Insurers and large corporate legal departments are sophisticated consumers of legal services, but they face a constant struggle to contain the ever-rising cost of litigation against a background of budget tightening by senior executives. One strategy is to keep more legal work in-house. Other approaches include increasing the use of alternative legal service providers and artificial intelligence technologies to do routine work that might not require a traditional law firm. Some companies are reportedly hiring auditors to scrutinize law firm statements for billing errors and kick those statements back to the law firm if they believe the charges are excessive or unlawful.
Yet another way companies are attempting to trim legal spending is through litigation billing guidelines that outside counsel is expected to follow.
It’s clear to see how litigation billing guidelines can place the lawyer in the uncomfortable position of serving two masters: the client and the bill-paying insurer. Ethically navigating relationships between these two parties can be challenging.
To the extent that billing guidelines address logistics relating to billing and client reporting, they are ethically unobjectionable. However, billing guidelines can wander into ethically problematic areas when they place limits on the number of hours that outside counsel can charge for legal research or require that all depositions in a case be handled by one attorney. A lawyer who acquiesces to the latter types of litigation billing guidelines may be violating the lawyer’s ethical duty to exercise independent professional judgment while representing the client.
A further ethical complication arises when the entity paying the legal fees is not, strictly speaking, the client. This occurs when an insurance company is providing a legal defense for its insuree. In this situation, the lawyer’s actual client is not the insuree but the insurer that is paying the legal bills. The ethical boundaries are established by the ABA Model Rule of Professional Conduct 5.4(c) (Professional Independence of a Lawyer), which provides:
- A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.
The ABA’s model rules have one additional thing to say about this arrangement. The comment to Rule 1.5, on attorneys’ fees, states that “an agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest.”
It’s clear to see how litigation billing guidelines can place the lawyer in the uncomfortable position of serving two masters: the client and the bill-paying insurer. Ethically navigating relationships between these two parties can be challenging.
To make matters more concrete, here are some examples of ethically questionable litigation billing guidelines:
- “Routine, computerized pleadings (“boilerplate’) should be billed at .10 hours or actual preparation time, whichever is less.”
- “Depositions, hearings, motion dockets, or meetings in preparation for trial, should be covered by one attorney . . .”
- “[The client] considers local time spent traveling as part of a law firm’s overhead and will not pay for local travel time.”
- “We require that you conduct prior consultation before scheduling any depositions.”
- “You must consult with [the client] before conducting any legal research.”
- “We should not be charged for routine legal research. Legal research concerning matters of common knowledge among reasonable experienced counsel in the locale is considered to be routine or elementary and, therefore, is non-chargeable.”
- “It is expected that paralegals or junior associates will be utilized in research matters.”
- “Local travel, defined as travel less than 100 miles roundtrip [is] a cost integral to running the law firm. It is therefore overhead.”
Although guidelines like the ones set out above do not specifically preclude the lawyer from exercising independent legal judgment on the client’s behalf, in reality, they strongly discourage the lawyer from handling the case in a fashion contrary to the insurer’s litigation billing guidelines. West Virginia’s bar ethics regulators have remarked that it would be “naive” to believe that economic consequences do not influence a lawyer’s exercise of professional judgment. See West Virginia Lawyer Disciplinary Board, L.E.I. No. 2005-01 (2005).
Most other courts and bar associations that examined the ethical propriety of restrictions like those set out above have concluded following them would be unethical. The position of the Indiana State Bar Association’s Legal Ethics Committee is typical. Yes, the insurer and lawyer are free to negotiate economic terms. However, it added, “If the negotiated financial terms result in a material disincentive to perform those tasks which, in the lawyer’s professional judgment, are reasonable and necessary to the defense of the insured, such provisions are ethically unacceptable.”
The Indiana bar group advised Indiana lawyers to attempt an acceptable modification of the litigation guidelines; however, if renegotiation of the guidelines proves unsuccessful, then the lawyer must decline the representation.
Similarly, bar ethics regulators in Colorado cautioned attorneys to refrain from agreeing to litigation guidelines without first considering how they might compromise the attorney’s independent professional judgment in foreseeable circumstances. “Billing guidelines that arbitrarily and unreasonably restrict compensation for time spent by counsel performing services deemed necessary by counsel or that impose arbitrary rates for specific services may discourage the performance of such services,” the Colorado ethics committee wrote. When this happens, they said, the attorney has several possible courses of action:
- obtain the insurer’s permission not to follow the guidelines;
- decline to abide by the guidelines and withdraw;
- obtain the insured’s permission to forego action that is contrary to the guidelines; or
- seek payment of attorneys’ fees directly from the insured.
Insurance defense experts believe that effective communication is the best medicine for keeping everyone reasonably satisfied with the course of the litigation in those cases in which, in the lawyer’s opinion, the interests of the client and the insurer diverge. It may be possible to obtain modifications of the litigation billing guidelines if compelling circumstances exist; likewise, impediments to the lawyer’s independent legal judgment might not be as restrictive as they appeared at first blush.
Lawyers interested in diving deeper into this topic should consult their local bar associations for guidance specific to their jurisdiction, as well as the following leading bar association opinions on the ethical implications of litigation billing guidelines:
- Colorado Bar Association Ethics Committee, Formal Opinion 107 (1999)
- Arizona State Bar Committee on the Rules of Professional Conduct, Opinion No. 99-08 (1999)
- State Bar of Wisconsin, Ethics Opinion No. E-99-1 (1999)
- lowa Supreme Court Board of Professional Ethics and Conduct, Opinion No. 99-01 (1999)
- Ohio Supreme Court Board of Commissioners on Grievances and Discipline, Opinion No. 2000-3 (2000)
- Indiana State Bar Association Legal Ethics Committee, Opinion No. 3 (1998)
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