Can insurance defense counsel let the insurer's outside auditors review billing and case files, and follow insurer directives on the defense?

Plain-English summary

The opinion addressed two practices that had become common as insurers retained outside auditors to review the fees, expenses, and files of attorneys appointed to defend insureds: whether disclosing information to the auditors violated the insured's confidentiality, and whether the insurer's directives to the attorney created an impermissible conflict. It reviewed prior Tennessee opinions 85-F-100 and 88-F-113 and the Tennessee Supreme Court's decision in In re Petition of Youngblood, 895 S.W.2d 322 (Tenn. 1995), all of which establish that the insured (not the insurer) is the lawyer's client and that the insurer cannot control the details of performance, dictate strategy or tactics, or limit the lawyer's professional discretion.

On confidentiality, the opinion explained that DR 4-101(B) bars revealing a client's confidences and secrets and that DR 4-101(B)(3) requires the client's consent after full disclosure when a confidence or secret is used for the advantage of a third person. Because the purpose of auditing bills and reviewing files is to benefit the insurer, a third person, the opinion concluded that client consent is required, and that the insurance contract itself is not sufficient consent. It directed the attorney to advise the client of the insurer's request, describe the advantages and disadvantages, allow the client to seek independent advice, and permit access only after the client consents. The opinion noted that several other states had reached the same client-consent conclusion.

On directives, the opinion relied on DR 5-107(B) (a lawyer may not permit a payer to direct or regulate the lawyer's professional judgment) and on Youngblood, which held that loyalty and independent judgment are absolutes and rejected cost-efficiency as a basis to modify the lawyer's duties to the insured. The opinion concluded that any directive compelling the attorney to alter the representation of the insured is improper, and that attorneys may not include confidential information in audited bills and files or agree to representation in which the insurer can direct the manner of the representation.

Currency note

This opinion was issued in 1999, before Tennessee's adoption of the 2003 Rules of Professional Conduct, which replaced the former Code of Professional Responsibility (including DR 4-101 and DR 5-107(B)) on which it relied, and before the ABA's 2002 Ethics 2000 revisions. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule or requirement mentioned here.

Common questions

Q: Did defense counsel need the insured's consent before an insurer's auditor saw the bills?

A: Per the opinion, yes. It concluded that because the audit benefits the insurer as a third person under DR 4-101(B)(3), the attorney needed the client's informed consent, and that the insurance contract alone was not sufficient consent.

Q: Could the insurer's litigation directives control the defense?

A: The opinion concluded that any directive compelling the attorney to alter the representation of the insured was improper under DR 5-107(B), relying on Youngblood's statement that loyalty and independent judgment are absolute.

Q: Could cost containment justify the audits or directives?

A: The opinion quoted Youngblood's rejection of cost-efficiency as a basis to modify the lawyer's duties, stating that reforms to reduce cost must not threaten the foundation of the profession and the system of justice.

Background and rules framework

The opinion interpreted the former Code's DR 4-101(B) (confidences and secrets; third-person use under (B)(3)) and DR 5-107(B) (a payer may not direct the lawyer's professional judgment). The modern analogs are RPC 1.6 (Model Rule 1.6) on confidentiality and RPC 5.4(c) (Model Rule 5.4) on professional independence. It relied on Tennessee opinions 85-F-100 and 88-F-113 and on In re Petition of Youngblood.

Citations and references

Rules of Professional Conduct (former Code):

• DR 4-101(B), (B)(3) (confidences and secrets; third-person use). Modern analog: Model Rule 1.6 / Tennessee RPC 1.6
• DR 5-107(B) (payer may not direct professional judgment). Modern analog: Model Rule 5.4(c) / Tennessee RPC 5.4

Cases:

• In re Petition of Youngblood, 895 S.W.2d 322 (Tenn. 1995)

Other opinions cited:

• Tennessee Formal Ethics Opinions 85-F-100 and 88-F-113
• Florida Bar Staff Opinion 20591 (1997); South Carolina Opinion 97-22 (1997); Virginia LEO 1723 (1998); Kentucky Opinion E-404 (1998); Utah Opinion 98-03 (1998); Washington Inquiry 1758 (1997)

