Can I follow my insurance-company client's litigation and billing guidelines when I am defending the insured?

Plain-English summary

Insurance defense lawyers are typically selected, employed, and paid by an insurer to defend a policyholder, and insurers had begun issuing litigation and billing guidelines restricting how retained counsel could run the defense, including whether to hire experts, what research or depositions were allowed, whether to investigate the claim, and whether to file motions. The Committee analyzed whether a lawyer could agree to such restrictions, anchoring the analysis in the rule that the insured is the lawyer's client (Employer's Casualty Co. v. Tilley) entitled to the same unqualified loyalty as any client.

The Committee concluded that loyalty and independent judgment govern. Rule 2.01 requires independent professional judgment and candid advice; Rule 5.04(c) bars a lawyer from letting a person who pays the lawyer to represent another direct or regulate the lawyer's professional judgment; and Rule 1.08(e)(2) bars accepting third-party compensation where it interferes with the lawyer's independent judgment or the attorney-client relationship. Guidelines that interfere with the lawyer's professional judgment also implicate Rule 1.01(b). The Committee drew the line between permissible routine billing requirements (such as when to submit statements) and impermissible restrictions that direct and control the legal services and how they are delivered.

The Committee held that although a lawyer may agree with the insurer about fees and services, that agreement cannot override the lawyer's ethical responsibilities; the lawyer must always remain free to exercise independent professional judgment for the insured. The Committee expressly declined to opine on the contractual rights and duties between insurer and insured or on the insurer's contractual obligation to pay for legal services, noting those are legal questions outside its authority, but stated that any such contracts cannot diminish the lawyer's ethical duties once the insured becomes the client.

Currency note

This opinion was issued in 2000, under the Texas Disciplinary Rules of Professional Conduct that took effect January 1, 1990. Texas did not adopt the ABA's Ethics 2000 revisions; its rules have been amended only piecemeal since (including the March 1, 2005 amendment to the fee rule, Rule 1.04, and the comprehensive 2021 revisions adopted by Texas Supreme Court order). 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, deadline, or requirement mentioned here.

Common questions

Q: Can insurance defense counsel agree to follow the insurer's litigation guidelines?

A: The Committee concluded that a lawyer may not agree to guidelines that direct or regulate the lawyer's independent professional judgment in representing the insured, because Rules 5.04(c), 1.08(e), and 2.01 forbid the third-party payer from controlling that judgment.

Q: Are any insurer billing requirements acceptable?

A: The Committee concluded that reasonable requirements related to third-party payment, such as when to submit statements for legal services or similar routine matters that do not affect the actual representation, are permissible; only restrictions that direct or regulate the lawyer's professional judgment are not.

Q: Who is the client when an insurer hires the lawyer?

A: The insured. The Committee relied on Tilley and later Texas decisions holding that an attorney-client relationship exists between the insured and the lawyer retained by the insurer, so the lawyer owes the insured unqualified loyalty.

Q: Does the insurer's contract with the lawyer or insured change the analysis?

A: No. The Committee concluded that a fee-and-services agreement with the insurer cannot override the lawyer's ethical responsibilities, and it declined to opine on the separate contractual rights and duties between insurer and insured as legal questions outside its authority.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 5.04(c) (professional independence; third party directing judgment, ABA Model Rule 5.4), Rule 1.08(e) (third-party compensation, ABA Model Rule 1.8(f)), Rule 2.01 (advisor; independent professional judgment, ABA Model Rule 2.1), Rule 1.02 (scope of representation), Rule 1.01(b) (diligence), and Rule 1.06 (loyalty, ABA Model Rule 1.7). The analysis turned on the rule that the insured is the client owed unqualified loyalty, and on the distinction between routine third-party billing terms and guidelines that control the lawyer's professional judgment.

Citations and references

Rules of Professional Conduct:

• MR 5.4 (professional independence of a lawyer)
• MR 1.8 (third-party payment of fees)
• MR 2.1 (advisor)
• MR 1.7 (conflict of interest; loyalty)
• Texas Disciplinary Rules 5.04(c), 1.08(e), 2.01, 1.02, 1.01(b), 1.06

Cases:

• Employer's Casualty Co. v. Tilley, 496 S.W.2d 552 (Tex. 1973), insured-defense lawyer owes the insured the same unqualified loyalty as if originally employed by the insured
• American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992), attorney-client relationship between insured and insurer-retained counsel
• Bradt v. West, 892 S.W.2d 56 (Tex. App.-Houston 1994), same
• State Farm Mutual Automobile Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998), counsel must protect the insured's interests if compromised by the insurer's instructions

See also

• TX Ethics Op. 542: Fixed Fees from a Liability Insurer for Defending the Insured
• TX Ethics Op. 552: Insurance Defense Fee Statements and Third-Party Auditors
• TX Ethics Op. 696: Insurance Staff Counsel and Performance Surveys

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-533/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_533.pdf

Original opinion text

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

QUESTION PRESENTED

May a lawyer, who is retained by an insurance company to defend its insured, ethically comply with litigation/billing guidelines which place certain restrictions on how the lawyer should conduct the defense of the insured?

