Can an insurance defense lawyer send detailed billing statements to an outside auditor hired by the insurer without the insured client's consent?

Currency note

This opinion was issued in 2000, before Ohio's adoption of the Ohio Rules of Professional Conduct (effective February 1, 2007). The Board flagged it as a "CPR Opinion" because it interprets the former Ohio Code of Professional Responsibility, since superseded. The DR 4-101 provisions discussed here are now addressed by Ohio Prof. Cond. R. 1.6. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule or requirement mentioned here.

Plain-English summary

The Board addressed whether an insurance defense attorney may submit detailed legal bills, incurred in defending an insured, to an outside auditing company hired by the insurer. The request before the Board described the least comprehensive level of audit: a review of the invoices the defense attorneys submit, checked against the insurer's billing guidelines, with the auditor authorized to disallow charges it deems inappropriate.

The Board concluded that detailed billing statements can contain client confidences and secrets, because they may reveal the nature of legal services performed, legal research conducted, strategic decisions, and information that could embarrass the insured. Under DR 4-101(B)(3) a lawyer may not use a confidence or secret for the advantage of a third person unless the client consents after full disclosure, and DR 4-101(C)(1) permits revealing confidences or secrets only with the client's consent after full disclosure. The Board aligned itself with the majority of the roughly twenty-two states that had addressed the question, requiring the insured's fully informed consent before submission.

The Board specified what full disclosure requires: informing the client of the type of information the insurer requires in the billing invoice, the type of supporting documentation (if any) the audit requires, and that waiver of the attorney-client privilege might be raised as a consequence. The Board expressly declined to decide whether submitting the bills actually waives the attorney-client privilege or work-product doctrine, treating that as a question of law beyond the scope of an ethics opinion.

Common questions

Q: Could an Ohio insurance defense lawyer send detailed bills to the insurer's outside auditor without telling the insured?

A: No. The opinion concluded the attorney must first obtain the insured client's consent after full disclosure, because the bills can reveal confidences and secrets protected by DR 4-101.

Q: What did the opinion say "full disclosure" had to cover?

A: The opinion stated that full disclosure includes informing the client of the type of information the insurer requires in the invoice, the type of supporting documentation the audit requires, and that waiver of the attorney-client privilege might be raised as a consequence.

Q: Did the opinion decide whether submitting the bills waives the attorney-client privilege?

A: No. The opinion stated that whether submission waives the privilege or work-product doctrine is a question of law beyond the scope of the opinion.

Background and rules framework

The opinion interprets former Ohio Code of Professional Responsibility DR 4-101, which governed the preservation of a client's confidences and secrets, in particular DR 4-101(B)(3) (no use of a confidence or secret for a third person's advantage without consent after full disclosure) and DR 4-101(C)(1) (a lawyer may reveal confidences or secrets with the client's consent after full disclosure). That subject matter is now addressed by Ohio Prof. Cond. R. 1.6 (Model Rule 1.6).

Citations and references

Rules of Professional Conduct:

• Former Ohio Code of Professional Responsibility DR 4-101(B)(3), DR 4-101(C)(1)

Cases:

• United States v. Massachusetts Institute of Technology, 129 F.3d 681 (1st Cir. 1997), disclosure of legal bills to an audit agency forfeited the attorney-client privilege

Other opinions cited:

• The opinion surveyed billing-audit opinions from at least twenty-two states, including Kentucky Bar Ass'n Op. E-404 (1998), Maryland State Bar Ass'n Op. 99-7, Rhode Island Ethics Advisory Panel Op. 99-17 (1999), Cincinnati Bar Ass'n Op. 98-99-02, and Oregon State Bar Formal Op. 1999-157 (1999)

See also

• Ohio BPC Op. 2000-003: Insurer Litigation Management Guidelines and Professional Judgment
• Ohio BPC Op. 1997-007: Flat Fee for Insurer Defense Work
• Ohio BPC Op. 1994-009: Insurance Staff Counsel as an In-House Law Firm

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2017/04/Op-00-002.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

The Supreme Court of Ohio
BOARD OF COMMISSIONERS ON GRIEVANCES AND DISCIPLINE
41 SOUTH HIGH STREET-SUITE 3370, COLUMBUS, OH 43215-6105
(614) 644-5800 FAX: (614) 644-5804

                                         OFFICE OF SECRETARY




                                       OPINION 2000-2
                                      Issued June 1, 2000

[CPR Opinion-provides advice under the Ohio Code of Professional Responsibility which is superseded
by the Ohio Rules of Professional Conduct, eff. 2/1/2007.]

