The Evolving Role of Defense Counsel
GUIDELINES, AUDITS, STAFF COUNSEL AND UNAUTHORIZED PRACTICE: THE EVOLVING ROLE OF DEFENSE COUNSEL
STATE BAR OF TEXAS
PROFESSIONAL ETHICS COMMITTEE
OPINION NO. 533
May a lawyer, who is retained by an insurance company to defend its insured, ethically comply with litigation/billing guidelines which place certain restrictions on how the lawyer should conduct the defense of the insured?
STATEMENT OF FACTS
Lawyers who are involved in what is commonly known as insurance defense practice are often called upon by insurance companies (“insurer”) to represent its policy holders (“insured”) under policies that exist between the insured and the insurer. The policy between the insurer and the insured defines the insurance company’s obligation to defend the insurer and customarily provides that the insurance company will select and pay the lawyer. Recently, insurance companies have issued litigation/billing guidelines which are imposed on the lawyer they retain. These guidelines place certain restrictions on how retained counsel can conduct the defense of the insured, including, but not limited to, discovery limitations and means of periodic reporting to the insurer. Examples of the limitations imposed on lawyers retained by insurance companies are the following:
1. Whether to hire an expert in the defense of the insured;
2. What, if any, legal research may be conducted by the lawyer in defense of the insured;
3. What, if any, depositions may be taken in the defense of the insured;
4. Whether the defense counsel may investigate the claims made against the insured;
5. Whether particular depositions may be videotaped;
6. Whether any motions, including, motion to dismiss or for summary judgment, may be filed; and
7. Whether the lawyer or a paralegal should engage in the preparation of various documents.
The Texas Supreme Court has held that despite the fact that a lawyer is selected, employed and paid by the insurance company “Nevertheless, such attorney becomes the attorney of record and the legal representative of the insured, and as such he owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured.” Employer’s Casualty Company v. Tilley, 496 S.W. 2d 552 at 558 (Tex. 1973). Since Tilley, Texas courts have been unanimous in holding that an attorney-client relationship exists between an insured and the lawyer retained by the insured’s insurer. See American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W. 2d 480 (Tex. 1992); Bradt v. West, 892 S.W. 2d 56 (Tex.App. – Houston 1994).
Loyalty is an essential element in the lawyer’s relationship to a client. (Rule 1.06, Comment 1, Texas Disciplinary Rules of Professional Conduct). In advising or otherwise representing a client, a lawyer shall exercise independent professional judgment and render candid advice (Rule 2.01). The attorney-client relationship is a personal relationship in which the client generally must trust the lawyer to exercise appropriate professional judgment on the client’s behalf (Rule 5.04, Comment 4).
Rule 5.04 (c) specifically provides as follows:
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.
Among other requirements, Rule 1.08(e)(2) provides that a lawyer shall not accept compensation for representing the client from one other than the client unless there is no interference with the lawyer’s independence of professional judgment or with the attorney-client relationship.
Litigation/billing guidelines which interfere with the lawyer’s professional judgment not only violate the above mentioned rules, but also rule 1.01(b) which prohibits a lawyer from frequently failing to “carry out completely the obligations that the lawyer owes to a client or clients.” (emphasis added) Loyalty to the client/insured demands that “the lawyer must at all times protect the interests of the insured if those interests would be compromised by the insurer’s instructions. State Farm Mutual Automobile Ins. Co. v. Traver, 980 S.W. 2d 625, at 628 (Tex. 1998).
When a lawyer has been retained by an insurer to represent an insured, the representation may be limited to matters related to insurance coverage. (Rule 1.02, Comment 4). However, when restrictions in litigation/billing guidelines direct and control legal services rendered by the lawyer to a client and how those services are to be delivered, imposing such restrictions upon the lawyer would result in a violation of the Rules by the lawyer. Although the lawyer is free to enter into an agreement with the insurer regarding his fee and services to be rendered for the insured/client, such agreement cannot override the ethical responsibilities of the lawyer under the Texas Disciplinary Rules. In other words, regardless of such agreement with the insurer, the lawyer must at all times be free to exercise his or her independent professional judgment in rendering legal services to the client.
Although there may be some reasonable requirements related to third-party payment for legal representation, such as when to submit statements for legal services rendered or similar routine matters not affecting the actual representation of the client, no restriction or requirement by the third-party insurer can direct or regulate the lawyer’s professional judgment in rendering such legal services or affect the lawyer’s responsibility to the insured/client. As stated in Rule 5.04, Comment 5:
Because a lawyer must always be free to exercise professional judgment without regard to the interests or motives of a third person, the lawyer who is employed or paid by one to represent another should guard constantly against erosion of the lawyer’s professional judgment. The lawyer should recognize that a person or organization that pays or furnishes lawyers to represent others possesses a potential power to exert strong pressures against the independent judgment of the lawyer. The lawyer should be watchful that such persons or organizations are not seeking to further their own economic, political, or social goals without regard to the lawyer’s responsibility to the client.
The Committee expresses no opinion as to the relationship between the insured and insurer regarding contractual rights or duties they owe to each other or what contractual obligations the insurance company has to pay for legal services rendered. Those matters involve legal issues this Committee has no authority to address. The Committee understands that an insured can enter into different types of contractual relationships with an insurance company; however, such agreements between the insured and insurer cannot affect or diminish a lawyer’s ethical responsibilities to the insured under the Texas Disciplinary Rules once the insured becomes the client of the lawyer.
It’s impermissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to agree with an insurance company to restrictions which interfere with the lawyer’s exercise of his or her independent professional judgment in rendering such legal services to the insured/client.
