The Indefensible Defense

As an initial matter, policyholders should be aware that these guidelines are almost certainly not legally binding. Very rarely do insurers attach or incorporate billing guidelines in the policy when it is issued. Thus, as a matter of simple contract law, the billing guidelines do not form a part of the insurance contract. From a legal perspective, such billing guidelines represent little more than an insurer's opinion or wish list regarding underlying defense issues.

Ethical and Legal Problems

Setting aside the dubious contractual enforceability of insurer billing guidelines, many jurisdictions have criticized, and even rejected, insurer billing guidelines as improperly interfering with a defense counsel's ethical obligations to its client, the insured. The ethical issue was summarized by The West Virginia Lawyer Disciplinary Board as follows:

Although the apparent purpose of these guidelines is to effect economy, the ineluctable result is to constrain or limit an attorney's exercise of independent professional judgment, either by (1) precluding payment for certain activities (even if the attorney deems the activities to be appropriate) or (2) requiring the attorney to submit to 'second guessing' of the attorney's judgment and decisions and then precluding payment if the attorney acts in a manner contrary to such 'second guessing.'

Due to this “second guessing” concern, legal ethics authorities in several states have held that insurer billing guidelines interfere with an attorney's independent professional judgment and, accordingly, a defense attorney not only need not, but potentially may not ethically, agree to abide by such guidelines. See, e.g., Rhode Island Supreme Court Ethics Advisory Panel Opinion No. 99-13 (issued Oct. 27, 1999) (“the litigation management guidelines ' interfere with the independent professional judgment of defense counsel and ultimately with the quality of legal services provided to the insureds. As such, the [attorney and his/her firm] may not ethically agree to abide by these guidelines in their entirety.”); Iowa Supreme Court Board of Professional Ethics and Conduct Opinion No. 99-01 (Sept. 8, 1999) (“[i]t is the opinion of The Board that: (1) it would be improper for an Iowa lawyer to agree to, or accept or follow guidelines which seek to direct, control, or regulate the lawyer's professional judgment or details of the lawyer's performance, dictate the strategy or tactics to be employed; or limit the professional discretion and control of the lawyer.”)

The rejection of insurer billing guidelines has not been limited to ethics panels. Numerous courts have reached similar conclusions. For example, the California Court of Appeals expressly “question[ed] the wisdom and propriety of so-called 'outside counsel guidelines' by which insurers seek to limit or restrict certain types of discovery, legal research, or computerized legal research by outside attorneys they retain to represent their insureds where there is a potential for an uncovered claim.” Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999 (1998). The court concluded that '[u]nder no circumstances can such guidelines be permitted to impede the attorney's own professional judgment about how best to competently represent the insureds.” Similarly, the Supreme Court of Appeals of West Virginia has held that an insurance company possesses no right to control the methods or means chosen by the attorney to defend the insured. Barefield v. DPIC Companies, Inc., 215 W.Va. 544, 600 S.E.2d 256 (2004).

Practical Considerations

The lack of enforceability of insurer billing guidelines as a matter of both contract law and ethics provides corporate policyholders with strong ammunition to reject any attempt by an insurer to unilaterally impose such guidelines. Nevertheless, the ultimate objective, of course, is to reach consensus with the insurer regarding a cost-effective vigorous defense that allows reasonable input from the insurer in a manner that does not impede or restrict the defense effort. Identified below are some of the more frequent billing guideline disputes that arise between corporate policyholders and their insurers and some suggested approaches for resolution.

Hourly Rates

Some litigation guidelines purport to list the “highest hourly rate” that the insurer will pay for the defense of a particular matter. Again, that identified rate simply reflects the unilateral opinion of the insurer as to the hourly rate it wishes to pay. Generally, unless the policy expressly says otherwise or is subject to statutory provisions in certain states, a policyholder is entitled to retain any qualified counsel whose hourly rates are consistent with the rates paid in that geographic area for that type of case. As would be expected, the reasonable hourly rate for handling complex securities litigation in New York is likely to be quite different than a routine personal injury claim in North Dakota.

A policyholder should certainly try, if at all possible, to reach an agreement from the outset with its insurer about the identity and hourly rates of underlying defense counsel. As an initial matter, a policyholder should review its policy to see whether the policy contains a list of law firms who the insurer has pre-approved (so-called “panel counsel”) and whether any such list simply identifies potential firms or actually purports to limit the policyholder to choosing one of the listed firms.