SYLLABUS: Under DR 4-101(B)(3) and DR 4-101(C)(1), an attorney may not submit
detailed legal bills to an outside audit company hired by an insurer without first obtaining
client consent after full disclosure. Full disclosure includes informing the client of the
type of information required by the insurer in the billing invoice, the type of supporting
documentation, if any, required by the audit, and that waiver of attorney-client privilege
might be raised as a consequence. Whether submission of legal bills to an audit company
waives the attorney-client privilege or work product doctrine is a question of law beyond
the scope of this opinion.

OPINION: This opinion addresses a question regarding the auditing of insurance
defense bills for legal services rendered to an insured by an attorney.

    Is it proper for an insurance defense attorney to submit detailed legal bills
    incurred in defending an insured to an outside auditing company hired by
    an insurer?

The use of outside auditors by insurance companies to review insurance defense
counsels’ legal bills for defending insureds is causing considerable concern among
attorneys. The primary ethical concern is whether the submission of detailed billing
statements to outside auditors violates an attorney’s duty to preserve client confidences
and secrets.

Insurance defense attorneys are being asked to submit detailed billing invoices so that
auditors hired by the insurer can scrutinize the information to determine what services the
attorneys should be paid for and what should be denied. The use of legal audits stems
from both fears of billing fraud and desires to monitor and control costs. For discussion
of the trend toward auditing of legal bills see Claire H. Matturro, Auditing Attorneys’
Bills: Legal and Ethical Pitfalls of a Growing Trend, 73-May Fla. B.J. 14 (1999).

Examples of the types of billing categories that may be questioned through a legal audit
are:

    1. Insufficient Detail/Vague Time Entries;
    2. Undisclosed Timekeepers;
    3. Excessive and/or Undisclosed Hourly Rates;

Op. 2000-2 2

   4. Block-Billing;
   5. Minimum or Formula Time Charges;
   6. Rounding Up;
   7. Unusual Number of Long Billing Days;
   8. Multiple Billers/Duplication of Effort;
   9. Inefficient Staffing;
   10. Excessive Reviews and Revisions;
   11. Excessive Research;
   12. Excessive Intra-Office Conferencing;
   13. Excessive Abstracting, Summarizing and Indexing;
   14. Fees in Excess of Budgeted Hours;
   15. Lack of Description for Reported Expenses; and
   16. Unapproved Overhead Expenses.

Robert C. Heist, The Tripartite Relationship and the Insurer’s Duty to Defend Contrasted
With Its Desire to Manage and Control Litigation Through the Introduction of the Legal
Audit, 602 PLI/LIT 221, 246-47 (1999).

Auditors determine through the legal audit whether payment is justified for the attorney’s
services. Auditors make the determination by looking at the billing categories, using
billing guidelines, detailed invoices, and sometimes supporting document review and
interviews.

Four basic levels of analysis in legal audits have been described.

   The most comprehensive review available is an on-site review of all fee
   and expense entries, law firm work product, expense documentation, pre-
   bills and time sheets. Key law firm personnel are also interviewed. This
   on-site audit is the most expensive and time consuming, and many clients
   [or third party payers] decide not to use it for those reasons.

   Less comprehensive is a preliminary analysis based on a review of all the
   firm’s fee and expense entries, and a review of any expense
   documentation, work product, pre-bills, and time sheets that can be
   provided by the client, although no on-site audit is conducted. This audit
   avoids the cost of the auditor’s visit to the law firm, and while the auditor
   does not have the benefit of interviewing the attorneys, a great deal of
   information can be obtained through a review of all of the documents.