PROFESSIONAL ETHICS COMMITTEE
OPINION NO. 532
Without the informed consent of the client, may a lawyer, who is retained by an insurance company to defend its insured, be required by the insurance company to submit fee statements to a third-party auditor describing legal services rendered by the lawyer on behalf of the client?
STATEMENT OF FACTS
A lawyer is engaged in what is commonly referred to as insurance defense practice. Typically, the lawyer is retained by an insurance company to defend an insured who purchased and is covered by a liability insurance policy issued by the insurance company. The insured’s insurance policy provides that the insurance company will pay the legal fees associated with defending the insured against any claims covered by the policy.
The insurance company that has retained the lawyer to represent its insureds has notified the lawyer that he must submit all of his invoices or fee statements for legal services to an independent, third-party audit company retained by the insurance company. The guidelines of the audit company require the lawyer’s fee statements to be in a certain format and set forth in detail the legal work performed in representing the insured. For example, if the representation involved a meeting or conference, the fee statement must list each person who participated and a description of the subject matter discussed; billing for legal research requires listing the subject matters researched; billing for writing letters requires identifying to whom the letter was sent and the purpose of the communication. Statements for legal services that do not comply with the guidelines will not be paid.
The stated purpose of the guidelines is to enable the outside auditor to determine and inform the insurance company whether the legal work performed by the lawyer in representing the insured was reasonably necessary and whether the time spent was reasonable.
The lawyer is concerned about his obligation to protect his client’s confidential information and, in particular, whether sending his fee statements describing legal services on behalf of the insured to the insurance company’s outside auditor would violate provisions of the Texas Disciplinary Rules of Professional Conduct (“Texas Disciplinary Rules”).
Although a lawyer defending an insured is normally selected, employed and paid by the insurance company, it is established Texas law that the lawyer’s only client in that situation is the insured. See Employer’s Casualty Company v. Tilley, 496 S.W. 2d 552 (Tex. 1973). Moreover, because a lawyer owes unqualified loyalty to the insured, “the lawyer must at all times protect the interests of the insured if those interests would be compromised by the insurer’s instructions.” State Farm Mutual Automobile Ins. Co. v. Traver, 980 S.W. 2d 625, 628 (Tex. 1998).
Texas Disciplinary Rule 1.08(e) provides that a lawyer shall not accept compensation for representing a client from a person other than the client unless, among other requirements, there is no interference with the lawyer’s independent professional judgment or with the client-lawyer relationship and “information relating to the representation of a client is protected as required by Rule 1.05.”
A lawyer’s obligation to protect the confidential information of a current or former client is set forth in Texas Disciplinary Rule 1.05(b), which provides:
“(b) Except as permitted by paragraphs (c) and (d), or as required by paragraphs (e) and (f), a lawyer shall not knowingly:
(1) Reveal confidential information of a client or a
former client to
(i) a person that the client has instructed is not to receive the information, or
(ii) anyone else, other than the client, the client’s representatives, or the members, associates, or employees of the lawyer’s law firm.
(2) Use confidential information of a client to the disadvantage of the client unless the client consents after consultations.
(3) Use confidential information of a former client to the disadvantage of the former client after the representation is concluded unless the former client consents after consultation or the confidential information has become generally known.
(4) Use privileged information of a client for the advantage of the lawyer or of a third person, unless the client consents after consultation.”
The term “confidential information” is defined very broadly in Rule 1.05. It includes both information protected by attorney-client privilege and unprivileged client information. The phrase “unprivileged client information” is defined to encompass “all information relating to a client or furnished by the client, other than privileged information, acquired by the lawyer during the course of or by reason of the representation of the client.” If a lawyer’s invoice or fee statement describes the legal services rendered, it includes information relating to a client acquired by reason of the representation. Therefore, it contains confidential information of the client as defined in Rule 1.05(a). Even the name of a lawyer’s client can be confidential information protected by Rule 1.05. See Texas Professional Ethics Opinion No. 479 (August 1991).
The Committee believes that the submission to a third-party auditing company, at the instruction of the insurer, of fee statements describing legal services rendered by the insured’s lawyer does not come within any of the exceptions set forth in sub-paragraphs (c), (d), (e) and (f) of Texas Disciplinary Rule 1.05.
Texas Disciplinary Rule 1.05 does permit a lawyer to reveal a client’s confidential information if the client consents after consultation. Accordingly, in representing an insured, before a lawyer submits or releases any of his client’s fee statements describing legal services rendered to an independent third-party audit company, the lawyer must consult with and obtain the client’s informed consent. Consultation in this contest involves informing the client of the implications or possible adverse consequences of disclosure, including the possibility that revealing a fee statement to a third-party auditor may result in a loss or waiver of the attorney-client privilege with respect to information described in such fee statement.
The Committee expresses no opinion as to the relationship between the insured and the insurer regarding contractual rights or duties they owe to each other, or what contractual obligations the insurance company has to pay for legal services rendered. Those matters involve legal issues this Committee has no authority to address. The Committee understands that an insured can enter into different types of contractual relationships with an insurance company; however, such agreements between the insured and insurer cannot affect or diminish a lawyer’s ethical responsibilities to the insured under the Texas Disciplinary Rules once the insured becomes the client of the lawyer.
When a lawyer is retained by an insurance company to represent an insured, the lawyer is obligated to protect the confidential information of the insured as defined in Texas Disciplinary Rule 1.05. A lawyer’s invoice or fee statement describing legal services rendered by the lawyer constitutes “confidential information.” Without first obtaining the informed consent of the insured, a lawyer cannot, at the request of the insurance company paying his fees for the representation, provide fee statements to a third-party auditor describing legal services rendered by the lawyer for the insured.