsible for
disposition of claims, whether in suit or not. We expect the St. Paul claim
professional to take the lead in initiating settlement negotiations … . We
also expect the claim professional to have significant input into the
development of litigation strategy (i.e., settle or try).”12
In particular, St. Paul required “prior approval before a defense attorney may undertake to
schedule depositions, conduct research, employ experts, or prepare motions.”13 St. Paul’s guidelines
concluded with a statement that:
“[w]e understand that any conflicts between [the guidelines] and the
9
MT— 2000 MT 110, ¶ 7. 10Professor Hazard, Trustee Professor of Law at the University of Pennsylvania, was the Director
of the American Law Institute during its preparation of the Restatement, and was the Reporter
for the ABA Commission that drafted the Model Rules. 11
MT— 2000 MT 110 ¶ 17. 12
MT— 2000 MT 110 ¶ 18. 13
MT— 2000 MT 110 ¶ 20.
102382060\V-1
- 23 -
exercise of your independent judgment to protect the interests of the
insured must be resolved in favor of the insured. We expect, however, to
be given an opportunity to resolve any such conflicts with you before
you take any action that is in substantial contravention of [the
guidelines].”14
The court began with an extended discussion of whether a company could be a co-client with the
policyholder in a defense representation, concluding that it cannot be a co-client.15 Nor could it be
regarded as an agent of the policyholder, entitled to direct the defense unless and until the policyholder
directed otherwise.16 Any requirement of prior approval impermissibly interfered with the lawyer’s
obligation to exercise independent judgment on behalf of the policyholder.17
[b] Even Insurers in Montana May Still Require Consultation Before Counsel Takes Significant Action
While requirements of prior approval are clearly proscribed in Montana, requirements of prior
consultation, like those in Allstate’s guidelines, still appear permissible. As explained in Respondents’
Brief, “Allstate does not require preapproval, vesting the power to decide on defense activities in defense
counsel, but only after counsel has consulted with Allstate’s adjuster.” Whatever activities are undertaken,
after consultation, will be paid for. Nothing in the court’s opinion condemns an arrangement of this sort.
The Montana court defined the question before it as whether a Montana attorney can “agree to
abide by an insurer’s billing and practice rules which impose conditions limiting or directing the scope
and extent of the representation of his or her client, the insured.”18 The court observed that the rules
before it “typically” impose such conditions and focused specifically on requirements of prior approval,
as exemplified by St. Paul’s guidelines.19 The bottom-line holding is that “defense counsel in Montana
14
MT— 2000 MT 110 ¶ 20. 15
MT— 2000 MT 110 ¶¶ 21–38. 16
MT— 2000 MT 110 ¶¶ 40–42. 17
MT— 2000 MT 110 ¶¶ 43–51. 18
MT— 2000 MT 110 ¶ 11. 19
102382060\V-1
- 24 -
who submit to the requirement of prior approval violate their duties under the Rules of Professional
Conduct to exercise their independent judgment and give their undivided loyalty to insureds.”20
The court expressly refrained from passing on the validity of “a mere requirement of
consultation,” though expressing concern that such a requirement “may be indistinguishable, in its
interference with a defense counsel’s exercise of independent judgment and ability to provide competent
representation, from a requirement of prior approval.”21 But that passage is imbedded in a discussion of
effects of a threat to withhold payment.22 Because a denial of prior approval is no more than a threat to
withhold payment, a requirement of a consultation that does or might lead to such a threat would seem
indistinguishable from a requirement of prior approval. But the same cannot be said of a consultation, like
those addressed here, that—as counsel knows—is simply a prelude to committing the decision to counsel,
with full assurance of payment for whatever action is decided upon.
Moreover, the propriety of requiring simple consultation (without any threat of disapproval), was
undisputed. At oral argument, Justice Gray had the following exchange with one of Petitioners’ counsel,
Robert James:
Mr. James: Rule 1.8 is fairly straightforward. A lawyer shall not accept
compensation for representing a client from one other than the client
unless there is no interference with the lawyers independence of
professional judgment. Rule 5.4 is very similar. It essentially says the
same thing. A lawyer shall not permit a person who recommends,
employs or pays the lawyer to render legal services for another to direct
or regulate the lawyer’s professional judgment. When the billing rules
say that we need pre-approval to hire experts to conduct research to file a
motion, to file pleadings, to engage in trial preparation or to decide how
to staff a case we simply can’t agree to do so. Why? Our position is that
the plain and ordinary meaning of these ethical rules prohibit us from
allowing an insurance company from directing and regulating our
judgment to do so. It’s just that simple.
