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Insurers’ Attempts to Limit Defense Costs, Litigation Guidelines, and Related Ethical Considerations: Balancing the Interests of Insurers and Policyholders.

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Presentation on theme: "Insurers’ Attempts to Limit Defense Costs, Litigation Guidelines, and Related Ethical Considerations: Balancing the Interests of Insurers and Policyholders."— Presentation transcript:

1 Insurers’ Attempts to Limit Defense Costs, Litigation Guidelines, and Related Ethical Considerations: Balancing the Interests of Insurers and Policyholders Joseph D. Jean Nicole Bearce Albano Barbara Sellinger November 17, 2011

2 2 Welcome Joseph D. Jean, Member, Lowenstein Sandler PC, Insurance Coverage Group Nicole Bearce Albano, Member, Lowenstein Sandler PC, Litigation Group Barbara Sellinger, General Counsel, artsHorizon

3 3 Summary of Topic/Outline Introduction: The Nature of Insurance Know Your Insurance Policies Getting Your Insurer to Defend Your Claim Insurers’ Attempts to Limit Defense Costs Insurer Imposed Litigation Guidelines

4 4 Introduction: The Nature of Insurance Risk transfer mechanism Competing interests between insurer and insured Liability Coverage  Protects the Company against loss to the Company itself  This insurance covers you against damages that you might inflict on a third party (someone else) as a result of an accident or other happening  Insurance covers expenses for suits brought by a third party as a result of the policyholder's actions

5 5 Know Your Insurance Policies

6 6 Getting Your Insurer to Defend Your Claim Know your policy Give notice early Develop a strategy early  Know the issues  Manage the defense  Choose appropriate counsel Keep your insurer informed Is litigation necessary?

7 7 Getting Your Insurer to Defend Your Claim In most jurisdictions, only one claim need be “potentially” covered for the insurer to have a “duty to defend” against all claims. Nat’l Union Fire Ins. Co. v. Rhone- Poulenc, 1992 Del. Super. LEXIS 45 (Sup. Ct. Del. 1992). Duty to defend is broader than duty to indemnify. See, e.g., Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 310, 486 N.Y.S.2d 873, 476 N.E.2d 272 (1984). Claims/complaints are interpreted broadly and in favor of coverage. See, e.g., Powell v. Liberty Mut. Fire Ins. Co., 252 P.3d 668, 672 (Nev. 2011).

8 8 The Duty to Defend in New Jersey New Jersey is different Duty to defend is guided by Burd v. Sussex Mutual Insurance Co., 267 A.2d 7 (N.J. 1970)  The policyholder fired a shotgun, injuring a third party. The victim alleged both negligent and intentional tort claims and the insurer refused to defend.  Policyholder defended the action through his own counsel and the plaintiff was awarded damages.  Burd held that the insurer had the option of leaving the policyholder to defend the claim by itself; then if at the end of the case covered liability was imposed, the insurer reimburses the insured’s defense costs. See also, SL Indus., Inc. v. Am. Motorists Ins. Co., 607 A.2d 1266 (N.J. 1992) (holding insurer’s initial decision not to defend fraud claims against insured was appropriate where there was no indication at time insured forwarded complaint that insured’s former employee had suffered emotional distress); Aetna Cas. & Sur. Co. v. Ply Gem Indus., Inc., 778 A.2d 1132 (N.J. Super. Ct. App. Div. 2001) (holding that, absent actual proof of damage during insured’s policy period, insurer had the right not to defend and “risk” a duty to later reimburse insured for defense costs); Grand Cove II Condo. Ass’n, Inc. v. Ginsberg, 676 A.2d 1123 (N.J. Super. Ct. App. Div. 1996) (holding duty to defend “converted to a duty to reimburse pending the outcome of the coverage litigation”).

9 9 The Tripartite Relationship Relationship between insured, attorney and insurer. Insurer Policyholder Defense Counsel $$$$$

10 10 The Tripartite Relationship Standards vary by jurisdiction Impacts communications and sharing of information Insurer is not entitled to all information Loyalty of counsel to insured vs. to insurer Continental Cas. Co. v. Pullman, Comley, Bradley & Reeves, 929 F.2d 103, 108 (2d Cir. 1991) (attorney owes duties and allegiance to insured, not to the insurer)  Lieberman v. Employers Ins. of Wausau, 419 A.2d 417, 424 (N.J. 1980) (defense counsel retained to represent the insured owed his sole duty to the insured) Fact that an insurer is paying the bills does not alter the lawyer’s ethical obligations to the insured.  N.J. Adv. Comm. Prof. Eth., Opinion 502 at *1 (Sept. 23, 1982) (“The duty of an attorney hired by the insurance company runs to the insured and the fact that the attorney is to be paid by the carrier does not dilute that duty.”)  Montanez v. Irizarry-Rodriguez, 641 A.2d 1079, 1084 (N.J. Super. Ct. App. Div. 1994) (“Nonetheless, it is clear that insurance counsel is required to represent the insured’s interest as if the insured hired counsel directly.”)