If the policy does not specify a firm to use, a policyholder should ensure that the hourly rates of its selected firms are reasonable for the jurisdiction and type of matter. While some states have statutes that address (and may limit) an insurer's hourly rate reimbursement obligations in certain settings, a policyholder is otherwise generally entitled to reimbursement of the actual hourly rates charged by underlying defense counsel so long as they are reasonable.

If an agreement on rates cannot be reached, one possible alternative is for the policyholder to fund the delta between the insurer rate and the actual hourly rate and reserve rights to pursue the insurer for the full amount at a later time. While such an approach has the downside of requiring the policyholder to self-fund some portion of the defense costs, it does allow for selected counsel to focus on the defense of the case. With the insurer reserving rights on the indemnity aspects of the case (i.e., whether any settlement or judgment is covered), the accumulated amount of unpaid defense costs can be added to subsequent negotiations (or coverage litigation) over whether the insurer is obligated to fund any settlement or judgment. Just as the amount at issue with respect to a settlement or judgment often impacts the nature of negotiations between a corporate policyholder and its insurer, the amount of unpaid defense costs at issue often dictates whether that gap can be resolved short of litigation.

Staffing

Insurers often try to exert control over staffing by attempting to pay for only “pre-approved timekeepers.” As the ethics opinions discussed earlier demonstrate, the decision about the appropriate attorneys for a matter belongs to the policyholder and its counsel, not the insurer. See, e.g., Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio Opinion No. 2000-3 (dated June 1, 2000) (“[g]uidelines 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 are an interference with an attorney's professional judgment ' .”).

In order to counter an insurer's attempt to claim that the staffing for the defense of a particular case was unreasonable, corporate policyholders should consider working with their defense counsel on the identification of the “core” attorneys involved in the defense of the case (which partner(s), associate(s), and paralegal(s) will have day-to-day responsibility) and limit the number of “transient” time-keepers (attorneys or paralegals who “drift” in and out of a case billing a few hours from time to time). While there is obviously an occasional need to add timekeepers either because of work demand (periods of intense discovery or trial preparation) or specific expertise (inclusion of an attorney with particular subject matter expertise on a discrete issue), the reasoning behind the use of these additional defense team members should be documented to blunt any subsequent “second-guessing.”

Budgeting and Task Approval

Corporate policyholders and insurers both have legitimate reasons to employ budgeting processes as part of the defense effort. Corporate policyholders want predictability for the likely expense associated with the defense of a case, while adjusters for the insurers generally seek to set internal reserves for what they are likely going to be asked to pay as the defense proceeds.

Unfortunately, insurers far too often seek to unilaterally impose their own timing considerations for any budget and attempt to use budget estimates as some sort of cap on actual defense costs. Any party that has been involved in reasonably complex litigation knows that the timing and accuracy of budget estimates can be quite fluid as events in the litigation occur. For example, a corporate policyholder may file an early motion to dismiss in a case and, depending on how the court rules on that motion, a case could be dismissed or substantially altered. In such situations, the client and its counsel may decide it makes sense to defer budget estimates until the parties receive guidance from the court on threshold issues. Similarly, the client and its counsel may decide to create estimated budgets that contain wide ranges to account for different possibilities. How and when to employ budgeting is a decision between the client and its counsel. While, subject to privilege considerations, a corporate policyholder may choose to share its budgeting with its insurer, the insurer is not in a position to dictate that budget process.

Even more problematic than budget demands, some insurers purport to not pay for certain litigation activities or require pre-approval for certain litigation activities before the insurer will pay. Once again, numerous jurisdictions have disapproved of such requirements as being inconsistent with an attorney's professional judgment. For example, Washington State Bar Association Formal Opinion No. 195 (1999) provides:

A billing guideline that arbitrarily and unreasonably limits or restricts compensation for the time spent by counsel performing services which counsel considers necessary to adequate representation, such as periodic view of pleadings, conducting depositions, or in preparing or defending against a summary judgment motion, endeavors to direct or regulate the lawyer's professional judgment in violation of [Washington Rules of Professional Conduct].

Op. at pg. 6. Ohio has also expressly disapproved of insurers' attempts to require pre approval for litigation tasks.

