Managing Litigation by Fiat: Can An Insurer Impose Litigation Guidelines on Defense Counsel Hired to Defend a Potentially Insured Claim?, Insurance Policyholder Advocate

Insurance policies that include a duty to defend generally provide—explicitly or, in the insurer's view, by implication—that the insurer gets to select counsel to defend a potentially covered claim. Insurance policies that provide for the policyholder to defend, with the insurer paying the cost of defense, often give the insurance company the right to provide input into the selection of counsel. And even policies which provide that the policyholder has the right to select counsel and defend commonly state that the insurer is liable only for "reasonable defense costs."

Where an insurer bears some or all of the cost to defend a lawsuit, the insurer often takes the position that it will pay defense costs only if defense counsel scrupulously follows "defense guidelines" drafted by the insurer, and the insurer refuses to pay defense costs it claims are not consistent with the guidelines, leaving the client and defense counsel at odds. Although insurers treat compliance with these guidelines as a strict condition to paying defenses costs, as a purely legal matter, they are not: Most insurance policies do not include or incorporate by reference such defense guidelines (though of course they could), quite plainly making them extra-contractual.

In some cases, an insurer's defense guidelines are very specific and stringent, for example stating that the insurer will not pay for conferences between two lawyers or certain types of activities such as legal research or travel time. In other cases, they are more general, stating (for example) that the insurer will not pay for "administrative" work or certain types of expenses (e.g., expenses it considers to be "overhead"). Whatever form such guidelines may take, two things are clear: (1) defense cost guidelines represent an attempt by insurers to impose restrictions on the duty to defend (or to pay defense costs) that are not part of the written contract between the insured and the insurer, and therefore they are of questionable enforceability; and (2) they can be especially harmful to a policyholder if they attempt to restrict, or have the effect of restricting, defense counsel's zealous representation of its client and are unlikely to be enforced by a court when that is the case.

Somewhat surprisingly, these types of guidelines appear not to have been the subject of many challenges, at least judging from the paucity of reported decisions on this subject. Perhaps that is because the policyholder's interests and those of the insurer are often aligned, at least to some degree, in trying to keep defense costs down, and accordingly any disputes that do arise are resolved through discussion and negotiation. Or perhaps it is because a policyholder for whom the defense is critical does not want to upset the apple cart at peril of having the insurer take a hard line on defense costs. Whatever the cause, policyholders need to examine carefully whether such guidelines improperly impinge upon counsel's ability to provide—and the policyholder's contractual right to receive—a complete and zealous defense consistent with the applicable ethical rules.

Applying a common-sense view, some courts have recognized that insurers cannot impose restrictions on defense counsel that hamper or restrict counsel's ability to provide a full and complete defense. See, e.g., Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1009 (Cal. Ct. App. 1998) (stating that "[i]nsurer-imposed restrictions on discovery or other litigation costs may well violate the insurer's duty to defend as well as the attorney's ethical responsibilities to exercise their independent professional judgment in rendering legal services."); In re Urgin, 2 P.3d 806, 814-15 (Mont. 2000) (examining the requirement for the insurer's prior approval for defense work and holding "the requirement of prior approval fundamentally interferes with defense counsel's exercise of their independent judgment, required by Rule 1.8(f), M.R. Prof. Conduct.").

Several state ethics boards and similar attorney ethics organizations have expressed similar views. For example, in an advisory opinion, the Ohio Ethics Board addressed in detail whether it is proper for an insurance defense attorney to abide by an insurer's litigation guidelines in the representation of the insured.1 The Board stated that, "the majority view is that certain carrier imposed limitations give rise to ethical problems." Among other things, the Board held that it was "improper under DR 5-107(B) for an insurance defense attorney to abide by an insurance company's litigation management guidelines in the representation of an insured when the guidelines directly interfere with the professional judgment of the attorney." The Board then described litigation guidelines that would interfere with the professional judgment of an attorney. These guidelines include: (a) guidelines that restrict or require prior approval before performing computerized or other legal research; (b) guidelines that dictate how work is to be allocated among defense team members by designating what tasks are to be performed by a paralegal, associate, or senior attorney; (c) guidelines that require approval before conducting discovery, taking a deposition, or consulting with an expert witness; and (d) guidelines that require an insurer's approval before filing a motion or other pleading. The Board further noted that, "[o]ther guidelines may or may not interfere with an attorney's professional judgment."