11 11 Ethics, Loyalty & The Tripartite Relationship The ABA Model Rules of Professional Conduct, the Third Restatement, and case law on lawyer ethics, informed by states’ ethics opinions (not an insurance policy), define counsel’s ethical responsibilities. See Prevratil v. Mohr, 678 A.2d 243, 250 (N.J. 1996) (“Plainly stated, in any litigation, counsel for an insurer must put the insured’s interests ahead of the insurer’s.”); Purdy v. Pacific Auto Ins. Co., 203 Cal. Rptr. 524, 533-34 (Cal. App. 1984) (noting that lawyer retained by insurer for policyholder has primary duty to “further the best interests of the insured”) See also Restatement (Third) of the Law Governing Lawyers, §134 cmt. f (2000) (holding view that “a lawyer designated to defend the insured has a client-lawyer relationship with the insured” and that “[t]he insurer is not, simply by the fact that it designates the lawyer, a client of the lawyer”); Model Rule 5.4(c) (prohibiting a lawyer from allowing a third party who pays that lawyer to direct or regulate the lawyer’s professional judgment in providing legal services); Rule 1.8(b) (prohibiting a lawyer from using information relating to representation of a client to the client’s disadvantage without client’s informed consent); Rule 1.7 (prohibiting representation where there is a significant risk that representation of one client will be materially limited by responsibilities to another client) ABA Opinion 08-450 (Apr. 2008): “Ordinarily, when a lawyer is engaged by an insurer to represent the insured, the substantive law precludes the lawyer from acting contrary to the interests of the insured.”

12 12 Insurers’ Attempts to Limit Defense Costs Don’t just accept what the insurer offers Insurers’ interests often diverge from yours Insurer-imposed counsel rates – usually very low Insurer-imposed litigation guidelines – not a part of the insurance contract and might violate ethical rules Insurer-imposed audits of invoices – can violate ethical rules

13 13 Reasonableness of Attorneys Fees Are costs reasonable? The law varies. Factors include: Time and labor required, the novelty and difficulty of the questions involved, and the skill required to perform the legal service properly; Fee customarily charged in locality for similar legal services; Efficiency of the attorney in presenting the case, and the amount involved and the results obtained; Nature and length of the professional relationship with the client; and Experience, reputation, and ability of the lawyers performing the services.  Aquino v. State Farm Ins. Co., 793 A.2d 824, 832 (N.J. Super. 2002)  Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818 (Tex.1997)  Kona Technology Corp v. Southern Pacific Transportation Co., 225 F.3d 595 (5th Cir. 2000).

14 14 Insurer-Imposed Litigation Guidelines Some of the most common potential conflicts stem from insurer-imposed litigation guidelines. Guidelines explain how much of the defense the carrier will NOT pay Include restrictions on the way the defense must be conducted  Frequently guidelines exclude reimbursement for such things as:  discussions between members of the defense team on the case;  emails between the defense team;  leaving or listening to voicemails; and  attendance of more than one attorney at hearings or meetings, Regularly impose arbitrary restrictions on legal research; and arbitrary time limits on drafting of pleadings, no matter how complex Often, insurers impose guidelines retroactively – back to the beginning of the case and before they sent them to either the insured or to defense counsel

15 15 Guidelines Must Not Impede Counsel’s Discretion Billing guidelines have been criticized or rejected: …by ethical opinions:  See, e.g., ABA Standing Committee on Ethics and Professional Responsibility (Feb. 16, 2001) (attorney must not permit compliance with “guidelines” and other directives to impair materially the attorney's independent professional judgment in representing an insured); In re Rules of Professional Conduct, 2 P.3d 806 (Mont. 2000) (insurer-imposed restrictions in litigation costs may violate insurer's duty to defend and attorneys’ ethical responsibilities to exercise independent professional judgment). …and by courts:  See, e.g., Dynamic Concepts Inc. v. Truck Insurance Exchange, 61 Cal.App.4th 999 (1998) (“Insurer imposed restrictions on discovery or other litigation costs may well violate the insurer’s duty to defend as well as the attorneys' ethical responsibilities to exercise their independent professional judgment in rendering legal services”)

16 16 Insurer Audits of Defense Invoices Use of audit agencies to review defense counsel bills has become an increasingly common, cost-cutting practice within insurance industry The billing information and file materials required by audit companies inevitably contain confidential information To the extent that billing records or other records sought by the insurance company’s auditors contain “secrets” or “confidences” of the insured, N.Y. Disciplinary Rule 4:101 forbids the insured’s lawyer from disclosing them “except with the consent of the client... after a full disclosure.” See N.Y.S.B.A.Opinion 716 See also ABA Comm. on Ethics and Prof’s Responsibility, Formal Op. 08- 450 (2008) (opining that retained defense counsel may not disclose client confidential information of policyholder to insurer absent policyholder consent); ABA Comm. on Ethics and Prof’s Responsibility, Formal Op. 01- 421 (2001) (“[A] lawyer must not permit compliance with ‘guidelines’ and other directives of an insurer relating to the lawyer’s services to impair materially the lawyer’s independent professional judgment in representing an insured.”)

17 17 What if Your Insurer Won’t Pay Defense Costs? Do what is best for your company Continue to paper the insurers’ file Leverage a potential bad faith claim Litigation vs. ADR  Timing  Causes of action: declaratory judgment, breach of contract  Legal vs. factual issues  What jurisdiction? Don’t get jumped Choose and manage your defense counsel wisely

18 18 Manage Your Defense Establish a strategy early Know your budget and keep an eye on it Request budgets Review bills Conserve your limits Insurers don’t always pay for everything Use litigation management tools  Guidelines  Litigation plans  Task code billing  No block billing  Regular monthly billing  Proper work allocation—partners don’t have to do everything

19 19 Choosing Defense Counsel Referrals/Panel Counsel Do your own research Interview several firms Loyalty Experience Strategy—how will they handle this case? Rates Cheapest isn’t always best

20 20 Best Practices Read your policy and know your policy Know your claims Develop an early strategy Know your lawyers and seek out loyalty and team approach Watch out for the tripartite relationship Know the ethical rules Comply with policy provisions & Keep Your Insurer Informed Stay involved and manage the litigation to your strategy Know your end game and don’t just take “no” for an answer Never assume there is no coverage Coverage tail doesn’t wag the defense dog

21 21 Question and Answer

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