While it is certainly good practice to keep a defending insurer informed of significant developments in the case, such as major ongoing tasks and the retention of experts, insurers should not be able to dictate those decisions by insisting on prior approval of litigation activities approved by the client and within the professional judgment of defense counsel.

Conclusion

Ideally, the objectives of the corporate policyholder and its insurer should be fully aligned ' successfully defending the underlying litigation. Both parties want to eliminate or minimize risk and potential liability by defending a case in as legally effective and cost-efficient manner as possible. Misalignment occurs when an insurer who is reserving rights to deny coverage simultaneously attempts to minimize or avoid its contractual defense obligations by seeking to impose its views, through billing guidelines or otherwise, on the attorney-client relationship. Too frequently, corporate policyholders (or their defense counsel) will receive insurer billing guidelines shortly after the defense of a case has commenced and allow such largely legally ineffective, and ethically questionable, guidelines to interfere with the defense effort.

Although it is obviously preferable for corporate policyholders to engage in a constructive and cooperative dialogue with their insurers in defending cases, corporate policyholders should be aware that there is substantial authority reflecting that an insurer's billing guidelines are nothing more than the insurer's unilateral opinion that carries only marginal legal relevance to the parties' defense discussions.

Ty Childress is a partner in the Los Angeles office of Jones Day. E-mail: [email protected] or go to www.jonesday.com.

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Generally, an insurer has three options when a claim is tendered for defense. An insurer may deny any obligation to defend, agree to fully defend without reservation, or agree to defend while reserving rights to deny coverage later. Policyholders need to consider a whole host of issues when an insurer agrees to defend under a reservation of rights including, but not limited to, who controls selection of underlying defense counsel, rates to be paid to that counsel, privilege issues associated with underlying counsel communications, and potential conflicts between the policyholder's and the insurer's interests.

One source of increasing disputes between policyholders and their insurers is the increasing attempted use of so-called “litigation management guidelines” by insurers in addressing their defense obligations. Contrary to what insurers often claim, these types of guidelines generally do not have any binding legal effect. Policyholders should consider carefully how to respond to an insurer's attempt to impose such guidelines.

Frequently, in agreeing to defend a claim, an insurer will attach to its response a document titled “Litigation Management Guidelines” or something similar. Typically, the guidelines purport to dictate various rules and procedures that the policyholder and its underlying defense counsel must comply with in order to have the insurer pay defense costs. The guidelines will often address such issues as: 1) the hourly rates the insurer will pay; 2) insurer pre approval for various expenses (i.e., experts); 3) what costs the insurer will or will not pay (i.e., overnight delivery, travel, copying); 4) underlying counsel reporting and budget requirements; and 5) staffing/billing expectations (i.e., intra-office conferences, number of counsel attending depositions).

As an initial matter, policyholders should be aware that these guidelines are almost certainly not legally binding. Very rarely do insurers attach or incorporate billing guidelines in the policy when it is issued. Thus, as a matter of simple contract law, the billing guidelines do not form a part of the insurance contract. From a legal perspective, such billing guidelines represent little more than an insurer's opinion or wish list regarding underlying defense issues.

Ethical and Legal Problems

Setting aside the dubious contractual enforceability of insurer billing guidelines, many jurisdictions have criticized, and even rejected, insurer billing guidelines as improperly interfering with a defense counsel's ethical obligations to its client, the insured. The ethical issue was summarized by The West Virginia Lawyer Disciplinary Board as follows:

Although the apparent purpose of these guidelines is to effect economy, the ineluctable result is to constrain or limit an attorney's exercise of independent professional judgment, either by (1) precluding payment for certain activities (even if the attorney deems the activities to be appropriate) or (2) requiring the attorney to submit to 'second guessing' of the attorney's judgment and decisions and then precluding payment if the attorney acts in a manner contrary to such 'second guessing.'