See also

• ABA Formal Op. 01-421: Lawyer Acting Under Insurance Company Guidelines
• Colorado Op. 107: Third-Party Auditors in Insurance Defense
• Oklahoma Op. 314: Insurer Submission of Defense Bills to Outside Auditors
• Tennessee Op. 2000-F-145: Insurer-Directed Defense Counsel

Source

• Landing page: https://www.tbpr.org/ethic_opinions/99-f-143

Original opinion text

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

99-F-143 - Insurance company directing attorney

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 99-F-143

Inquiry regarding the propriety of a lawyer who is appointed by a insurance company to defend an insured, permitting the insurance company to hire outside auditors to audit the legal expenses of the attorney and to give directives relative to his defense of the insured.

It has become increasingly common for insurance companies to retain outside auditors to audit the fees, expenses and files of attorneys, who have been appointed to represent insureds. In some of these instances, the insurance companies and/or the auditors have issued directives to the attorneys regarding their defense of the insured. In this regards, two particular considerations arise. The first is whether the disclosure of information to the auditors is a violation of the insured’s attorney/client confidentiality privilege. The second is whether an impermissible conflict has occurred as a result of the insurer’s directives to the attorney.

BACKGROUND

In analyzing these issues, two prior formal opinions and an opinion of the Tennessee Supreme Court must first be considered. These opinions do not address the auditing situations directly, but the dicta in these opinions are relevant to the consideration of these situations.

Board of Professional Responsibility Formal Ethics Opinion 85-F-100 (1985) examines the “ethical obligations of an attorney employed by an insurer to defend the insured when a question arises under the insurance contract as to the continuing obligation of the insurer to defend on behalf of the insured.” Citing ABA Informal Opinions 728 (1963), 832 (1965), and 783 (1965), this Tennessee formal opinion holds that the insured, not the insurer, is the attorney’s client. Opinion 85-F-100 acknowledges that an attorney so retained is in a “precarious position of having a potential, if not actual, conflict of interest.” The opinion requires “full and complete disclosure of the possible effect of his representation on the exercise of his independent professional judgment and the client/insured should be given an opportunity to evaluate the need for representation free of any potential conflict ...” Opinion 85-F-100 also addresses the attorney’s obligation to relay to the insurance company information gained in discovery which might cause the insurance carrier to terminate its defense duty. The opinion finds no impropriety in relaying discovery information regarding potential liability or damages, but does consider it improper to relay discovery information “that would adversely affect the insured’s coverage of insurance when such information is subject to the attorney-client confidences and secrets.”

The second Board opinion, Board of Professional Responsibility Formal Ethics Opinion 88-F-113 (1988), is concerned with the insurer’s limiting or directing the scope and extent of pre-trial discovery. This opinion suggests that such limitations or directives may be improper.

The attorney should devote his complete loyalty to the insured-client and not allow the insurer, or anyone else, to regulate, direct, control, or interfere with his professional judgment . . . An attorney may not accept employment by an insurer on behalf of an insured with conditions limiting or directing the scope and extent of his representation of the insured in any manner, including pre-trial discovery.

The Tennessee Supreme Court in In Re: Petition of Youngblood, 895 S.W. 2d 322 (1995) reviewed a Board of Professional Responsibility ethics opinion which addressed the ethical propriety of in-house attorneys of liability insurance companies representing insureds. The Supreme Court noted in its opinion that “the employment of an attorney by an insurer to represent insured does not create the relationship of attorney-client between the insurer and the attorney, nor does that employment necessarily impose upon the attorney any duty or loyalty to the insurer which impairs the attorney-client relationship between the attorney and the insured or impedes the performance of legal services for the insured by the attorney.” (emphasis supplied). The Supreme Courtfurther noted that the Code of Professional Responsibility:

prohibits any relationship between the attorney and the insurer or any other person or entity, which impairs the attorney’s complete loyalty to the client with regard to the performance for the client or the agreed legal services or with regard to any matter touching the attorney-client relationship between the attorney and the insured. The terms of the agreement between the insurer and the attorney whereby the attorney agrees to undertake the representation of the insured must respect the attorney-client relationship between the attorney and the insured. Youngblood at 328.