A similar approach was set forth in ethics opinions, bar association comments, and advisory opinions in, among other states, Pennsylvania, Texas, Utah, Washington, and Indiana2 These analyses focus, in large part, on the potential conflict between defense counsel's duty to zealously represent its client (and the client's obvious interest is a fulsome defense) and the fact that another party (often, though not always, an insurer) that is paying for the defense may have a legitimate interest in managing the cost of litigation.

By way of example, the Pennsylvania Bar Association on Legal Ethics and Professional Responsibility3,while noting that insurer-imposed guidelines do not violate ethics rules per se, stated as follows:

[U]nder the Pennsylvania Rules of Professional Conduct], "an agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a manner contrary to the client's interests. . . . Any duties that the lawyer may owe to the Third Party Provider by contract or otherwise cannot prevail over the lawyer's duties owed to the client under the guise of enabling the Third Party Provider to provide a "cost-effective" defense and indemnity to the client.

Discussing litigation guidelines that require approval of litigation strategy by third party providers (such as insurers), the Committee further stated that, "[l]itigation management guidelines, no matter how well intended, cannot operate to remove the attorney's independent professional judgment and replace it with that of a Third Party Provider." Id. at *5. In other words, guidelines that have the effect of micromanaging the defense by controlling the activities of defense counsel are likely to be viewed as problematic.

In summary, while insurer-imposed defense cost guidelines may not be found to be improper or unenforceable per se, they are unlikely to be enforced by a court if they infringe in a material way on defense counsel's duty to zealously represent its client, the policyholder. Furthermore, a policyholder likely will have a reasonable basis to instruct counsel to ignore guidelines that arguably are inconsistent with ethical rules and attempt to restrict counsel's legitimate discretion in running a case (e.g., a rule that two attorneys cannot attend court hearings or a rule that the insurer will not pay for conferences between two attorneys).

So what actions should a policyholder take?

  • First, if an insurer attempts to impose on defense counsel stringent defense guidelines that the policyholder or defense counsel believes restrict defense counsel's ability to defend a case with the appropriate level of independence and effort, the policyholder and defense counsel should raise the issue with the insurer in writing at the beginning of the representation, specifically objecting to the problematic portion(s) of the guidelines and citing (if necessary and appropriate) relevant ethics opinions.
  • Second, if an insurer acts overly aggressively in enforcing litigation guidelines (for example, by refusing to reimburse significant amounts of defense costs), the policyholder or its defense counsel should write to the insurer to the effect that the insurer's guidelines or conduct are improperly restricting counsel's ability to litigate the case. At the very least, such communications should cause the insurer to think twice about attempting to enforce litigation guidelines in an overly aggressive manner.

As noted above, while most courts and ethics organizations have not categorically rejected such guidelines per se, they are likely to come out in favor of the policyholder if they conclude that the guidelines, as written or applied, in effect substitute the judgment of the insurer for the judgment of the lawyer in staffing and litigating a case.

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1 The Supreme Court of Ohio Bd. of Comm'rs on Grievance and Discipline, Op. 2000-3 (2000).

2 See, e.g., Tex. Comm. on Prof'l Ethics, Op. 533 (2000); Utah State Bar Ethics Advisory Op. Comm., Op. 02-03 (2002) (2002 WL 340262); Wash. State Bar Assoc., Formal Op. 195 (1999); Ind. State Bar Assoc. Legal Ethics Comm., Op. 3 (1998).

3 Pa. Bar Ass'n Comm. on Legal Ethics and Prof'l Responsibility, Formal Op. 2001-200 (2001) (2001 WL 1744775).

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