General Practice, Solo & Small Firm DivisionMagazine

 

Legal Ethics: Customs, Cases, and Confusion/Martin Paskind

Martin Paskind is a lawyer in Albuquerque, New Mexico. His practice focuses on the representation of small businesses and their owners.

Insurance

Someone once said, “There are lies, damned lies, and statistics.” Analogously, as all know, there are bureaucrats, damned bureaucrats, and insurance-company bureaucrats.

The insurance people took a few hits recently. It’s about time. Insurance companies everywhere want rigid cost control. Health maintenance organizations pioneered this approach to profitability during the last seven or eight years. Now, casualty insurers use the same methods. They limit the work of defense counsel.

America’s thousands of casualty insurers do not take a uniform approach to reducing defense costs. Typically, however, companies prepare “litigation management guidebooks” that bind defense counsel under contracts between insurance company and lawyer. Provisions of these documents require that billings go to independent auditors, who can decide whether an associate could have done work charged at a partner’s rate. If so, the insurance company pays the associate’s rate and that’s that.

Limits on Litigators

Other restrictive provisions limit numbers of depositions, research time greater than three or so hours, use of experts, purchasing from vendors, and many other ordinary activities of representation. All this leaves the real client, the insured person, out in the cold.

Control of the case is frequently by an adjuster, who isn’t a lawyer and whose paycheck comes from the insurance company.

Conflicts between loyalties to the carriers who provide ongoing business and to individual insureds are commonplace. This is an old story. What is happening more now is a new determination on the parts of insurance bureaucrats to micromanage every aspect of defense litigation.

Some companies require lawyers to develop elaborate case-management plans, evaluating liability and damages and recommending settlement or litigation. And just as the insurers impose these requirements, they reduce willingness to pay for the enlarged administrative burden.

Ethics Committees Unload!

Until late last year, the legal profession’s response didn’t go beyond losing arguments with insurance company bureaucrats. Slowly, however, ethics committees are taking on insurance company overregulation. The Indiana State Bar’s ethics committee is out in front with two opinions.

In the first, the state’s ethics committee ruled that lawyers may not contract for legal services with casualty-insurance companies whose agreements may put the lawyer at risk of ethical violations when representing a policyholder. The committee looked at 22 pages of insurance bureaucrats’ “litigation guidelines and procedures for defense counsel.” These required a team for each defense, including a senior litigator, an associate and a paralegal or law clerk. Hourly rates were set for each category. If the adjuster decided that the law firm could have assigned an associate’s work to a law clerk, the insurer pays only the clerk’s rate.

If two or more team members conferred, only the senior lawyer could bill for the time unless the adjuster approved the conference in advance. The agreement classified organizing and indexing medical records as a clerical chore, for which the carrier would pay no fee. Only paralegals would be allowed to review and summarize medical records.

Indiana committee members said that insurance defense lawyers must be aware of economic survival of the carriers that appoint them. At the same time, counsel can’t allow anyone to impair duties to any client, including people who have insurance. “The insured,” said the committee, “is the primary client to whom all ethical duties are owed.” Thus, said the committee, “if the negotiated financial terms result in a material disincentive to perform those tasks that, in the lawyer’s professional judgment, are reasonable and necessary to the defense of the insured, such provisions are ethically unacceptable.”

Five provisions were especially troublesome. Provisions curtailing discussions among the defense team led the list. The committee rejected efforts to dictate use of law-office staff. Contractual provisions setting rates at the lowest level came in for criticism. Requiring or permitting counsel to rely on research of an unsupervised paralegal came in for heavy criticism. If counsel can’t negotiate away the problems, “the representation must be declined” (Indiana State Bar Assn. Legal Ethics Comm., Op.3 of 1998).

Second Opinions

Indiana’s second opinion challenged contracts requiring that lawyers’ bills go to independent auditors hired by insurance companies. Contracts required detailed bills. Details included charges for letters and telephone calls, with names of persons receiving calls and letters. Other required details included names of persons interviewed, the substance of discussions, and the substance of research.

All such information is confidential and privileged, said the Indiana committee. Lawyers can’t release this data unless the client—the insured person—approves.

Statements may become discoverable if disclosed to independent auditors, who have no duty to the client. Such disclosure may waive both lawyer-client and work-product privileges. Insurance bureaucrats don’t know about privileges, because the secrets are not theirs. They could care less.

At a minimum, said the committee, a lawyer must consider carefully what to say in bills. Counsel should include nothing within the privilege rules. If counsel were to follow this advice, of course, nothing would be left for auditors to read.

Nothing can be disclosed without the client’s informed consent. Risks here seem great. Privileges are not waived piecemeal. Once any part is gone, all privilege is gone. Consequences for clients could be profound.

The best course may well be not even to raise the question with the client, but to turn down cases requiring disclosures to auditors. (For details, check Indiana State Bar Assn. Legal Ethics Comm., Op. 4 of 1998.)

Don’t Bother Asking

Alabama’s commission went further than Indiana’s on the question of disclosures to auditors. The danger to privilege is so great, it said, that a lawyer shouldn’t even ask a client to approve a waiver. Otherwise, Alabama came out in much the same place as Indiana on issues posed by contracts with insurance carriers.

The Alabama commission responded to many inquiries about contracts similar to those used in Indiana. However, these contracts contained additional limitations. Hours billed preparing for depositions could not exceed time spent in the deposition itself. The agreement required an analysis and integrated defense plan governing strategy, investigation, and disposition. The most current plan had to accompany bills submitted to auditors.

Insurance industry bureaucrats love this kind of thing. This, said the Alabama group (State Bar Disciplinary Comm’n, Op. RO-98-02), is out of line, because of risks to privilege and confidentiality.

Two Trends

Down the road, these issues probably will go in two directions. The trend to impose state ethical rules on lawyers’ contracts with insurance companies no doubt will continue and grow. Insurance bureaucrats won’t give up.

The insurance business will react, as to some extent it already has, by putting defense counsel on the payroll. That won’t help. Such counsel still represent the insured. Carriers’ willingness to risk lawyers’ licenses will increase. Many battles remain.

In addition, the word will get out inevitably. Unhappy clients, perhaps those hit with judgments of more than policy limits, will think themselves inadequately defended by insurance lawyers. They will realize that depositions were too few, research too scanty, expertise too slight, and preparation too modest. They’ll chase defense counsel for resulting damages. They may chase their insurance companies as well, claiming breach of contract or unfair practices. We may be looking at the beginning of a whole new industry.

Still, defense counsel will stay in the game, perhaps because the game is the only one they know. It may be a good time to look for other areas in which to focus.

The insurance bureaucrats will prosper. The first law of bureaucracy says that empires, once built, never go away. You probably cannot count on much in this life, but you can count on bureaucrats to act like bureaucrats. CL
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