Justice Gray: Counsel, if the billing rules said “consult” instead of
“approve,” would they still violate the rules?
Mr. James: No, I think that we consult with the insurance company all
the time with insurance adjusters and tell them here’s what we think
MT— 2000 MT 110 ¶¶ 16–20. 20
MT— 2000 MT 110 ¶ 51. 21
MT— 2000 MT 110 ¶ 44 (emphasis omitted). 22
MT— 2000 MT 110 ¶¶ 43–45.
102382060\V-1
- 25 -
should be done so I think that one of the things that the insurance
companies can expect defense counsel to do is to consult with them and
find out what our thinking is, why we are thinking and in many cases an
adjuster may say let me question you about that. Maybe this isn’t a good
thing at this particular time and maybe you will agree or maybe you will
disagree.23
The latter statement effectively endorses the propriety of the type of consultation Allstate’s
guidelines called for. The fact that consultation of this sort was not in dispute may be one reason the court
did not address that issue.
Defense counsel who wished to resist such a requirement would have to argue that the lawyer’s
interest in future referrals would tend to make the lawyer too compliant with company suggestions, even
when not accompanied by a possibility of nonpayment in the particular case. But that risk is inherent in
company selection of counsel, even without any consultation requirement. If that risk, apart from any
specific facts indicating a particularized problem, violates the Rules of Professional Conduct, then both
the traditional liability policy and the business of defending cases under such policies would be unlawful.
Lawyers would be obliged to decline all agreements with insurers, not just those calling for prior approval
(or consultation). The court clearly indicates an intent to preserve what the court regarded as traditional
practices in insurance defense against the innovations recently instituted by insurers. The court nowhere
suggests an intent to proscribe the traditional practices along with the innovations. Consequently,
counsel’s interest in future referrals should not preclude requiring advance consultation in the context of a
traditional insurance defense relationship.
The court has now ruled that “under the [Montana] Rules of Professional Conduct, the insured is
the sole client of defense counsel.”24 But a company’s right to consultation does not depend on being a
co-client. The law outside Montana denies a company the right to be a co-client where coverage issues
create divergent interests between company and policyholder in the determination or handling of issues in
the litigation against the policyholder.25 But a coverage-related conflict does not eliminate the company’s
interest in the defense. The company still desires the most effective and efficient defense, as the company
is still obliged to pay defense costs and may be required to pay any judgment or settlement. The
policyholder is still bound by the contractual duty of cooperation, except insofar as that duty is excused
by the conflict. Surely, even where there is a conflict of interest, “advance consultation by defense
23Oral Argument, 2000 MT 110 (Mont. 2000), recording on file with the authors. 24
MT— 2000 MT 110 ¶ 38. 25E.g.,
CA— San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 162 Cal. App. 3d 358, 365 (1984)
(policyholder has right to select independent counsel, at insurer’s expense);
WA— Tank v. State Farm Fire & Cas. Co., 105 Wash. 2d 381, 383 (1986) (policyholder has right to
independent counsel, but insurer may select, subject to enhanced duty of good faith).
102382060\V-1
- 26 -
counsel … is as minimal a form of cooperation as one can imagine.”26 (See § 14.03[1], below.) That is
even more obviously true where, as in almost all cases defended by insurers, there is no conflict of any
sort between the company’s interests and those of the policyholder.
To be sure, the insurance contract does not govern the relationship between the company and
defense counsel. But counsel (especially counsel representing and answerable solely to the policyholder)
could injure the policyholder’s coverage by failing to act in accordance with the policyholder’s duties
under the policy. At least so long as consulting with the company does not entail any substantial risk of
harm to the policyholder, counsel’s duties to the policyholder require counsel to engage in such
consultation (if requested by the company) to avoid any risk of injuring the policyholder’s coverage
interests.