Due to this “second guessing” concern, legal ethics authorities in several states have held that insurer billing guidelines interfere with an attorney's independent professional judgment and, accordingly, a defense attorney not only need not, but potentially may not ethically, agree to abide by such guidelines. See, e.g., Rhode Island Supreme Court Ethics Advisory Panel Opinion No. 99-13 (issued Oct. 27, 1999) (“the litigation management guidelines ' interfere with the independent professional judgment of defense counsel and ultimately with the quality of legal services provided to the insureds. As such, the [attorney and his/her firm] may not ethically agree to abide by these guidelines in their entirety.”); Iowa Supreme Court Board of Professional Ethics and Conduct Opinion No. 99-01 (Sept. 8, 1999) (“[i]t is the opinion of The Board that: (1) it would be improper for an Iowa lawyer to agree to, or accept or follow guidelines which seek to direct, control, or regulate the lawyer's professional judgment or details of the lawyer's performance, dictate the strategy or tactics to be employed; or limit the professional discretion and control of the lawyer.”)

The rejection of insurer billing guidelines has not been limited to ethics panels. Numerous courts have reached similar conclusions. For example, the California Court of Appeals expressly “question[ed] the wisdom and propriety of so-called 'outside counsel guidelines' by which insurers seek to limit or restrict certain types of discovery, legal research, or computerized legal research by outside attorneys they retain to represent their insureds where there is a potential for an uncovered claim.” Dynamic Concepts, Inc. v. Truck Ins. Exch. , 61 Cal. App. 4th 999 (1998). The court concluded that '[u]nder no circumstances can such guidelines be permitted to impede the attorney's own professional judgment about how best to competently represent the insureds.” Similarly, the Supreme Court of Appeals of West Virginia has held that an insurance company possesses no right to control the methods or means chosen by the attorney to defend the insured. Barefield v. DPIC Companies, Inc. , 215 W.Va. 544, 600 S.E.2d 256 (2004).

Practical Considerations

The lack of enforceability of insurer billing guidelines as a matter of both contract law and ethics provides corporate policyholders with strong ammunition to reject any attempt by an insurer to unilaterally impose such guidelines. Nevertheless, the ultimate objective, of course, is to reach consensus with the insurer regarding a cost-effective vigorous defense that allows reasonable input from the insurer in a manner that does not impede or restrict the defense effort. Identified below are some of the more frequent billing guideline disputes that arise between corporate policyholders and their insurers and some suggested approaches for resolution.

Hourly Rates

Some litigation guidelines purport to list the “highest hourly rate” that the insurer will pay for the defense of a particular matter. Again, that identified rate simply reflects the unilateral opinion of the insurer as to the hourly rate it wishes to pay. Generally, unless the policy expressly says otherwise or is subject to statutory provisions in certain states, a policyholder is entitled to retain any qualified counsel whose hourly rates are consistent with the rates paid in that geographic area for that type of case. As would be expected, the reasonable hourly rate for handling complex securities litigation in New York is likely to be quite different than a routine personal injury claim in North Dakota.

A policyholder should certainly try, if at all possible, to reach an agreement from the outset with its insurer about the identity and hourly rates of underlying defense counsel. As an initial matter, a policyholder should review its policy to see whether the policy contains a list of law firms who the insurer has pre-approved (so-called “panel counsel”) and whether any such list simply identifies potential firms or actually purports to limit the policyholder to choosing one of the listed firms.

If the policy does not specify a firm to use, a policyholder should ensure that the hourly rates of its selected firms are reasonable for the jurisdiction and type of matter. While some states have statutes that address (and may limit) an insurer's hourly rate reimbursement obligations in certain settings, a policyholder is otherwise generally entitled to reimbursement of the actual hourly rates charged by underlying defense counsel so long as they are reasonable.

If an agreement on rates cannot be reached, one possible alternative is for the policyholder to fund the delta between the insurer rate and the actual hourly rate and reserve rights to pursue the insurer for the full amount at a later time. While such an approach has the downside of requiring the policyholder to self-fund some portion of the defense costs, it does allow for selected counsel to focus on the defense of the case. With the insurer reserving rights on the indemnity aspects of the case (i.e., whether any settlement or judgment is covered), the accumulated amount of unpaid defense costs can be added to subsequent negotiations (or coverage litigation) over whether the insurer is obligated to fund any settlement or judgment. Just as the amount at issue with respect to a settlement or judgment often impacts the nature of negotiations between a corporate policyholder and its insurer, the amount of unpaid defense costs at issue often dictates whether that gap can be resolved short of litigation.