   Still less comprehensive is a review of all of the law firm’s fee and
   expense billing without the review of any expense documentation, work
   product, pre-bills or time sheets. Although this type of audit can be
   beneficial in some instances, it lacks both on-site interviews and
   comprehensive document review.

   The least comprehensive review is a letter report that simply analyzes
   specific concerns or issues that can be identified from the client’s billing
   entries or statements.

Op. 2000-2 3

James P. Schratz, Cross-examining a Legal Auditor, 20 Am. J. Trial Advoc. 91, 93-4
(1996).

Concerns regarding the preservation of confidences and secrets may appear greater with
increased levels of audit scrutiny. Yet, concerns exist even at the lowest level of audit,
particularly when insurers require defense attorneys to submit detailed billing statements.

As described in a Kentucky advisory opinion, “these bills are now quite detailed, and
contain information about the nature of the legal services performed, information about
legal research conducted, and information which could contain strategic decisions made
regarding the handling of the case. Sometimes legal bills could include information
which would tend to embarrass the insured client.” Kentucky Bar Ass’n, Op. E-404
(1998).

As described in a Maryland advisory opinion,

     [t]he auditing agency has made a request for supplemental materials to
   support these invoices including specific descriptions of work performed,
   settlement offers, and estimates of the insured’s percentage of liability.
   Specifically, the auditing agency has requested such items as the identity
   of participants, as well as the substance of a variety of communications,
   specific issues researched, the identity of materials and documents
   reviewed, specific trial preparation performed and specific non-deposition
   discovery.
     Recently, the auditor has requested that the Firm forward certain
   documentation which could be classified as attorney work product to
   support the Firm’s invoices.”

Maryland State Bar Ass’n, Op. 99-7 (1998).

As described in a Rhode Island opinion, “[e]xamples of the level of detail the insurer
requires include the subject matter of all written or oral communication, the identity of
participants including witnesses and clients, the specific issues researched, the identity of
materials and documents reviewed, the specific trial preparation performed, and a
description of the specific issues central to pleadings, motions, or memoranda prepared.”
Rhode Island Sup Ct, Ethics Advisory Panel, Op. 99-17 (1999).

In the request presented to this Board, the level of scrutiny used in the audit of insurance
defense attorneys’ bill is described as a review of invoices submitted by the defense
attorneys. Auditors review the invoices to assure compliance with the insurer’s billing
guidelines and have authority to disallow charges for legal services that the auditors deem
inappropriate. While this request refers to the least comprehensive review, the Board is
cognizant that more comprehensive reviews could be undertaken.

Across the nation, attorneys seek guidance from advisory bodies as to whether the
submission of insurance defense bills to outside auditors comports with the professional
rules of ethics. Ethics opinions have been issued in at least twenty-two states.
Op. 2000-2 4

   Alabama State Bar, Op. RO-98-02 (1998)
   Alaska Bar Ass’n, Op. 99-1 (1999)
   Hawaii, Office of Disciplinary Counsel, Sup Ct of Hawaii, Formal Op. 36 (1999)
   Indiana State Bar Ass’n, Op. 4 of 1998
   Kentucky Bar Ass’n, Op. E-404 (1998)
   Maine, Board of Overseers, Op. 164 (1998)
   Maryland State Bar Ass’n, Op. 99-7 (1998)
   Mississippi State Bar, Op. 246 (1999)
   Missouri, Office of Chief Disciplinary Counsel, Sup Ct of Missouri, Informal
       Opinion Summary, 980188
   North Carolina State Bar Ass’n, 98 Formal Ethics Opinion 10 (1998)
   Ohio, Cincinnati Bar Ass’n, Op. 98-99-02
   Oregon State Bar, Formal Op. 1999-157 (1999)
   Pennsylvania Bar Ass’n, Informal Op. 97-119 (1997)
   Rhode Island Sup Ct, Ethics Advisory Panel, Op. 99-17 (1999)
   South Carolina Bar, Op. 97-22 (1997)
   Tennessee Sup Ct, Bd of Prof Resp, Formal Ops. 99-F-143 and 99-143(a) (1999)
   Utah State Bar, Op. 98-03 (1998)
   Virginia, LEO 1723 (1998)
   Vermont Bar Ass’n, Op. 98-7 (undated)
   Washington State Bar Ass’n, Formal Op. 195 (1999)
   West Virginia Lawyer Disciplinary Board, Office of Disciplinary Counsel, LEI
       99-02 (1999)
   Wisconsin, State Bar of Wisconsin, Op E-99-1 (undated)

