Corporate Governance

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					Insurers’ Attempts to Limit Defense Costs,
 Litigation Guidelines, and Related Ethical
             Considerations: Balancing the
                  Interests of Insurers and
                                   Joseph D. Jean
                             Nicole Bearce Albano
                                 Barbara Sellinger
                               November 17, 2011

• Joseph D. Jean, Member,
  Lowenstein Sandler PC, Insurance Coverage
• Nicole Bearce Albano, Member,
  Lowenstein Sandler PC, Litigation Group
• Barbara Sellinger, General Counsel, artsHorizon

Summary of Topic/Outline

•   Introduction: The Nature of Insurance
•   Know Your Insurance Policies
•   Getting Your Insurer to Defend Your Claim
•   Insurers’ Attempts to Limit Defense Costs
•   Insurer Imposed Litigation Guidelines

Introduction: The Nature of Insurance

• Risk transfer mechanism
• Competing interests between insurer and insured
•   Liability Coverage

          Protects the Company against loss to the Company itself
          This insurance covers you against damages that you might inflict
           on a third party (someone else) as a result of an accident or other
          Insurance covers expenses for suits brought by a third party as a
           result of the policyholder's actions

Know Your Insurance Policies

Getting Your Insurer to Defend Your Claim

• Know your policy
• Give notice early
• Develop a strategy early
     Know the issues
     Manage the defense
     Choose appropriate counsel
• Keep your insurer informed
• Is litigation necessary?

Getting Your Insurer to Defend Your Claim

•   In most jurisdictions, only one claim need be
    “potentially” covered for the insurer to have a “duty to
    defend” against all claims. Nat’l Union Fire Ins. Co. v. Rhone-
    Poulenc, 1992 Del. Super. LEXIS 45 (Sup. Ct. Del. 1992).
•   Duty to defend is broader than duty to indemnify. See, e.g.,
    Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 310, 486 N.Y.S.2d 873,
    476 N.E.2d 272 (1984).
•   Claims/complaints are interpreted broadly and in favor of
    coverage. See, e.g., Powell v. Liberty Mut. Fire Ins. Co., 252 P.3d 668,
    672 (Nev. 2011).

The Duty to Defend in New Jersey

•   New Jersey is different
•   Duty to defend is guided by Burd v. Sussex Mutual Insurance Co., 267 A.2d 7 (N.J.
          The policyholder fired a shotgun, injuring a third party. The victim alleged both negligent
           and intentional tort claims and the insurer refused to defend.
          Policyholder defended the action through his own counsel and the plaintiff was awarded
          Burd held that the insurer had the option of leaving the policyholder to defend the claim by
           itself; then if at the end of the case covered liability was imposed, the insurer reimburses
           the insured’s defense costs.
•   See also, SL Indus., Inc. v. Am. Motorists Ins. Co., 607 A.2d 1266 (N.J. 1992) (holding
    insurer’s initial decision not to defend fraud claims against insured was appropriate
    where there was no indication at time insured forwarded complaint that insured’s
    former employee had suffered emotional distress); Aetna Cas. & Sur. Co. v. Ply Gem
    Indus., Inc., 778 A.2d 1132 (N.J. Super. Ct. App. Div. 2001) (holding that, absent
    actual proof of damage during insured’s policy period, insurer had the right not to
    defend and “risk” a duty to later reimburse insured for defense costs); Grand Cove II
    Condo. Ass’n, Inc. v. Ginsberg, 676 A.2d 1123 (N.J. Super. Ct. App. Div. 1996)
    (holding duty to defend “converted to a duty to reimburse pending the outcome of the
    coverage litigation”).