Staffing

Insurers often try to exert control over staffing by attempting to pay for only “pre-approved timekeepers.” As the ethics opinions discussed earlier demonstrate, the decision about the appropriate attorneys for a matter belongs to the policyholder and its counsel, not the insurer. See, e.g., Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio Opinion No. 2000-3 (dated June 1, 2000) (“[g]uidelines 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 are an interference with an attorney's professional judgment ' .”).

In order to counter an insurer's attempt to claim that the staffing for the defense of a particular case was unreasonable, corporate policyholders should consider working with their defense counsel on the identification of the “core” attorneys involved in the defense of the case (which partner(s), associate(s), and paralegal(s) will have day-to-day responsibility) and limit the number of “transient” time-keepers (attorneys or paralegals who “drift” in and out of a case billing a few hours from time to time). While there is obviously an occasional need to add timekeepers either because of work demand (periods of intense discovery or trial preparation) or specific expertise (inclusion of an attorney with particular subject matter expertise on a discrete issue), the reasoning behind the use of these additional defense team members should be documented to blunt any subsequent “second-guessing.”

Budgeting and Task Approval

Corporate policyholders and insurers both have legitimate reasons to employ budgeting processes as part of the defense effort. Corporate policyholders want predictability for the likely expense associated with the defense of a case, while adjusters for the insurers generally seek to set internal reserves for what they are likely going to be asked to pay as the defense proceeds.

Unfortunately, insurers far too often seek to unilaterally impose their own timing considerations for any budget and attempt to use budget estimates as some sort of cap on actual defense costs. Any party that has been involved in reasonably complex litigation knows that the timing and accuracy of budget estimates can be quite fluid as events in the litigation occur. For example, a corporate policyholder may file an early motion to dismiss in a case and, depending on how the court rules on that motion, a case could be dismissed or substantially altered. In such situations, the client and its counsel may decide it makes sense to defer budget estimates until the parties receive guidance from the court on threshold issues. Similarly, the client and its counsel may decide to create estimated budgets that contain wide ranges to account for different possibilities. How and when to employ budgeting is a decision between the client and its counsel. While, subject to privilege considerations, a corporate policyholder may choose to share its budgeting with its insurer, the insurer is not in a position to dictate that budget process.

Even more problematic than budget demands, some insurers purport to not pay for certain litigation activities or require pre-approval for certain litigation activities before the insurer will pay. Once again, numerous jurisdictions have disapproved of such requirements as being inconsistent with an attorney's professional judgment. For example, Washington State Bar Association Formal Opinion No. 195 (1999) provides:

A billing guideline that arbitrarily and unreasonably limits or restricts compensation for the time spent by counsel performing services which counsel considers necessary to adequate representation, such as periodic view of pleadings, conducting depositions, or in preparing or defending against a summary judgment motion, endeavors to direct or regulate the lawyer's professional judgment in violation of [Washington Rules of Professional Conduct].

Op. at pg. 6. Ohio has also expressly disapproved of insurers' attempts to require pre approval for litigation tasks.

While it is certainly good practice to keep a defending insurer informed of significant developments in the case, such as major ongoing tasks and the retention of experts, insurers should not be able to dictate those decisions by insisting on prior approval of litigation activities approved by the client and within the professional judgment of defense counsel.

Conclusion

Ideally, the objectives of the corporate policyholder and its insurer should be fully aligned ' successfully defending the underlying litigation. Both parties want to eliminate or minimize risk and potential liability by defending a case in as legally effective and cost-efficient manner as possible. Misalignment occurs when an insurer who is reserving rights to deny coverage simultaneously attempts to minimize or avoid its contractual defense obligations by seeking to impose its views, through billing guidelines or otherwise, on the attorney-client relationship. Too frequently, corporate policyholders (or their defense counsel) will receive insurer billing guidelines shortly after the defense of a case has commenced and allow such largely legally ineffective, and ethically questionable, guidelines to interfere with the defense effort.

Although it is obviously preferable for corporate policyholders to engage in a constructive and cooperative dialogue with their insurers in defending cases, corporate policyholders should be aware that there is substantial authority reflecting that an insurer's billing guidelines are nothing more than the insurer's unilateral opinion that carries only marginal legal relevance to the parties' defense discussions.

Ty Childress is a partner in the Los Angeles office of Jones Day. E-mail: [email protected] or go to www.jonesday.com.

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