In light of the foregoing, the only significant form of possible injury to the policyholder from
consultation would be loss of the protection of the attorney-client and work product privileges for the
information disclosed. But the court’s ruling that disclosure to legal auditors requires the policyholder’s
informed consent necessarily presupposes that communications with the company itself would be
privileged. The risk to the policyholder which the court found to preclude implied authority to disclose
was the risk that disclosure to the auditor would forfeit the privilege.27 But that must assume that
disclosure to the company itself would not forfeit that privilege. Otherwise, disclosure to the auditor
would make no difference. This is consistent with authority outside Montana, which recognizes the
company as a person of common interest to whom privileged information may be disclosed without loss
of protection against third persons.28 So consultation with the company ordinarily should not waive any
privilege, even in Montana.
[c] Other Jurisdictions Ought Not To Follow Montana on the Guidelines Issue
[i] The Montana Court Distorted the Relationships among the Parties to the Insurance Defense Relationship
The Montana court departed radically from the mainstream of both judicial and scholarly opinions
(including the court’s own prior opinions) on many fundamental issues. The mainstream opinions
Montana repudiates are well founded, and the court offered no sound reasons for departing from them.
The only real justification given was an unstated finding of fact, unsupported by any record, and made in
a proceeding where insurers sought to provide evidence to the contrary and were flatly denied any
opportunity to do so. The court’s implicit factual premise was simply untrue, and any court willing to
look at evidence before making factual findings ought not to accept that premise. To show that the
Montana opinion does rest on that unsupported finding of fact, it is necessary to point out the flaws in the
26Kent D. Syverud, The Ethics of Insurer Litigation Management Guidelines and Legal Audits,
21 No. 7 INS. LITIG. REP. 180, 188 (1999). Of course, in a conflict situation, consultation by
independent counsel would be limited to the extent necessary to protect the policyholder’s
confidential information pertinent to the conflict. 27
MT— 2000 MT 110 ¶ 55–78. 28E.g., RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 134, cmt. f (2000) (lawyer’s
communications with insurer privileged); see RESTATEMENT § 76 (protection for common
interest arrangements generally).
102382060\V-1
- 27 -
purported legal analysis.
The most obvious point of divergence from the mainstream of the law elsewhere is the holding
that the policyholder is always the only client of defense counsel. (See Chapter 4 above.) Some authorities
say the policyholder is the “primary” client and treat the company as a contingent or secondary client,
whose interests may be subordinated to those of the policyholder when the policyholder’s interests
diverge. (See §§ 2.04[3], 5.04, above.) But even that provides the company with ordinary client status in
the great bulk of the cases defended under insurance contracts.
The most hostile scholarly view treats the company not as a client, but as an agent for the
policyholder.29 That view allows the policyholder to take control, covertly, by instructing defense counsel
on some points and telling counsel not to let the company know. It also allows the policyholder to have
counsel keep whatever secrets the policyholder chooses from the company. We find this view contrary to
the contract between company and policyholder. But the point here is that it allows the company to
manage the defense, as usual, in all cases where the policyholder does not choose to interfere with that
management. (Of course, counsel would be obliged to point out occasions when the policyholder might
wish to interfere.) It is this alternative that allows so many commentators to say it really doesn’t matter
greatly whether the company is treated as a client.30
The Montana court refused even to consider these more moderate ways of protecting
policyholders within a conventional insurance defense relationship. It appears to constitute the lawyer as a
sort of trustee for the policyholder, charged with doing whatever the lawyer thinks is best for the
policyholder, at least unless the policyholder happens to instruct otherwise. (It is unclear whether any
consultation with the policyholder is contemplated, unless the policyholder happens to seek such
consultation.) Lawyers are normally considered agents, not trustees.
[ii] The Decision Subjects Insurers to Unjust Vicarious Liability Not only does the Montana court deprive insurers of some of the most effective methods of
avoiding wasteful defense expenditures, but it also threatens injustice to insurers on responsibility for
judgments. The law in Montana, like that in most states (see § 11.06 above), has held the company liable
for any negligence of defense counsel. That rule has been predicated on the company’s right to supervise
and control defense counsel’s actions. The court has now deprived insurers of any right to control, but it
has not altered their vicarious liability (and it seems unlikely to do so, given the extremely populist
approach it takes on most insurance issues). Insurers apparently will be able to sue defense lawyers for
malpractice.31 But that is a costly process, even if any judgment is collectible. An ability to try to prevent
malpractice should be a precondition to any vicarious liability. But the Montana court denies or limits any
such ability.
