Chapter 4. Insurance defense practice - Outside counsel guidelines and billing audits

Yet another form of “managed advocacy” arises where insurers use detailed litigation guidelines to manage the work of outside defense counsel. Such guidelines typically address all aspects of case preparation and handling, including investigation, hiring of experts, depositions, reporting, settlement negotiations, trial, and billing format. They require multiple planning conferences with claims handlers in the insurance company, followed by written litigation plans and detailed budgets, and provide that defense counsel will not be paid for activities not included in the litigation plan or budget. Such litigation guidelines seek to shift trial preparation from lawyers to less costly technicians. Taken to the extreme, the result may be a significant diminution of the quality of defense practice.

At the same time, many insurers submit the bills of outside defense counsel to fee audit firms that routinely and sometimes arbitrarily cut all bills, with some apparently charging insurance companies contingent fees for the amount they slice from defense legal bills.

In 1999, the State Bar of Georgia issued proposed Formal Advisory Opinion 99-R2, recommending that the Supreme Court hold that lawyers were not bound to follow litigation guidelines imposed by persons or entities other than the client whom the attorney actually represents in a legal proceeding. The insurance industry responded with arguments that the insured, in accepting a defense under the insurance contract, has delegated to the insurer the exclusive authority to manage litigation and make all decisions concerning that litigation. After a rare oral argument on a proposed FAO, the Supreme Court declined to adopt the proposed FAO “as submitted.” The issue of the extent to which an insurer may actively and exclusively control the details of litigation and case preparation remains unsettled in Georgia.¹

The lack of a clear ruling that a lawyer may be disciplined for complying with an insurance company's litigation guidelines does not mean that a lawyer should completely defer to insurance company guidelines in preparation of a case on behalf of an insured defendant. The attorney who signs pleadings and enters an appearance in court on behalf of the insured would be hard pressed to contend that the insured defendant is not his client. Rule 1.8(f) provides “A lawyer shall not accept compensation for representing a client from one other than the client unless ... (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship.” ² And Rule 5.4(c) provides that “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 in rendering such legal services.”

In the absence of clearer guidance, the defense lawyer must make his own ethical choices. If the attorney believes that some particular action is reasonably necessary to protect the interests of the insured, the attorney should so advise the insurer and request authority from the insurer to take the requested action and incur the related fees and costs. If the insurer declines, the attorney should inform the insured of the insurer's decision and why the action is necessary or recommended. If the insured requests the attorney to take such action, the attorney may request payment from the insured of the legal fees and costs that the insurer refuses to pay, and advise the insured to seek independent counsel. If the insured and the insurer are unwilling or unable to make satisfactory arrangements, the attorney may consider whether it is permissible or mandatory to withdraw.

While the Georgia Supreme Court deferred ruling on the propriety of litigation guidelines overriding the lawyer's professional judgment, the Montana Supreme Court did not. In the appeal of a declaratory judgment action filed by a defense firm, which drew a flurry of amicus briefs from the insurance industry and bar organizations around the country, that court unambiguously addressed both insurers' litigation guidelines and fee audit practices.³

First, the court considered an insurer's “Litigation Management Plan” that required “that defense counsel secure the consent of the claim professional prior to scheduling depositions, undertaking research, employing experts or preparing motions.” After virtually encyclopedic analysis, the court concluded:

• [T]he requirement of prior approval fundamentally interferes with defense counsels' exercise of their independent judgment, as required by Rule 1.8(f) …. Further, prior approval creates a substantial appearance of impropriety in its suggestion that it is insurers rather than defense counsel who control the day to day details of a defense …. We hold that defense counsel ... who submit to the requirement of prior approval violate their duties under the Rules of Professional Conduct to exercise their independent judgment and to give their undivided loyalty to insureds.⁴

Next the court turned to an insurer's requirement for all its defense counsel as follows: “All requested books and records must be made available to us during business hours for examination, audit, or reproduction. We shall employ, at our discretion, internal auditors or independent outside auditors for purposes of accomplishing audits.” Following exhaustive analysis, the court held:

• We hold that disclosure by defense counsel of detailed descriptions of professional services to third-party auditors without first obtaining the contemporaneous fully informed consent of insureds violates client confidentiality under the Rules of Professional Conduct.⁵

While Georgia defense lawyers do not have clear guidance from the Georgia Supreme Court, they may find meaningful guidance in the seminal Montana decision and cases citing it.

¹ George E. Duncan, Jr., Preparation of an Automobile Case from the Defense Perspective, Georgia Law of Torts: Preparation for Trial (Seminar Materials, ICLE, 2002).

² State Bar of Georgia, Rules of Professional Conduct, Rule 1.8(f).

³ In re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2000 MT 110, 299 Mont. 321, 2 P.3d 806 (2000).

⁴ In re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2000 MT 110, 299 Mont. 321, 2 P.3d 806, 815 (2000).

⁵ In re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2000 MT 110, 299 Mont. 321, 2 P.3d 806, 822 (2000).

On May 22, 2018, former State Bar of Georgia president Ken Shigley will be a candidate for election to the Georgia Court of Appeals. The only other candidate is Ken Hodges, a former Dougherty County District Attorney. Ken Hodges was the Democratic Party nominee for Attorney General in 2010.