Ethics
Ethical Risks Inherent in Representing Both Insurers and
Insureds
Professional ethics opinion E-99-1 considers outside auditors
review of attorneys bills for services and restrictive guidelines by an
insurer on providing a legal defense to an insured.
By
the State Bar Professional Ethics Committee
When a lawyer is retained by an insurer to represent an insured, what
must the lawyer do when instructed by the insurer to submit detailed
bills for services to an outside audit firm for review? How must a
lawyer respond to restrictive guidelines imposed by an insurer on the
manner in which the lawyer may provide a defense for an insured?
Lawyers Who Represent Insurers and Insureds
Wisconsin lawyers retained by insurers under a policy of insurance
typically represent both the insurer and insured in the defense of
claims. Counsel are typically selected by the insurer and regularly
report to the insurers on the progress of cases and may, but do not
always, report to the insured. These counsel regularly consult with the
insurers regarding settlement and obtain settlement authority from
insurers. Practices vary regarding consultation with insureds, unless
insureds have liability exposure beyond the coverage of their insurance
policies.
Counsel who regularly represent insureds usually have ongoing
attorney-client relationships and economic ties to those insurers.
Counsel fees are paid by the insurer. Many such counsel represent
insurers in multiple matters and depend upon those insurers for
selection and assignment to cases on an ongoing basis.
In cases in which they represent both insurers and insureds, counsel
must be alert to ethical risks that are inherent in such
circumstances.
First, conflicts may arise between the interests of insurers and
insureds. In such cases, it is unlikely a lawyer can continue to
represent both without an informed mutual written waiver of the
conflict.
Second, some confidential information relating to one party may not
be information that counsel can share with the other represented party.
One example would be information a lawyer learns from or about the
insured indicating the prospect of a defense to coverage. As valuable as
this information may be to the insurer, a lawyer cannot reveal it and,
in fact, must, as the lawyer for the insured, prevent the insurer from
uncovering this knowledge to the extent permitted by law.
Third, when representing two clients in the same matter, either
client may suggest or demand that the lawyer act or refrain from acting
in a way that is inimical to the interests of the other client. In such
a circumstance, the lawyer must persuade that client to withdraw the
suggestion or demand to the extent consistent with that client's
interests, or the lawyer must withdraw from the representation. A lawyer
cannot represent two clients when the representation of one client
requires the lawyer to act averse to the interests of the other client.
When a lawyer withdraws from representing one client, whether the lawyer
may continue to represent the remaining client is governed by SCR
20:1.9.
The Use of Outside Auditors by Insurers
The Professional Ethics Committee has received several inquiries from
lawyers regarding the insurers who require them to submit their detailed
bills for services to outside auditors.
These outside auditors are private contractors, hired by the
management of insurance companies to review and act on the detail of
defense lawyers' bills. The audits are intended to identify ways to
reduce defense costs of cases. The auditors have no apparent expertise
in rendering professional legal services or in assuring compliance with
the Rules of Professional Conduct. Depending upon the particular
contract between the outside audit firm and the insurer, the audit
company may be authorized to direct how the defense should be conducted
to reduce costs, and these directions to defense counsel may relate to
decisions about the nature of the professional services that are to be
provided to insureds. The auditors also may have authority to disallow
charges for legal services that the auditor deems to be
inappropriate.
The information in a lawyer's bill for services may contain
confidential information. See SCR
20:1.6(a). Each client represented in a joint representation is
entitled to review the lawyer's bill. However, lawyers representing
joint clients must always weigh the consequences of providing one or
both of their clients with confidential information. A lawyer may not
use confidential information in a way that may be detrimental to the
interests of a client without the client's informed consent.
See SCR
20:1.8(b). One client who receives confidential information may
communicate it to a third person, may use it for his or her own benefit,
or may cause it to be used to the detriment of the other client. Lawyers
must protect the confidentiality interests of each of their clients.
This requires them to consider a range of strategies including joint
client agreements to limit the release of certain information to certain
clients, consulting with the joint clients about the use and
distribution of confidential information, joint client agreements
regarding the use and/or outside distribution of confidential
information, redacting portions of a document distributed to particular
clients, or, in some instances withdrawing from representation when the
lawyer cannot meet conflicting obligations to the joint clients.
