Does an insurer's invoice-processing fee that cuts a percentage from each defense bill violate the rules on advancing costs and sharing fees?

Plain-English summary

Inquiries 2012 and 2020 came from insurance-defense lawyers retained to defend civil cases, and the committee addressed them in a single combined opinion. The insurer ran a billing-audit program: it required every participating lawyer to accept a .65% (or 1%) reduction off the gross amount of each invoice (which it called an "invoice processing fee" and one lawyer called a "rebate"), and it imposed claim litigation guidelines covering disclosure to the insured, communication with the insurer, and tactical choices such as objecting to pleadings, moving to change venue, and attending hearings.

The committee held the blanket percentage cut violates two rules. Because the cut does not separate invoices for litigation expenses from invoices for fees, it reduces costs the lawyer advanced for the client so the client is not fully reimbursed, in violation of RPC 1.8(e). And because the same cut necessarily reduces the lawyer's earned fee to help the insurer defray its auditing-software cost, it shares legal fees with a nonlawyer in violation of RPC 5.4(a). A reduction the insurer and firm agree to in advance is different, the committee said, because those fees would never have been earned.

On confidentiality and the guidelines, the committee applied its earlier Formal Opinion 195. Sending more detailed billing information to the insurer or its outside auditor when the audit software rejects an entry can violate RPC 1.6 to the extent it reveals client confidences without consent. Guidelines that arbitrarily limit compensation or impose "de facto" rates regulate the lawyer's professional judgment in violation of RPC 5.4(c), and guidelines restricting tactical decisions can violate RPC 5.4(c) and 1.8(f)(2) where they would materially affect the representation. Electronic invoice submission through a third party's website is allowed only if the site is secure so no information, including the fact of representation, is intercepted. The committee declined to address whether the program violates the insurance statutes in RCW 48.

Currency note

This opinion was issued in 2003, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct. The substantive rules the opinion applies (RPC 1.6, 1.8, and 5.4) kept their numbers in 2006, but the opinion's reference to withdrawal "subject to the requirements of RPC 1.15" corresponds to the current RPC 1.16. 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.

In practice

Under the Washington rules as they stood at the time of the opinion, the committee treated the insurer's blanket percentage deduction from every invoice as a violation of both RPC 1.8(e) and RPC 5.4(a), because the one cut reaches advanced costs (so the client is not fully reimbursed) and the lawyer's earned fee (sharing it with the nonlawyer insurer). The committee read a discount negotiated in advance differently, since the foregone amount would never have been earned. On the litigation guidelines, the opinion holds that guidelines limiting compensation or directing tactical decisions can violate RPC 5.4(c) and 1.8(f)(2) where the lawyer reasonably believes compliance would materially affect the representation, and in that situation the lawyer must either withdraw (then subject to RPC 1.15, now RPC 1.16) or disregard the offending guideline.

Common questions

Q: Is an insurer's "invoice processing fee" taken off each bill permissible?

A: No. The committee said a mandatory .65% (or 1%) reduction of the gross amount of each invoice violates RPC 1.8(e), because it cuts costs the lawyer advanced so the client is not fully reimbursed, and RPC 5.4(a), because it shares the lawyer's earned fee with the nonlawyer insurer.

Q: How is this different from negotiating a lower fee with the insurer up front?

A: A fee reduction agreed in advance does not violate RPC 5.4, the committee said, because the reduced fees would never have been earned. The problem with the program was the across-the-board cut applied after the fact to both costs and fees.

Q: Can guidelines restrict objecting to pleadings, changing venue, or attending hearings?

A: They can violate the rules. The committee said guidelines that restrict tactical decisions can violate RPC 5.4(c) and 1.8(f)(2) where the lawyer reasonably believes compliance would materially affect the representation or interfere with the lawyer's independent professional judgment.

Q: Did the committee decide whether the program violates Washington's insurance statutes?

A: No. The committee declined to address RCW 48.30A.015, 48.30.140, and .170, saying review of particular statutes is beyond the scope of its work.