The majority view of the ethics advisory committees is that an insurance defense attorney
may not submit legal bills to an outside audit company without first obtaining the fully
informed consent of the insured. [See e.g., Kentucky, South Carolina, Tennessee, Utah,
Ohio (Cincinnati Bar Ass’n), Pennsylvania, Missouri, Maryland, Wisconsin, Hawaii,
Vermont, Maine, Washington, West Virginia, Mississippi, Alaska, Indiana, North
Carolina, Rhode Island].

Within the advisory opinions, important concerns are raised. First, the feasibility of
obtaining informed consent for revealing confidences and secrets is a concern. One state
explains that “[a]ll client information is confidential, and as a practical matter, obtaining
the informed consent necessary to such a disclosure is highly problematic. The client’s
consent to the release of confidential information has to be completely informed, based
upon more than the mere fact that his or her billing record will be released to the auditors.
The lawyer must make clear to the insured the kind of information to be found in the
billing records, as well as the possible legal effects of the release of such information
upon the insured client’s rights.” (Vermont). Several states caution attorneys that the
insurance contract itself is not sufficient to constitute consent. (Tennessee, Utah, Hawaii,
West Virginia, Rhode Island).

Second, the ethical propriety of even seeking informed consent is a concern. One state’s
view is that seeking the client’s consent when there are client confidences and secrets in
billings puts the attorney in an impossible situation for “[i]t is almost inconceivable that it
Op. 2000-2 5

would ever be in the client’s best interests to disclose confidences or secrets to a third
party.” (Washington). Another state advises that “[i]n ordinary circumstances, the
request to submit Client confidences and secrets in a detailed bill to a third party auditor
will create an actual conflict of interest between insured and insurer. . . . If an actual
conflict exists between insurer and insured regarding the advisability of releasing the
billing information, DR 5-105(E) prohibits Attorney from asking Client for permission to
send the bills to the third-party auditor.” (Oregon). Another state advises that “consent
may not be requested by a lawyer if a disinterested lawyer would conclude that the client
should not agree to such disclosure.” (Mississippi). One state advises that “the lawyer
must reasonably conclude that there is some benefit to the insured to outweigh any
reasonable expectation of prejudice, or that the insured cannot be prejudiced by a release
of the confidential information, before the lawyer may seek the informed consent of the
insured after adequate consultation.” (North Carolina). One state notes that “pursuant to
the attorney’s duty of loyalty to the client, as prescribed by DR 7-101, the insured’s
attorney should not recommend that the client provide such consent if the disclosure to
the auditors would in some way prejudice the client.” (Virginia).

Third, the possibility of waiver of attorney-client privilege is a concern. Two states
advise that the lawyer may submit the bills only with informed consent of the insurer and
only so long as the lawyer reasonably believes that doing so will not substantially affect
the representation of the insured client. (Kentucky, South Carolina). One state advises
that “if a waiver of privilege is caused by such submission to independent auditor, and if
such waiver is detrimental to the insured’s cause” disclosure may constitute unethical
conduct. (Indiana). Another state advises that “a lawyer should not permit the disclosure
of information relating to the representation to a third party, such as a billing auditor, if
there is a possibility that waiver of confidentiality, the attorney-client privilege or the
work product privileges would occur.” (Alabama).

