Randy Evans and Shari Klevens, Dentons partners. ()
When disputes arise out of an attorney’s handling of a legal matter, the parties involved are generally the attorney and the client. It is a basic concept that attorneys are only liable to their clients for their errors and omissions. But, as is the case with most rules, there can be gray areas.
What happens, for example, when someone other than the client is paying the legal fees? In most circumstances, an attorney does not owe any duties to a person who is simply paying the legal bills associated with the representation of another. However, this issue is even more complicated when an insurance company is overseeing the representation and paying the bills.
In many circumstances, the insurance company has an obligation to provide a defense, through financing legal fees, which makes the insurance company’s involvement different from a situation in which, for example, a person’s legal fees are simply being paid off by a family member.
In situations in which an insurance company is paying the bills of a defense, is the insurance company a “client” of the firm defending the insured? The short answer is, it depends.
In some situations—such as where the insurance company and the insured agree on the bounds of coverage—the insurer, insured, and defense counsel may enjoy a “tripartite” relationship. In such a relationship, in several states, the attorney or law practice may owe duties to both the insurer and the insured (although the primary duty is usually to the insured).
In situations in which there is a conflict between the insured and the insurer—such as when it is in question whether the applicable policy provides coverage for the conduct or damages alleged—the “tripartite” relationship may not apply. Although there is only limited precedent on the issue in Connecticut, upon such a conflict, the insurer may be obligated to provide “independent counsel” (called Cumis counsel in some jurisdictions after San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 (1984)) who is loyal only to the insured.
For states requiring independent counsel, courts and legislators reason that independent counsel cannot serve two masters on the issue related to the conflict. If the attorney provides information to the insurance company that impacts the availability of coverage, it may harm the insured. Thus, generally, independent counsel are considered to be truly independent and enjoy a traditional attorney-client relationship with the insured, despite the fact that they are paid by the insurer and may owe a duty of disclosure to the insurer.
The use of independent counsel is nothing new and, in many jurisdictions, is well-defined by case law or statute. However, there are still a number of related issues for which the answer or the boundaries are less clear. For example, it is unclear in certain jurisdictions whether an insurer has standing to sue independent counsel for issues arising out of the representation.
In 2015 the Supreme Court of California addressed this issue in Hartford Casualty Insurance Company v. JR Marketing. In that case, the insurer and insured disputed whether there was coverage for a third-party claim. Because California law requires that an insurer provide a defense for a claim that is even potentially covered, the insurer provided the insured with independent counsel.
The complicating factor in this case was that the insurer later alleged that the independent counsel “padded” their bills to the insurer with charges that were excessive, unreasonable, or even fraudulent. The insurer sought to bring a direct action against the law firm acting as independent counsel. The law firm argued that any rights the insurer had ran solely against its insured. The California Supreme Court rejected that argument and instead found that the insurer could directly sue and recover from the independent counsel for alleged billing irregularities.
A potentially distinguishing fact in JR Marketing is that the independent counsel had prepared a court order that provided that the insurer would be able to recover any fees that were excessive. However the court decision supports the conclusion that, although the independent counsel may not have a traditional attorney-client relationship with the insurer, the attorney nonetheless has certain obligations tied to reasonable billing that could give rise to a direct claim by the insurer.
This case provides some lessons for attorneys who represent insureds.
Independent counsel should strive to be conscientious and accurate in their billing to insurers for work performed for an insured. An insurer’s agreement to provide a defense to the insured does not mean that defense costs may be unreasonable, or that budgeting and other requests may be ignored. In the wake of the decision in JR Marketing, insurers may review bills more carefully to ensure that they are not being charged for “useless and wasteful” expenses.
As a way to limit unnecessary costs and increase efficiency, many insurers will require independent counsel to comply with litigation billing guidelines. Courts routinely uphold the use of such guidelines, even when used by independent counsel, as a way to ensure reasonable and efficient billing. Thus independent counsel should clarify the billing requirements if there is any uncertainty, as compliance with the insurer’s guidelines is the best way to ensure that bills are reasonable and that bills get paid.
The independent counsel’s primary duties—including the duty of loyalty, duty of candor, and duty of confidentiality—are to the insured, particularly in situations where a coverage dispute arises (which is the circumstance that may give rise to independent counsel). However, that fact does not mean that the independent counsel can completely ignore the insurer.
Many jurisdictions require that the independent counsel disclose information to the insurer to allow it to make reasonable and informed assessments regarding the case, including information regarding potential exposure and the insured’s likelihood of success. Although the independent counsel may need to protect information that bears on the issue of coverage, it cannot wall off the insurer from all information simply because there is a coverage dispute.
Attorneys handling matters for insured clients should thus be aware that the insurer could be a potential plaintiff against the attorney under certain circumstances. However, the tools to defend against or prevent such a claim are largely within the independent counsel’s control.