Background and rules framework

The opinion interprets Washington rules that map directly to the Model Rules of the same number: RPC 1.8(e) (Model Rule 1.8(e), advancing litigation expenses with the client remaining ultimately liable); RPC 5.4(a) and 5.4(c) (Model Rule 5.4(a) and 5.4(c), the bar on sharing legal fees with a nonlawyer and the protection of the lawyer's professional independence); RPC 1.6 (Model Rule 1.6, confidentiality); and RPC 1.8(f) (Model Rule 1.8(f), compensation from someone other than the client). It also touches RPC 1.8(a) (business transactions with a client) and, in its withdrawal reference, the then-RPC 1.15 (now RPC 1.16). The analysis builds on the committee's earlier Formal Opinion 195 on insurance-defense billing and confidentiality.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8(e) / Washington RPC 1.8(e) (advancing litigation expenses; client ultimately liable)
• Model Rule 5.4(a) and 5.4(c) / Washington RPC 5.4(a) and 5.4(c) (sharing fees with a nonlawyer; professional independence)
• Model Rule 1.6 / Washington RPC 1.6 (confidentiality of information)
• Model Rule 1.8(f) / Washington RPC 1.8(f) (compensation from a third party)
• Model Rule 1.8(a) / Washington RPC 1.8(a) (business transactions with a client)

Statutes:

• RCW 48 (Washington insurance code); the committee declined to address whether the program violates RCW 48.30A.015, 48.30.140, and .170

Other opinions cited:

• WSBA Formal Opinion 195: ethical limits on insurance-defense billing guidelines and disclosure of client confidences to the insurer

See also

• WSBA Ethics Op. 2012: Insurer Billing Cuts
• ABA Formal Op. 01-421: Insurer Litigation Guidelines
• WSBA Ethics Op. 1872: Billing Audits, Confidentiality
• WSBA Ethics Op. 1279: Insurance-Defense Budget Bonus

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1274

Original opinion text

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

Advisory Opinion: 2020
Year Issued: 2003
RPC(s): RPC 1.8(e)
Subject: insurance defense lawyers and billing

Facts Inquiries #2012 and #2020 arose out of two separate letters (one of which was a series of letters) from insurance defense lawyers retained by an insurance company to perform defense work in civil cases. The committee also received one letter from an attorney representing the insurance company responding to the inquiry from one of the insurance defense lawyers.

The insurance company purchased software from an auditing company to facilitate the auditing of bills submitted to the insurance company by defense lawyers. The bills are reviewed only by the insurance company’s personnel and not by a third party auditor. However, one of the inquiring attorneys states that in the course of training to use the software system and/or seeking further instructions to comply with billing guidelines regarding submitted billings, the auditing company requests that the attorney submit a copy of the invoice or time slip to the auditing company. Be that as it may, the software apparently checks billing entries for compliance with the litigation guidelines of the insurance company “concerning, for example, description of time entries, amount of time spent on various tasks, the approved timekeepers for a given matter and given task, and so forth.”

The billing guideline provides that as a condition of doing business with the insurance company, the defense lawyers must to agree to a .65% reduction (or 1% reduction) from the gross amount of each invoice submitted. The insurance company labels this .65% reduction an “invoice processing fee” while one of the inquiring lawyers labels it a “rebate.” A letter of introduction from the insurance company to such lawyers regarding the new program suggests that participation is mandatory. As stated in the letter; “If you decide that you do not wish to participate, we will arrange for the orderly transfer of your . . . cases to other counsel.”

The insurance company’s Claim Litigation Guidelines impose additional obligations on the attorney. They include: (1) disclosure to the insured (the client) that the attorney will be communicating on a regular basis with claims professionals at the insurance company; and (2) that the lawyer shall not object to a pleading unless certain conditions are met, shall not move to change venue without prior approval by the insurance company and shall not attend court hearings or other proceedings that do not directly involve the insured.

Analysis Question 1 -- The defense lawyers are contractually obligated to accept a .65% (or 1%) reduction of advanced costs or denied reimbursement of that advance cost. Does acceptance of this term violate RPC 1.8(e)(1)? - Yes.

RPC 1.8(e)(1) states: A lawyer who is representing a client in a matter: (e) Shall not, while representing a client in connection with contemplated or pending litigation, advance or guarantee assistance to his or her client, except that: (1) A lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses.

The insurance company requires all defense lawyers to accept a .65% (or 1%) reduction from the gross amount of each invoice submitted as a cost of doing business with the insurance company. The insurance company, in its submission, describes the .65% (or 1%) reduction of the gross amount of each invoice as follows:

"As you can imagine, the expense related to this change is substantial. We ask that you share a portion of the cost with us. A deduction of 1% will be made from the gross amount of each invoice submitted. If there are circumstances that prevent you from participating in this process, we will certainly discuss them with you. If you decide that you do not wish to participate, we will arrange for the orderly transfer of your … cases to other counsel." Letter from insurance company dated October 14, 2002.