Of course, advisory bodies cannot answer the legal question of whether there is or will be
waiver of attorney-client privilege. Case law develops that issue. In particular, one case
is noted herein because it is of related interest to advisory bodies. In United States v.
Massachusetts Institute of Technology, 129 F. 3d 681 (1997), Massachusetts Institute of
Technology (MIT) attempted to assert the attorney-client privilege and work-product
doctrine in response to a document request by the Internal Revenue Service (IRS). The
IRS sought billing statements of the law firms that had represented MIT and minutes of
the MIT corporation and its executive and auditing committees. Earlier, the billing
statements and some or all of the minutes sought by the IRS had been provided to an
audit agency pursuant to contracts between MIT and entities in the Department of
Defense. The First Circuit Court of Appeals upheld the district court’s holding that the
disclosure of the legal bills to the audit agency forfeited the attorney-client privilege. Id.
at 683, 688.

In Ohio, DR 4-101 of the Ohio Code of Professional Responsibility governs the
preservation of confidences and secrets of a client.

      DR 4-101 PRESERVATION OF CONFIDENCES AND SECRETS OF A
                              CLIENT

Op. 2000-2 6

   (A) “Confidence” refers to information protected by the attorney-client
       privilege under applicable law, and “secret” refers to other
       information gained in the professional relationship that the client has
       requested be held inviolate or the disclosure of which would be
       embarrassing or would be likely to be detrimental to the client.
   (B) Except when permitted under DR 4-101(C), a lawyer shall not
       knowingly:
       (1) Reveal a confidence or secret of his client.
       (2) Use a confidence or secret of his client to the disadvantage of the
           client.
       (3) Use a confidence or secret of his client for the advantage of
           himself or of a third person, unless the client consents after full
           disclosure.
   (C) A lawyer may reveal:
       (1) Confidences or secrets with the consent of the client or clients
           affected, but only after a full disclosure to them.
       (2) Confidences or secrets when permitted under Disciplinary Rules
           or required by law or court order.
       (3) The intention of his client to commit a crime and the information
           necessary to prevent the crime.
       (4) Confidences or secrets necessary to establish or collect his fee or
           to defend himself or his employees or associates against an
           accusation of wrongful conduct.
   (D) A lawyer shall exercise reasonable care to prevent his employees,
       associates, and others whose services are utilized by him from
       disclosing or using confidences or secrets of a client, except that a
       lawyer may reveal the information allowed by DR 4-101(C) through
       an employee.

Ethical Consideration 4-3 provides guidance as to disclosures to outside agencies. The
information must be “limited” and “necessary for statistical, bookkeeping, accounting,
data processing, banking, printing, or other legitimate purpose.”

         EC 4-3 DISCLOSURE TO CERTAIN OUTSIDE AGENCIES

   Unless the client otherwise directs, it is not improper for a lawyer to give
   limited information from his files to an outside agency necessary for
   statistical, bookkeeping, accounting, data processing, banking, printing, or
   other legitimate purposes, provided he exercises due care in the selection
   of the agency and warns the agency that the information must be kept
   confidential.

In this Board’s view, ethical Consideration 4-3 does not authorize disclosure of legal bills
without client consent to an outside auditing company. The information sought in a legal
audit often goes beyond “limited” information. Depending upon the information
contained therein, a billing invoice might reveal client confidences and secrets. Revealing
confidences and secrets of an insured to an outside audit company serves the economic
Op. 2000-2 7

advantage of the insurer. The economic benefit of an insurer is not considered a
“legitimate purpose” under EC 4-3.

In conclusion, the Board advises that under DR 4-101(B)(3) and DR 4-101(C)(1), an
attorney may not submit detailed legal bills to an outside audit company hired by an
insurer without first obtaining client consent after full disclosure. Full disclosure
includes informing the client of the type of information required by the insurer in the
billing invoice, the type of supporting documentation, if any, required by the audit, and
that waiver of attorney-client privilege might be raised as a consequence. Whether
submission of legal bills to an audit company waives the attorney-client privilege or work
product doctrine is a question of law beyond the scope of this opinion.

Advisory Opinions of the Board of Commissioners on Grievances and Discipline are
informal, nonbinding opinions in response to prospective or hypothetical questions
regarding the application of the Supreme Court Rules for the Government of the
Bar of Ohio, the Supreme Court Rules for the Government of the Judiciary, the
Code of Professional Responsibility, the Code of Judicial Conduct, and the
Attorney’s Oath of Office.