 The Tripartite Relationship

 Relationship between insured, attorney and insurer.
                                  Defense Counsel

The Tripartite Relationship

•      Standards vary by jurisdiction
•      Impacts communications and sharing of information
•      Insurer is not entitled to all information
•      Loyalty of counsel to insured vs. to insurer
     •       Continental Cas. Co. v. Pullman, Comley, Bradley & Reeves, 929 F.2d 103,
             108 (2d Cir. 1991) (attorney owes duties and allegiance to insured, not to the
            Lieberman v. Employers Ins. of Wausau, 419 A.2d 417, 424 (N.J. 1980)
             (defense counsel retained to represent the insured owed his sole duty to the
•      Fact that an insurer is paying the bills does not alter the lawyer’s ethical obligations
       to the insured.
            N.J. Adv. Comm. Prof. Eth., Opinion 502 at *1 (Sept. 23, 1982) (“The duty of
             an attorney hired by the insurance company runs to the insured and the fact
             that the attorney is to be paid by the carrier does not dilute that duty.”)
            Montanez v. Irizarry-Rodriguez, 641 A.2d 1079, 1084 (N.J. Super. Ct. App.
             Div. 1994) (“Nonetheless, it is clear that insurance counsel is required to
             represent the insured’s interest as if the insured hired counsel directly.”)

Ethics, Loyalty & The Tripartite Relationship

•    The ABA Model Rules of Professional Conduct, the Third Restatement, and case law
     on lawyer ethics, informed by states’ ethics opinions (not an insurance policy), define
     counsel’s ethical responsibilities.
•    See Prevratil v. Mohr, 678 A.2d 243, 250 (N.J. 1996) (“Plainly stated, in any litigation,
     counsel for an insurer must put the insured’s interests ahead of the insurer’s.”); Purdy
     v. Pacific Auto Ins. Co., 203 Cal. Rptr. 524, 533-34 (Cal. App. 1984) (noting that
     lawyer retained by insurer for policyholder has primary duty to “further the best
     interests of the insured”)
•    See also Restatement (Third) of the Law Governing Lawyers, §134 cmt. f (2000)
     (holding view that “a lawyer designated to defend the insured has a client-lawyer
     relationship with the insured” and that “[t]he insurer is not, simply by the fact that it
     designates the lawyer, a client of the lawyer”); Model Rule 5.4(c) (prohibiting a lawyer
     from allowing a third party who pays that lawyer to direct or regulate the lawyer’s
     professional judgment in providing legal services); Rule 1.8(b) (prohibiting a lawyer
     from using information relating to representation of a client to the client’s disadvantage
     without client’s informed consent); Rule 1.7 (prohibiting representation where there is
     a significant risk that representation of one client will be materially limited by
     responsibilities to another client)
•    ABA Opinion 08-450 (Apr. 2008): “Ordinarily, when a lawyer is engaged by an insurer
     to represent the insured, the substantive law precludes the lawyer from acting contrary
     to the interests of the insured.”

Insurers’ Attempts to Limit Defense Costs

• Don’t just accept what the insurer offers
• Insurers’ interests often diverge from yours
• Insurer-imposed counsel rates – usually very low
• Insurer-imposed litigation guidelines – not a part
  of the insurance contract and might violate
  ethical rules
• Insurer-imposed audits of invoices – can violate
  ethical rules

Reasonableness of Attorneys Fees

Are costs reasonable? The law varies. Factors include:
•    Time and labor required, the novelty and difficulty of the questions involved,
     and the skill required to perform the legal service properly;
•    Fee customarily charged in locality for similar legal services;
•    Efficiency of the attorney in presenting the case, and the amount involved
     and the results obtained;
•    Nature and length of the professional relationship with the client; and
•    Experience, reputation, and ability of the lawyers performing the services.
       Aquino v. State Farm Ins. Co., 793 A.2d 824, 832 (N.J. Super. 2002)
       Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818
       Kona Technology Corp v. Southern Pacific Transportation Co., 225
           F.3d 595 (5th Cir. 2000).