When the insurance company institutes a blanket policy of reducing the gross amount of all invoices by .65% ( or 1%), the insurance company does not distinguish between the invoices that represent the expenses of litigation and the invoices that represent the lawyers’ fees. Furthermore, such “advancement” by the lawyer is not for an “expense of litigation” as that term is defined in RPC 1.8(e). As a result, when the insurance company reduces the costs advanced by the lawyer on behalf of the client by .65% (or 1%), this does violate RPC 1.8(e) because the defense lawyer is not fully reimbursed. Thus, the lawyer is, by definition, advancing or guarantying assistance to the client in a manner not permitted by the RPC.

Question 2 -- Does the requirement that the insurance company denies reimbursement by withholding .65% (or 1%) of all fees billed for attorney legal services constitute a violation of RPC 5.4(a) since the insurance company takes .65% (or 1%) of all fees billed? - Yes.

RPC 5.4(a) provides in relevant part that “A lawyer or law firm shall not share legal fees with a nonlawyer….” None of the exceptions to RPC 5.4(a) apply.

As discussed above, the insurance company withholds .65% (or 1%) of the gross amount of each invoice and it does not distinguish between the lawyers’ fees and expenses of litigation. Thus, the blanket deduction of the gross amount of each invoice submitted necessarily involves a deduction in the defense lawyer’s fee. The insurance company indicated that this deduction was instituted so that the defense lawyers would “share a portion of the cost [of implementing the auditing software] with the insurance company.” The insurance company takes a portion of the lawyer’s fee in order to defray the cost of the auditing software. This practice violates RPC 5.4(a) since it results in the sharing, albeit involuntarily, of the lawyers’ legal fee with a non-lawyer, i.e. the insurance company.

If, by prior agreement, an insurance company and the law firm agree to a reduction in the amount that the law firm will charge the insurance company for its services, such an arrangement would not violate RPC 5.4, since the fees would not have been earned.

Question 3 -- Will the .65% (or 1%) reduction in the gross amount of each invoice be construed as entering a business relationship with a client in violation of RPC 1.8(a)? - No.

RPC 1.8(a) states in pertinent part; A lawyer who is representing a client in a matter: (a) shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to the client unless: (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client, and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client; (2) the client is given a reasonable opportunity to seek the advice independent counsel in the transaction; and (3) the client consents thereto.

One could argue that this arrangement constitutes a business transaction with the insurer because it is a sharing of costs. If one assumes that the insurer is the client, so long as there has been adequate disclosure and a reasonable opportunity to seek the advice of independent counsel by the insurance company, the business transaction would satisfy the requirements of RPC 1.8. Since it is the insurance company which has imposed the contract provision, it should be assumed that proper disclosures and opportunity for advice have been given. However, it should be noted that the “client” for which or whom the rebate applies is typically the insured, not the insurer. Therefore, while RPC 1.8(a) has not been violated, RPC 1.8(f) may have been. The impact of RPC 1.8(f) is discussed below in response to Question 6.

Question 4 -- Does the requirement of submission of detailed information to the insurance company whenever the auditing program rejects a proposed billing constitute a violation of RPC 1.6 as identified in Formal Opinion 195? - Maybe.

In discussing RPC 1.6 , Formal Opinion 195 states, in relevant part,

Except for disclosures that are impliedly authorized to carry out representation, appointed defense counsel cannot disclose to an insurer confidential information provided by the client without the client’s consent, such as information that might be prejudicial to the client’s right to coverage. Nor can the lawyer disclose confidences or secrets that might be embarrassing to the client such as the insured’s insolvency or inability to pay the policy deductible.

Formal Opinion 195, Discussion of Issue 1 (emphasis added). To the extent that submitting more detailed information to the insurance company would reveal confidential information provided by the client, the defense lawyer would have to seek the client’s consent in order to avoid a violation of RPC 1.6. Note that this applies whether the billing information is being sent to the insurance company or a third party auditor retained by the insurance company. However, see Question 5 below.

Question 5 -- Do the requirements in the Insurer’s Claim Litigation Guidelines that the lawyer must tell the client that the lawyer will be communicating on a regular basis with the claims professionals at the insurance company and that the lawyer seeks the consent of the client to disclose confidential matters to the insurance company constitute a violation of Formal Opinion 195? – The attorney should notify the client of the attorney’s communication to the carrier. Confidences or secrets which are disclosed must comply with RPC 1.6 and 1.8 (f).

The lawyer can tell the client that the lawyer will be communicating on a regular basis with the claims professionals at the insurance company as long as the lawyer complies with RPC 1.8(f) and 1.6. RPC 1.8 (f) provides:

A lawyer who is representing a client in a matter: Shall not accept compensation for representing a client from one other than the client unless: (1) The client consents after consultation: (2) There is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and (3) Information relating to representation of a client is protected as required by rule 1.6.