29E.g., Stephen L. Pepper, Applying the Fundamentals of Lawyers’ Ethics to Insurance Defense
Practice, 4 CONN. INS. L.J. 27, 49–50 (1997–98). Professor Pepper’s views are discussed in
§ 2.04[2] above, and are critiqued in § 2.05[1]–[7]. 30Thomas D. Morgan, What Insurance Scholars Should Know About Professional Responsibility,
4 CONN. INS. L J. 1, 6–9 (1997). 31
MT— 2 P.3d at ¶ 35.
102382060\V-1
- 28 -
[iii] The Montana Court Misused the Rules of Professional Conduct Preexisting Montana law was strong for the proposition that the company is a co-client, and one
with an absolute right of control.32 The court dismissed all of it for failure to consider whether a company
is a client “under the Rules of Professional Conduct.”33
But the draftsmen of the Model Rules never intended those rules to address this issue. The Scope
statement declared that “for purposes of determining a lawyer’s authority and responsibility, principles of
substantive law external to these Rules determine whether a lawyer-client relationship exists … . Whether
a client-lawyer relationship exists for any specific purpose can depend on circumstances and may be a
question of fact.”34 While Montana did not adopt the Scope statement, it did adopt the text of the Model
Rules, which contained no provisions governing the formation of an attorney-client relationship. Those
Rules provide no support for jurisdictions other than Montana to adopt the latter’s view. The Restatement
also looks to the facts of the interaction between lawyer and putative client, not to any categorical rule, to
determine when an attorney-client relationship arises.35
[iv] The Montana Court Rejected Normal Conflict Management Methods The Montana court’s sticking point, of course, was Rule 1.8(f), providing that when a lawyer
receives payment or direction from one other than the client, the lawyer must remain unfettered in
“independence of professional judgment.” From the standpoint of an policyholder client, the Montana
court thought this inconsistent with any right or attempt by the company to direct.
If accepted, that logic would preclude any lawyer from ever undertaking to represent two or more
clients in the same matter. Each client has a right to direct the lawyer, but each would also have a right
that the lawyer be free of direction by the others. Taken in the abstract, as court took the insurance
defense relationship, the two sets rights cannot coexist.
Of course, a lawyer who is asked to accept a prior approval requirement must know that denial of
approval will not create an insoluble problem in performing the lawyer’s duties to the policyholder. In
32See cases purportedly distinguished in:
MT— In re Ugrin, Alexander, Zadick & Higgins, P.C., 2000 MT 110, 24-33; Palmer v. Farmers Ins.
Exch., 261 Mont. 91, 108 (1992); State ex rel. United States Fid. & Guar. Co. v. Montana
Second Judicial Dist. Court, 240 Mont. 5, 9–10, (1989); Safeco Ins. Co. v. Ellinghouse, 223
Mont. 239, 252–53 (1986). 33
MT— 2000 MT 110 ¶ 23. 34AMERICAN BAR ASS’N, ANNOTATED MODEL RULES OF PROF’L CONDUCT, xvii (3d ed. 1995).
The same statement is now found in MODEL RULES OF PROF’L CONDUCT, Scope, cmt. [17]
(2011). The standards for formation of an attorney-client relationship are discussed in § 4.04
above. 35RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 14 (2000). See RESTATEMENT
§ 134 cmt. f (“Whether a client-lawyer relationship also exists between the lawyer and the
insurer is determined under § 14.”).
102382060\V-1
- 29 -
fact, the normal resolution in dual client representations of all sorts is to warn the clients at the outset of
the risk of disagreement between them, but (if they are willing) then to undertake the representation
unless and until some disagreement arises. At every stage of the relationship, the lawyer exercises
independent judgment in advising the clients of the available options, the risks and benefits of each, and
the lawyer’s recommendation of which option is preferable. So long as the clients can reach agreement on
the instructions to the lawyer (which may be done by their deferring to a single decision maker), the
lawyer executes the instructions. Even if the instructions differ from the lawyer’s recommendation, that
does not impair the lawyer’s independence of judgment, because that independence was fully exercised in
advising the clients. If the clients disagree with one another, the lawyer has a conflict and must withdraw.
