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In a quiet end to a bitter fight, some of the country’s biggest insurance carriers have stopped sending their lawyers’ bills out to be picked over and whittled down by third-party auditors. About a year ago, Minnesota-based St. Paul Cos. ended its relationship with Law Audit Services of Wilton, Conn., one of the best-known outside auditors. Another major carrier, Columbus, Ohio-based Nationwide, did the same thing. Now both use software to review bills in-house. “The carriers that started using auditors and guidelines aggressively three or four years ago are getting out,” says Michael F. Aylward, a partner at Morrison Mahoney & Miller in Boston. Aylward is chairman of the insurance law committee at the Defense Research Institute (DRI), a Chicago-based group with 21,000 members that has been trying to improve relations between carriers and their counsel. He says that Zurich-American, Coregis, Commercial General Union and CNA also have stopped using outsiders to vet their bills. “They’re finding that the use of outside auditors was disastrous to their relationship with outside counsel,” he says. One relationship-killer was auditors’ interference with lawyers’ professional judgment and their attempts to dictate how a case was run. In Atlanta, Terrance C. Sullivan got so fed up with the process that three years ago he withdrew as a name partner of a defense firm he’d founded and became a plaintiffs’ lawyer. Sullivan said then that, in one case, he thought he needed to hire two experts. The insurer and auditor refused to pay for one of them, so his law firm paid. Its expert offered a favorable opinion, and the insurer-paid expert’s opinion was “scaldingly negative.” “If I had not sent the case for two experts, we would not have had an expert at trial,” he says. Another part of the problem is money. Auditors routinely cut between 10 percent and 25 percent of lawyers’ bills, and some lawyers say the cuts aren’t always warranted. Malcolm S. Murray Sr. of Atlanta, an outside counsel to Nationwide for more than 20 years, sued it and two auditing companies, Law Audit Services and Examen Inc. of Sacramento, Calif., claiming that their refusal to pay his bills amounted to breach of contract and fraud. He settled for an undisclosed amount. Law Audit Services President Wayne Nykyforchyn won’t comment about the change in the industry. Its publicist, Mark O’Brien of Martino & Binzer in Avon, Conn., says that the company will change its name and expand its services beyond the insurance industry. LAWYERS FIGHT BACK Lawyers have successfully fought auditors by claiming that sharing their bills with outsiders violated attorney-client confidentiality. Thirty-eight state ethics opinions now address auditing issues, as do several court opinions. The best-known is a decision by the Montana Supreme Court that backs up the lawyers on confidentiality. Those opinions haven’t stopped third-party auditing, because many are advisory only. Even those that are binding sometimes offer ways for attorneys to avoid ethics problems, such as getting client consent before they reveal information to a carrier. In March, the American Bar Association issued Formal Opinion 00-421, which mirrors some of the state ethics opinions. It says that lawyers may not disclose a client’s confidential information to third-party auditors without first getting a client’s informed consent. The opinion isn’t legally binding, but comes from the profession’s 800-pound gorilla. “My guess,” says Aylward, “is that’s going to be the nail in the outside auditors’ coffin.” The auditors don’t agree. Dennis Costello, vice president of CSC Legalgard Systems in Philadelphia, says that he wouldn’t describe insurance carriers as stepping back from auditing. Kipp Johnson, chief executive officer of Examen, says his company is still doing third-party reviews of 20,000 to 25,000 invoices per month. Both say that even before the cry over third-party auditing, their companies began developing software in anticipation of a shift in the market. Costello says his company wasn’t motivated by lawyers’ anger, but saw a way to improve the process for clients. He adds that CSC Legalgard got unfairly classed with more intrusive auditors. “We’re not nearly the demons that people think we are,” he says. Lloyd H. Milliken Jr., a partner at Locke Reynolds in Indianapolis and immediate past president of the Defense Research Institute, sees another reason for the market change: “There’s only so much blood you can get from a turnip.” At first, he says, auditors may find lots of overcharges, but as firms learn the billing guidelines and adjust their practices accordingly, there’s less fat to trim. Law Audit Services saved St. Paul Cos. tens of millions of dollars over five or six years, according to Lee L. Bennett, St. Paul’s Baltimore-based senior vice president and claim general counsel. But he says that auditing not only created “a tremendous amount of bad blood in the industry” but had run its course. “Outside auditors have to keep finding write-downs to justify their existence,” he says. St. Paul started using software called Legal Advisor, produced by CSC Legalgard. Bennett says he uses it to compare data on cases and to evaluate the efficiency of his company’s 1,800 outside law firms. He couldn’t do that with third-party auditing, he says. Tim Elsass, an attorney who is director of industry initiatives at Nationwide, says his company helped develop the Legal Advisor software, and stopped using third-party auditors last winter. So far, he says, the processing costs of using the software are 40 percent less than those of auditing. He says savings likely will decrease to about 20 percent as Nationwide adds workers to handle the process in-house. Elsass says he saw a need for change after a survey of the company’s 750 outside law firms showed they were dissatisfied with auditors’ inconsistent application of billing guidelines and long waits for payment. Even when auditing moves in-house, lawyers can still be under the microscope. They’re still subject to insurers’ billing guidelines and sometimes to performance measurements. But the DRI’s Milliken says internal reviews may limit trespasses on professional judgment, partly because people doing them understand the case and what’s required to resolve it.

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