Insurer-Imposed Litigation Guidelines

    Some of the most common potential conflicts stem
        from insurer-imposed litigation guidelines.
•    Guidelines explain how much of the defense the carrier will NOT pay
•    Include restrictions on the way the defense must be conducted
             Frequently guidelines exclude reimbursement for such things as:
                    discussions between members of the defense team on the case;
                    emails between the defense team;
                    leaving or listening to voicemails; and
                    attendance of more than one attorney at hearings or meetings,
•    Regularly impose arbitrary restrictions on legal research; and arbitrary time
     limits on drafting of pleadings, no matter how complex
•    Often, insurers impose guidelines retroactively – back to the beginning of the
     case and before they sent them to either the insured or to defense counsel

Guidelines Must Not Impede Counsel’s Discretion

Billing guidelines have been criticized or rejected:

 …by ethical opinions:
            See, e.g., ABA Standing Committee on Ethics and Professional
             Responsibility (Feb. 16, 2001) (attorney must not permit
             compliance with “guidelines” and other directives to impair
             materially the attorney's independent professional judgment in
             representing an insured); In re Rules of Professional Conduct, 2
             P.3d 806 (Mont. 2000) (insurer-imposed restrictions in litigation
             costs may violate insurer's duty to defend and attorneys’ ethical
             responsibilities to exercise independent professional judgment).
…and by courts:
            See, e.g., Dynamic Concepts Inc. v. Truck Insurance Exchange,
             61 Cal.App.4th 999 (1998) (“Insurer imposed restrictions on
             discovery or other litigation costs may well violate the insurer’s
             duty to defend as well as the attorneys' ethical responsibilities to
             exercise their independent professional judgment in rendering
             legal services”)

Insurer Audits of Defense Invoices

•    Use of audit agencies to review defense counsel bills has become an
     increasingly common, cost-cutting practice within insurance industry
•    The billing information and file materials required by audit companies
     inevitably contain confidential information
•    To the extent that billing records or other records sought by the insurance
     company’s auditors contain “secrets” or “confidences” of the insured, N.Y.
     Disciplinary Rule 4:101 forbids the insured’s lawyer from disclosing them
     “except with the consent of the client ... after a full disclosure.” See
     N.Y.S.B.A .Opinion 716
•    See also ABA Comm. on Ethics and Prof’s Responsibility, Formal Op. 08-
     450 (2008) (opining that retained defense counsel may not disclose client
     confidential information of policyholder to insurer absent policyholder
     consent); ABA Comm. on Ethics and Prof’s Responsibility, Formal Op. 01-
     421 (2001) (“[A] lawyer must not permit compliance with ‘guidelines’ and
     other directives of an insurer relating to the lawyer’s services to impair
     materially the lawyer’s independent professional judgment in representing an

What if Your Insurer Won’t Pay Defense Costs?

•    Do what is best for your company
•    Continue to paper the insurers’ file
•    Leverage a potential bad faith claim
•    Litigation vs. ADR
         Timing
         Causes of action: declaratory judgment, breach of contract
         Legal vs. factual issues
         What jurisdiction?
•    Don’t get jumped
•    Choose and manage your defense counsel wisely

Manage Your Defense

•    Establish a strategy early
•    Know your budget and keep an eye on it
•    Request budgets
•    Review bills
•    Conserve your limits
•    Insurers don’t always pay for everything
•    Use litigation management tools
          Guidelines
          Litigation plans
          Task code billing
          No block billing
          Regular monthly billing
          Proper work allocation—partners don’t have to do everything

Choosing Defense Counsel

•    Referrals/Panel Counsel
•    Do your own research
•    Interview several firms
•    Loyalty
•    Experience
•    Strategy—how will they handle this case?
•    Rates
•    Cheapest isn’t always best

Best Practices

•    Read your policy and know your policy
•    Know your claims
•    Develop an early strategy
•    Know your lawyers and seek out loyalty and team approach
•    Watch out for the tripartite relationship
•    Know the ethical rules
•    Comply with policy provisions & Keep Your Insurer Informed
•    Stay involved and manage the litigation to your strategy
•    Know your end game and don’t just take “no” for an answer
•    Never assume there is no coverage
•    Coverage tail doesn’t wag the defense dog

     and Answer


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