At least outside of insurance representations, it is never the job of a lawyer to override the desires of one
client to serve those of another.
In the insurer-policyholder dual client relationship, the policyholder’s protection (regardless of
any terms of the economic relationship between company and counsel) is the lawyer’s obligation to
withdraw rather than inflict unconsented harm on any known interest of the policyholder. This means that
the lawyer cannot harm the policyholder without the latter’s informed consent, even if the harm is one the
insurance contract requires the policyholder to tolerate.36
36
IL— Rogers v. Robson, Masters, Ryan, Brumund & Belom, 74 Ill. App. 3d 467, 474 (1979, aff’d, 81
Ill. 2d 201 (1980) (even if policy gives insurer right to settle, defense counsel may not do so over
policyholder’s objection);
LA— Teague v. St. Paul Fire & Marine Ins Co., 974 So. 2d 1266, 1272–73 (La. 2008) (lawyer
breached duty to policyholder by settling case without informing policyholder; discussing
Rogers approvingly);
KS— Miller v. Sloan, Listrom,.Eisenbarth, Sloan & Glassman, 267 Kan. 245, 258 (1999) (defense
cousel breached duty to policyholder by settling without giving him notice of settlement
hearing);
MO— Arana v. Koerner, 735 S.W.2d 729, 733–34 (Mo. Ct. App. 1987) (following Rogers). See also
NJ— Lieberman v. Employers Ins., 84 N.J. 325, 339 (1980) (where policyholder withdrew consent to
settle and directed that case be tried, lawyer breached duty by settling at insurer’s instruction;
insurer also breached policy’s consent requirement). But see
AL— Mitchum v. Hudgens, 533 So. 2d 194, 201 (Ala. 1988) (disagreeing with Rogers: “If the insured
has contracted away the right to require his consent prior to a settlement of a claim against him,
no real conflict of interest exists between the insured and the insurer, at least where the claim or
settlement is within policy limits and there has been no reservation of rights by the insurer.”).
102382060\V-1
- 30 -
The Montana court simply ignored that protection. Yet the ability to withdraw, if necessary, is an
important reason that a lawyer may agree to prior approval requirements: withdrawal can always avoid
any action disloyal to the policyholder, while bringing the dispute to the attention of a court that can
resolve the dispute or otherwise protect the policyholder (if the company’s decision is improper).37 None
of the guidelines at issue in Montana limited the ability of counsel to withdraw. The Montana court’s
resort to radical measures when standard protections would suffice is another reason its opinion should
not be followed elsewhere.
Moreover, the Montana court completely altered normal means of analyzing and responding to
conflicts. Ordinarily, the lawyer must assess each situation on its own particular facts to determine
whether there is a substantial risk that the lawyer’s freedom to advise particular courses of action may be
limited by the lawyer’s other duties or interests.38 Only when the facts give rise to such a risk must steps
be taken to resolve the conflict or seek consent. The Montana court has instead adopted a broad
categorical rule embracing a multitude of situations in which there are no divergent interests at all.
This blunderbuss approach stands in sharp contrast to the more precisely aimed approach taken by
the more recent Opinion 01-421 of the American Bar Association. (See § 11.03[2] above.)