STATEMENT OF FACTS

Lawyers who are involved in what is commonly known as insurance defense practice are often called upon by insurance companies (insurer) to represent policyholders (insured) under policies that exist between the insured and the insurer. The policy between the insurer and the insured defines the insurance company's obligation to defend the insurer and customarily provides that the insurance company will select and pay the lawyer.

Recently, insurance companies have issued litigation/billing guidelines which are imposed on the lawyers they retain. These guidelines place certain restrictions on how retained counsel can conduct the defense of the insured, including, but not limited to, discovery limitations and means of periodic reporting to the insurer. Examples of the limitations imposed on lawyers retained by insurance companies are the following:
Whether to hire an expert in the defense of the insured;
What, if any, legal research may be conducted by the lawyer in defense of the insured;
What, if any, depositions may be taken in the defense of the insured;
Whether the defense counsel may investigate the claims made against the insured;
Whether particular depositions may be videotaped;
Whether any motions, including motions to dismiss or for summary judgment, may be filed; and
Whether the lawyer or a paralegal should engage in the preparation of various documents.

DISCUSSION

The Texas Supreme Court has held that despite the fact that a lawyer is selected, employed, and paid by the insurance company, Nevertheless, such attorney becomes the attorney of record and the legal representative of the insured, and as such he owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured. Employer's Casualty Company v. Tilley, 496 S.W.2d 552 at 558 (Tex. 1973). Since Tilley, Texas courts have been unanimous in holding that an attorney-client relationship exists between an insured and the lawyer retained by the insured's insurer. See American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (Tex. 1992); Bradt v. West, 892 S.W. 2d 56 (Tex. App.-Houston 1994).

Loyalty is an essential element in the lawyer's relationship to a client. (Rule 1.06, Comment 1, Texas Disciplinary Rules of Professional Conduct). In advising or otherwise representing a client, a lawyer shall exercise independent professional judgment and render candid advice (Rule 2.01). The attorney-client relationship is a personal relationship in which the client generally must trust the lawyer to exercise appropriate judgment on the client's behalf. (Rule 5.04, Comment 4). Rule 5.04(c) specifically provides as follows:

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.

Among other requirements, Rule 1.08(e)(2) provides that a lawyer shall not accept compensation for representing the client from one other than the client unless there is no interference with the lawyer's independence of professional judgment or with the attorney-client relationship.

Litigation/billing guidelines which interfere with the lawyer's professional judgment not only violate the above mentioned Rules but also Rule 1.01(b), which prohibits a lawyer from frequently failing to carry out completely the obligations that the lawyer owes to a client or clients' (emphasis added). Loyalty to the client/insured demands that the lawyer must at all times protect the interests of the insured if those interests would be compromised by the insurer's instructions. State Farm Mutual Automobile Ins. Co. v. Traver, 980 S.W.2d 625, at 628 (Tex. 1998).

When a lawyer has been retained by an insurer to represent an insured, the representation may be limited to matters related to insurance coverage. (Rule 1.02, Comment 4). However, when restrictions in litigation/billing guidelines direct and control legal services rendered by the lawyer to a client and how those services are to be delivered, imposing such restrictions upon the lawyer would result in a violation of the Rules by the lawyer. Although the lawyer is free to enter into an agreement with the insurer regarding his fee and services to be rendered for the insured/client, such an agreement cannot override the ethical responsibilities of the lawyer under the Texas Disciplinary Rules. In other words, regardless of such an agreement with the insurer, the lawyer must at all times be free to exercise his or her independent professional judgment in rendering legal services to the client.

Although there may be some reasonable requirements related to third-party payment for legal representation, such as when to submit statements for legal services rendered or similar routine matters not affecting the actual representation of the client, no restriction or requirement by the third-party insurer can direct or regulate the lawyer's professional judgment in rendering such legal services or affect the lawyer's responsibility to the insured/client. As stated in Rule 5.04, Comment 5:

Because a lawyer must always be free to exercise professional judgment without regard to the interests or motives of a third person, the lawyer who is employed or paid by one to represent another should guard constantly against erosion of the lawyer's professional judgment. The lawyer should recognize that a person or organization that pays or furnishes lawyers to represent others possesses a potential power to exert strong pressures against the independent judgment of the lawyer. The lawyer should be watchful that such persons or organizations are not seeking to further their own economic, political, or social goals without regard to the lawyer's responsibility to the client.

The Committee expresses no opinion as to the relationship between the insured and the insurer regarding contractual rights or duties they owe to each other or what contractual obligations the insurance company has to pay for legal services rendered. Those matters involve legal issues this Committee has no authority to address. The Committee understands that an insured can enter into different types of contractual relationships with an insurance company; however, such agreements between the insured and the insurer cannot affect or diminish a lawyer's ethical responsibilities to the insured under the Texas Disciplinary Rules once the insured becomes the client of the lawyer.

CONCLUSION

It is impermissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to agree with an insurance company to restrictions which interfere with the lawyer's exercise of his or her independent professional judgment in rendering such legal services to the insured/client.

Tex. Comm. On Professional Ethics, Op. 533 (2000)