Can a West Virginia lawyer hired and paid by a liability insurer to defend an insured agree to follow the insurer's litigation-management or billing guidelines that require approval before discovery, research, or motions?

Plain-English summary

The Lawyer Disciplinary Board responded to a request asking whether an agreement to accept and abide by billing requirements and guidelines imposed by a liability insurer for the client would violate the Rules of Professional Conduct. The request described a trend toward restrictive insurer "litigation management" guidelines, usually imposed on a take-it-or-leave-it basis, that the client is generally not a party to or even aware of. The inquirer supplied guidelines from seven insurers; the Board set aside the purely logistical billing provisions and focused on guidelines that affect how an attorney performs professional services and exercises judgment, quoting examples such as requiring prior approval before research, depositions, discovery, or motions, capping legal-research or motion-preparation hours, dictating that paralegals or junior associates be used, and treating local travel as non-billable overhead.

The Board analyzes three rules. Rule 1.8(f) allows accepting compensation from someone other than the client only if the client consents after consultation, there is no interference with the lawyer's independence of professional judgment, and confidentiality is protected, with the conjunctive "and" requiring all three. Rule 1.7(b) bars representation that may be materially limited by the lawyer's own interests unless the lawyer reasonably believes the representation will not be adversely affected and the client consents, again conjunctive. Most pointedly, Rule 5.4(c) provides that a lawyer shall not permit a person who recommends, employs, or pays the lawyer to direct or regulate the lawyer's professional judgment. The Board also cites the comment to Rule 1.5 that an agreement may not induce the lawyer to improperly curtail services for the client.

The Board rejects the argument that the guidelines are harmless because the only consequence of disregarding them is nonpayment or lost future referrals, reasoning that in the real world economic consequences impinge on professional judgment; it cites its own L.E.I. 99-01 (on insurance-company captive law firms) for the point that economic pressure affects judgment. The Board surveys authorities from other jurisdictions: some merely caution (Colorado Formal Op. 107; Florida Bar Staff Op. 20591; Wisconsin Op. E-99-1), some permit following guidelines with informed client consent (Missouri Informal Op. 980188; North Carolina 98 Formal Op. 17; Op. 1723), and several conclude such guidelines impermissibly interfere with independent judgment (Rhode Island Op. 99-18; Iowa Op. 99-01; Indiana Op. 3 of 1998; Ohio Op. 2000-3 under DR 5-107(B), which the Board notes is identical to West Virginia's Rule 5.4(c)). It also relies on Barefield v. DPIC Companies, Inc., 215 W. Va. 544, 600 S.E.2d 256 (2004), in which the West Virginia Supreme Court held defense counsel is ethically obligated to exercise independent professional judgment and an insurer has no right to control the methods or means the attorney chooses to defend the insured.

The Board concludes that the quoted guidelines, by their nature, interfere with independent professional judgment, either by precluding payment for activities the attorney deems appropriate or by subjecting the attorney's judgment to "second guessing" backed by nonpayment. While Rules 1.8(f) and 1.7(b) might seem to allow agreement with client consent, the conjunctive "and" requires also no interference with judgment and a reasonable belief the representation will not be adversely affected, and Rule 5.4(c) leaves no "wiggle room" even with consent. The Board cautions that its opinion does not give a lawyer paid by an insurer an open checkbook: Rule 1.5(a) requires fees to be reasonable, and the lawyer must always exercise judgment in a reasoned, reasonable manner.

In practice

Under this opinion, and under the West Virginia rules as they stood in 2005, a defense lawyer hired and paid by a liability insurer is treated as ethically barred from agreeing to the restrictive litigation-management guidelines the opinion quotes. The opinion holds that a lawyer cannot agree to adhere to guidelines that (1) dictate how work is allocated among defense team members (secretary, paralegal, associate, senior attorney); (2) restrict or require approval before conducting discovery, engaging in motion practice, preparing for trial, or otherwise performing substantive work; or (3) otherwise impose a financial penalty or create an economic disincentive on the lawyer's independent professional judgment.