[v] The Montana Court Made Up the Facts (or Accepted the Facts Made Up by Petitioners)
The underlying premise for the ruling is an empirical proposition:
Respondents argue vigorously that the interests of an insurer and an
insured usually coincide and that most litigation is settled within an
insured’s coverage limits. These arguments gloss over the stark reality
that the relationship between an insurer and insured is permeated with
potential conflicts.39
37Withdrawal from representing the policyholder would require court approval. If that were
denied, counsel would presumably have to withdraw from representation of the insurer, while
continuing to represent the policyholder. Counsel would then perform the services requested by
the policyholder. Counsel could collect for those services from the insurer if it were later held
that they were ones the insurer was obligated to provide. The policyholder, having requested the
services, should be liable if the insurer is not, but might lack the ability to pay. Even so, counsel
would be in the same position as any other lawyer refused permission to withdraw when the
client is unable or unwilling to pay. 38RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 121 (2000) (general conflict of
interest standard). 39
MT— In re Ugrin, Alexander, Zadick & Higgins, P.C., 2000 MT 110 37 (Mont. 2000) (emphasis
added). The court goes on to say that, “[i]n cases where an insured’s exposure exceeds his
insurance coverage, where the insurer provides a defense subject to a reservation of rights, and
where an insurer’s obligation to indemnify its insured may be excused because of a policy
defense, there are potential conflicts of interest.” 2000 MT 110 ¶ 37. So there are. But the court
102382060\V-1
- 31 -
The last sentence effectively asserts that conflicts are so pervasive that it is hopeless to try to deal
with them on a case-by-case basis: only a categorical provision can adequately protect policyholders. But
the supposed pervasiveness of conflicts is a factual statement. The court had before it no record to support
such a finding. This was an original proceeding in which the court refused the insurers the opportunity to
present evidence on issues including the infrequency of conflicts and the nonexistence of harm to
policyholders resulting from such conflicts.40 The court relies primarily on distorted statements from
commentators, all of whom recognize that conflicts are the exceptional situation and that such conflicts
can be managed within a dual-client relationship.41
We believe that the court’s factual assertion is blatantly false. Certainly Respondents might have
shown that, had the court been willing to allow presentation of evidence. Conflicts are infrequent, are
usually managed easily, and rarely (if ever) result in harm to policyholders. Because the court was acting
in an essentially legislative capacity, prescribing a rule for the future, it was not subject to the strict
requirements of due process. But courts in other contexts will be subject to those requirements. And even
those acting legislatively ought to wish to have the facts before making decisions that will be highly
disruptive of an important business, one whose charges are a significant part of both family and business
budgets. If insurers are given the opportunity to develop the facts and have them honestly assessed, the
factual claim made by the Montana court cannot survive scrutiny.
The decision ultimately rests on a false and unsupportable finding of fact. The legal approach
taken in reaching the decision is far outside the mainstream of American law. So, it seems highly unlikely
says nothing about how frequent such situations are (or why they should dictate handling of
situations where those problems don’t arise). Nor does the court consider whether there may be
ways to manage such conflicts that fully protect the policyholder without always divesting the
insurer of what even the Montana court apparently conceded is a contractual right of control. 40Similar statements were made, also without the benefit of any factual record in Am. Ins. Ass’n
v. Kentucky State Bar, 917 S.W.2d 568 (Ky. 1996), another advisory opinion. 41Thomas D. Morgan, What Insurance Scholars Should Know About Professional Responsibility,
4 CONN. INS. L. J. 1, 7–8 (1997), is quoted as saying that dual clients “would routinely create the
potential for conflicts.” But that is true whenever there are multiple clients. Professor Morgan
makes no claim about how frequent conflicts are, and argues that it really makes little difference
in addressing any actual problems whether the insurer is a client or not.
Kent D. Syverud, What Professional Responsibility Scholars Should Know About Insurance, 4
CONN. INS. L. J. 17, 23 (1997), is quoted for the proposition that both insurers and policyholders
have real stakes and that “history … suggests that unbridled control of the defense of litigation
by either the insurance company or the insured creates incentives for the party exercising that
control to take advantage of the other.” But he makes this point just after saying that, in the vast
bulk of cases, insurer control has worked well. 4 CONN. INS. L J. at 22–23. One avoids insurer
abuses by applying special rules, such as Cumis, in situations demanding them, and by enforcing
ordinary rules of professional conduct and insurance bad faith that prohibit abuse and make it
dangerous and expensive to commit it. Contrary to the Montana court’s holding, Dean Syverud
urges that professional responsibility law not disrupt relationships created by insurance law to
efficiently handle liability risks. 4 CONN. INS. L J. at 24–25. The Restatement is quoted on the
existence of conflict risks, but its proposals for dealing with such risks are dismissed out of hand.
2000 MT 110 ¶ 42.
102382060\V-1
- 32 -
that more than a few jurisdictions would follow the Montana court. It is far from clear that any
jurisdiction will follow that court. Certainly, no jurisdiction should do so.