According to the Court, the insurance company cannot control the details of the attorney’s performance, dictate the strategy or tactics employed by the attorney, or limitthe attorney’s professional discretion with regard to the representation. “Any policy,arrangement or devise which effectively limits, by design or operation the attorney’sprofessional judgment on behalf or loyalty to the client is prohibited by the Code, and undoubtedly would not be consistent with public policy.” (Youngblood at 328). An insurance company in Youngblood had suggested that their use of employee-attorneyswas necessary for “an efficient, economical means of accomplishing the insurersobligation to defend their insured.” The Court rejected this basis to modify the attorney’s duties to the insured:

The loyalty and independent judgment required by the Code, are absolute. They are essential to the integrity and accountability of the profession and the legal system. If the cost of legal representation is burdensome, as suggested by the petitioners, the profession must look to reforms which do not threaten the foundation of the profession and the system of justice.

CONFIDENTIALITY

It has been argued that insurance defense attorneys may violate the Code of Professional Responsibility by submitting bills to independent legal auditors that disclose client confidences and by allowing these auditors access to the attorney’s files. DR 4-101(B) prohibits an attorney from revealing a client’s confidences and secrets, from using the confidence or secret of a client to the disadvantage of the client, and from using a client’s confidence or secret of the client for the advantage of a lawyer or a third person. There are exceptions to this rule, the most important for the purposes of this opinion being that the client may consent to the disclosure.

Several states have opined that their confidentiality requirements mandate client consent prior to allowing insurers to audit and review case files. See for instance Florida Bar Staff Opinion 20591 (1997); South Carolina Ethics Advisory Opinion 97-22 (1997); Virginia Legal Ethics Opinion 1723 (1998); Kentucky Bar Association Ethics Opinion No. E-404 (1998); Utah State Bar Opinion No. 98-03 (1998); Washington State Bar Association Response to Inquiry No. 1758 (1997).

The ethical rules in Tennessee are fairly clear. DR 4-101(B) (3) requires a client’s consent “after full disclosure” when a confidence or secret of a client is being used for the advantage or a “third person”. The purpose of auditing attorneys’ bills and reviewing case files is accomplished to benefit the insurance company, a “third person.” In order to permit this activity, DR 4-101(B)(3) requires that client consent be given. The insurance contract itself would not be sufficient to constitute that consent. The attorney must advise the client of the request by the insurance company, provide the client a description of all of the advantages and disadvantages to the client relative to such review, allow the client to seek independent legal advice, and finally permit access by the insurance company and/or auditors only after the client gives his/her consent.

BILLING DIRECTIVES

The second issue relates to an insurance company’s attempts to contain defense counsel costs by issuing directives to the defense counsel as to the defense counsel’s efforts. These directives may vary from listing of tasks for which compensation may be paid compensated to actually controlling what work the defense counsel performs.

DR 5-107(B) states that: “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 aforementioned Formal Opinions of the Board and the Youngblood decision emphasize that the insurance company cannot “control the details of the attorney’s performance, dictate the strategy or tactics employed, or limit the attorney’s professional discretion with regard to the representation.” The Supreme Court in Youngblood recognized the legitimate desire of the insurance company to maintain an “efficient and economical means of accomplishing the insurer’s obligations to defend the insured”, but the Court stated that while such goals are laudatory, the proposition must be rejected. The Court found that loyalty and independent judgment as required by the Code are absolutes and are essential to the integrity and accountability of the profession and the legal system. “If the cost of legal representation is burdensome, as suggested by petitioners, the profession must look for reforms which do not threaten the foundation of the profession and the system of justice.” Younglood at 329.

Therefore, any directive by the insurance company which compels an attorney to alter his/her representation of the insured would be improper.

CONCLUSION

In summary, attorneys are not allowed to include confidential information in billing and file reviews by auditing firms. Neither are they allowed to enter into any agreement to represent an insured whereby the insurance company has the power to direct the manner of the attorney’s representation through any sort of directive.

This 14th day of June, 1999.

ETHICS COMMITTEE:

Johanna J. McGlothlin, Chair

Richard A. Fisher

Tom Hill

John W. Walton

APPROVED AND ADOPTED BY THE BOARD