Where confidences or secrets of the client are not revealed in the defense lawyer’s billings or through communications with the insurance company, a defense lawyer does not violate the ethical rules when it seeks the client’s consent to allow the bills to be reviewed by the insurance company. This is true as long as this will not interfere with the attorney’s independent professional judgment or with the attorney-client relationship.

However, where confidences or secrets of the client will be revealed to the insurance company, regardless of whether it is through billing statements or communications with the insurance company, Formal Opinion 195 suggests that such cannot be done without violating several RPCs. Formal Opinion 195 states in pertinent part:

A requirement that defense counsel seek or obtain the informed consent of the insured to disclose client confidences or secrets in billings to be submitted to the insurer…would invoke the prohibitions of RPC 1.7(b) and 1.8(f) and place defense counsel in an impossible situation, requiring withdrawal from the representation. This is because it is almost inconceivable that it would ever be in the client’s best interests to disclose confidences or secrets to a third party.

Question 6 -- Does complying with the Claim Litigation Guidelines of the insurance company violate RPC 5.4(c), 1.8(f), RPC 1.6 and Formal Opinion 195? - As discussed in Formal Opinion 195, billing guidelines from one other than the client “touch directly upon the relationship between the attorney and client and therefore trigger special ethical responsibilities of the lawyer.”

Formal Ethics Opinion 195 addresses the ethical responsibilities a lawyer must consider in determining whether complying with a claim litigation guideline will violate the lawyer’s ethical responsibilities. Some of the issues discussed in Formal Opinion 195 that the lawyer must consider are set forth below:

A billing guideline that arbitrarily and unreasonably limits or restricts compensation for the time spent by counsel performing services which counsel considers necessary to adequate representation, such as periodic review of pleadings, conducting depositions, or in preparing or defending against a summary judgment motion, endeavors to direct or regulate the lawyer’s professional judgment in violation of RPC 5.4(c).

A billing guideline that imposes “de facto” or arbitrary rates for certain services performed by a lawyer, such as compensating a lawyer at prevailing paralegal rates when the firm does not employ paralegals, operates as a disincentive to performance of those services in violation of RPC 5.4(c).

Where a lawyer reasonably believes that representation of the client will be materially affected by any limitations in the claim litigation guidelines of the person paying the billings, the lawyer must either withdraw, subject to the requirements of RPC 1.15, and notify the client of the basis for the withdrawal or ignore any billing guidelines that if followed, would constitute a violation of RPC 5.4(c).

Question 7 -- Are litigation guidelines that direct assigned counsel to not object to a pleading unless certain conditions are met; that prevent the attorney to not move to change venue unless previously approved and direct that counsel may attend only those court hearings that directly involve the insured present violations of RPC 5.4(c), 1.8(f)(2) and Formal Opinion 195? – They can be.

See answer to Question 6. To the extent that such litigation guidelines would reasonably cause the lawyer to believe that his/her representation of the client will be materially affected by his/her compliance with such guidelines, RPC 1.8(f)(2), 5.4(c) and Formal Opinion 195 would make such compliance a violation. In the same sense that imposition of “de facto” or arbitrary rates or restrictions in the time a lawyer may spend on a particularly activity on behalf of the client potentially limit or operate as a disincentive to performance, so too are restrictions in what a lawyer may do without insurance company approval. While compliance with such guidelines may not constitute a violation in every situation, the lawyer must not allow such guidelines to interfere in any manner with the lawyer’s independence of professional judgment or with the attorney-client relationship.

Question 8 -- Is it ethical under RPC 1.6 and Formal Opinion 195 for an attorney to submit invoices electronically via an internet website administered by a third party with whom the insurer has contracted for a license from the third party for its software, services, training and techniques? – It can be.

The only difference between the situation addressed by Formal Opinion 195 and the submission of invoices by an internet medium is the medium of transmission. The same principles apply, except that the internet website must also be “secure” such that no information, including the fact of the representation, is intercepted by any party other than the intended recipient. See RPC 1.6.

Question 9 -- Will the proposal for a rebate of fees violate RCW 48.30A.015, 48.30.140 and .170? - This question will not be answered because it is beyond the scope of this committee’s work.

The inquirer has also requested that we review RCW 48, and particular sections thereof, and provide guidance as to whether the plan, as proposed, may raise ethical issues because of a potential violation of certain statutes. We believe that it is not the Committee’s responsibility or ability to review particular statutes and determine if the actions of an attorney vis-à-vis a client might violate in a particular statute. Therefore, we decline to address any proposed ethical issues as they may relate to RCW 48.