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Vol. 72, No. 8, August 1999 |
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.
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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.
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