See SCR
20:1.7(b) and SCR
20:1.16(a)(1).
A lawyer should not submit a bill for services that contains
confidential information to an outside audit firm at the request of the
insurer without the consent of the insured. Information in the lawyer's
bill for services could be used to the detriment of the insured. Release
of such confidential information requires each client's consent, after
consultation. Practically, it may be difficult, if not impossible, to
keep such bills from auditors. Counsel must send their bills to the
insurer, who may send the bills to an auditor themselves. Counsel who,
in particular instances, are concerned that the transmission of their
bills to others may breach client confi-dences should consider using
drafting protocols that assure their billing narratives do not reveal
confidential information.
Opinions and advice of the Professional Ethics
Committee, its members, and assistants are issued pursuant to State Bar
Bylaws, Article IV, Section 5. Opinions and advice are limited to the
facts presented, are advisory only, and are not binding on the courts,
the Board of Attorneys Professional Responsibility, or State Bar
members.
Attorneys with questions on professional ethics issues may contact
the Ethics Hotline at (800) 444-9404, ext. 6168; or (608) 250-6168 (all
day Wednesday); and (608) 629-5721 on Monday, Tuesday, Thursday, and
Friday mornings. Send written requests for Professional Ethics Committee
opinions to the Professional Ethics Committee c/o Keith Kaap, State Bar
of Wisconsin, P.O. Box 7158, Madison, WI 53707-7158.
Professional Ethics Committee opinions may be found online.
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The ability of the outside audit firm, acting on behalf of the
insurer, to unilaterally disallow or reduce fees incurred in the defense
of the insured presents a risk of interference with the lawyer's
independent professional judgment on behalf of the client. When such a
risk is present, the client should be informed. See SCR
20:1.4. A lawyer may not permit a person paying the lawyer's fee on
behalf of the client to directly regulate the lawyer's professional
judgment on behalf of the client. See SCR
20:1.8(f)(2) and SCR
20:5.4(c). Lawyers who find themselves in circumstances in which
such monetary or other influences interfere with the exercise of their
independent professional judgment or advice to the client, cannot
represent those clients in conformity with requirements of the Rules of
Professional Conduct. The rules prohibit lawyers from entering into such
a representation and require a lawyer to immediately withdraw if such
interference cannot be abated. See SCR
20:1.16(a)(1).
Generally, lawyers may look to their insured clients to waive
obligations of confidentiality. However, in seeking such consent, a
lawyer should not rely on the client's implied authorization to disclose
"in order to carry out the representation." Such consent must be express
and only after consultation with the client. See SCR
20:1.6(a). While not required, it is generally advisable that such
consent be in writing. Likewise, lawyers should exercise caution that
such waivers by the client not constitute a waiver of the
attorney-client privilege or the protections afforded work product
doctrine.
The committee's opinion relating to the release of client bills to
outside auditors is consistent with opinions of 21 other state bar
ethics committee opinions issued on this topic as of the date of this
opinion.
Insurer Restrictions and Limitations on the Representation of
Insureds
Insurers may manage the defense of claims. They usually have
contracted for this right in the insurance policies issued to their
insureds. But not every limitation or restriction imposed by an insurer
on the defense of a case is consistent with a lawyer's duty under the
Rules of Professional Conduct. Lawyers, however, cannot accept
restrictions or limitations on the defense of claims that are so
financially or otherwise onerous that they would prevent lawyers from
satisfying their ethical obligations to their clients. See SCR
20:1.1, SCR
20:1.3, SCR
20:1.4, SCR
20:1.7. Lawyers may not accept restrictions that interfere with
their independent professional judgment on behalf of the insured/client.
See SCR
20:2.1. A lawyer may not enter into or continue in a contract with
an insurer that would be so restrictive. See SCR
20:1.8(f)(2), SCR
20:5.4(c) and SCR
20:1.16(a)(1). Each lawyer must make an independent professional
judgment about whether restrictions or limitations imposed by such a
contract raise such ethical limitations.
Wisconsin Lawyer