The opinion grounds the bar in Rules 1.8(f), 1.7(b), and especially Rule 5.4(c), and applies Barefield v. DPIC Companies for the point that an insurer has no right to control the methods the attorney uses to defend the insured. It holds that client consent after consultation does not cure the problem, because Rule 5.4(c) independently bars a payor from directing or regulating the lawyer's judgment and because Rules 1.8(f) and 1.7(b) also require no interference with judgment. The opinion is careful to limit its reach: it does not address purely logistical reporting and billing provisions, and it states under Rule 1.5(a) that a lawyer paid by an insurer still does not have an open checkbook and must exercise judgment reasonably. West Virginia adopted comprehensive amendments to its Rules of Professional Conduct effective January 1, 2015; verify the current text of these rules before relying on the specific provisions described here.

Common questions

Q: Can defense counsel agree to an insurer's litigation-management guidelines?

A: Not the restrictive kind. The opinion concludes a lawyer paid by an insurer cannot ethically agree to guidelines that dictate how defense work is allocated, require prior approval before discovery, motions, or trial preparation, or otherwise penalize the lawyer's independent judgment.

Q: Does getting the insured client's consent make it acceptable?

A: No. The opinion concludes consent does not cure the problem, because Rule 5.4(c) independently bars a payor from directing or regulating the lawyer's professional judgment, and Rules 1.8(f) and 1.7(b) also require that there be no interference with the lawyer's judgment.

Q: Which guidelines are not at issue?

A: The opinion sets aside guidelines that pertain only to the logistics of reporting and billing. At issue are guidelines that directly or indirectly affect how the attorney performs professional services and exercises judgment.

Q: Does this mean an insurer-paid lawyer can bill or do anything?

A: No. The opinion cautions that the lawyer does not have an open checkbook or carte blanche; Rule 1.5(a) requires fees to be reasonable, and the lawyer must always exercise professional judgment in a reasoned and reasonable manner.

Background and rules framework

The opinion interprets the West Virginia Rules of Professional Conduct as they existed in 2005. It applies Rule 1.8(f) (Model Rule 1.8), accepting compensation from someone other than the client only with consent, no interference with judgment, and protection of confidentiality; Rule 1.7(b) (Model Rule 1.7), conflicts from the lawyer's own interests; Rule 5.4(c) (Model Rule 5.4), the bar on a payor directing or regulating the lawyer's professional judgment; Rule 1.5(a) (Model Rule 1.5), reasonable fees; and Rule 1.6 (Model Rule 1.6), confidentiality. The context is liability-insurer "litigation management" and billing guidelines imposed on assigned defense counsel.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.4 / WV RPC 5.4(c) (a payor may not direct or regulate the lawyer's professional judgment)
• Model Rule 1.8 / WV RPC 1.8(f) (compensation from one other than the client; consent, no interference, confidentiality)
• Model Rule 1.7 / WV RPC 1.7(b) (conflict from the lawyer's own interests)
• Model Rule 1.5 / WV RPC 1.5(a) (reasonable fees)
• Model Rule 1.6 / WV RPC 1.6 (confidentiality)

Cases:

• Barefield v. DPIC Companies, Inc., 215 W. Va. 544, 600 S.E.2d 256 (W. Va. 2004), defense counsel must exercise independent professional judgment; an insurer has no right to control the methods or means chosen to defend the insured

Other opinions cited:

• West Virginia L.E.I. 99-01, "Ethical Proprietary of Insurance Company Captive Law Firms"
• Rhode Island Supreme Court Ethics Advisory Panel Op. 99-18 (Oct. 27, 1999): such guidelines interfere with independent judgment; counsel may not agree to abide by them in their entirety
• Iowa Supreme Court Board of Professional Ethics and Conduct Op. 99-01 (Sept. 8, 1999)
• Indiana State Bar Association Legal Ethics Committee Op. 3 of 1998
• Ohio Board of Commissioners on Grievances and Discipline Op. 2000-3 (June 1, 2000) under DR 5-107(B) (identical to WV Rule 5.4(c))
• Colorado Bar Association Formal Op. 107 (Sept. 18, 1999); Florida Bar Staff Op. 20591 (Dec. 31, 1997); State Bar of Wisconsin Op. E-99-1 (cautioning only)
• Missouri Office of Chief Disciplinary Counsel Informal Op. 980188; North Carolina State Bar 98 Formal Ethics Op. 17 (Jan. 15, 1999); Op. 1723 (permitting with informed consent)

See also

• WV LEO 2003-01: Private employment of appointed counsel
• WV LEO 2013-02: Conflicts of interest for government and military attorneys defending furlough complaints

Source

• Landing page: https://wvodc.org/Legal-Ethics-Opinion
• Original PDF: https://storage.googleapis.com/msgsndr/Rgd68xOkcVdteTsBkf6O/media/66a7ea7e519e28942b8fd1c0.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

L.E.I. No. 2005-01

WHETHER AN AGREEMENT TO ABIDE BY INSURANCE COMPANY IMPOSED BILLING GUIDELINES VIOLATES THE RULES OF PROFESSIONAL CONDUCT?

The Lawyer Disciplinary Board has received a request for a formal advisory opinion "as to whether an agreement to accept and abide by billing requirements and guidelines imposed by a liability insurer for the client would violate the Rules of Professional Conduct."

The request summarizes the background as follows:

In recent years, there has been a trend toward the adoption of ever more restrictive and onerous insurer policies, guidelines and programs of 'litigation management', presented as being for the purposes of cost containment, quality control or efficiency. They are usually unilaterally imposed on a 'take it or you do not get the work' scenario. Generally, the client is not a party to, or even aware of, the requirements or limits, unless the attorney informs them.

...

"The insurer 'guidelines' typically include requirements that the attorney secure approval from a claims representative before undertaking activities such as employing experts, scheduling depositions, undertaking research and investigation, or filing motions and appeals. Some 'guidelines' dictate the use of personnel within the attorney's office as appropriate for certain tasks, and put limits on time to be devoted to discovery, research, investigation, motions or travel. In many areas and activities of legal services, the guidelines impose compliance with every requirement as a condition of payment. Any point of arguable 'non-compliance' then becomes the basis for a challenge or unilateral adjustment, imposed after the fact when the billing invoice has been submitted. ... As you can imagine, many West Virginia attorneys find themselves engage in a daily struggle to do what is appropriate and necessary for their clients, while avoiding any technicality or formality on which payment or reimbursement will be refused. That struggle has now reached such proportions that counsel's independence is routinely put at risk, and the quality of the services being provided to our clients is being threatened on a daily basis."

DISCUSSION

The party submitting the request has provided to the Board copies of guidelines and policies from seven different insurers, as examples. Some of the guidelines supplied to the Board are relatively brief and, in some instances, general in content; others are quite extensive and specific.

Many of the insurance companies' guidelines pertain to the logistics of such things as reporting and billings. Those provisions are not at issue or addressed in this opinion.

At issue are the guidelines of insurance companies that directly affect, or indirectly tend to affect, the manner in which an attorney performs professional services and exercises professional judgment. Particularly troublesome are guidelines that limit discussions among attorneys in a law firm, curtail research and preparation of court filings, discourage travel whether reasonably necessary or not, or dictate who is to perform certain tasks. Examples of such troublesome guidelines are (quoting from the copies of various insurer's guidelines that the inquirer has submitted to the Board):

• "Routine, computerized pleadings ('boiler plate') should be billed at .10 hours or actual preparation time, whichever is less."

• "Time and expenses allocated to ... internal consults ... and interoffice conferences should not be charged."

• "Depositions, hearings, motion dockets, or meetings in preparation for trial should be covered by one attorney ... ."

• "[The insurer] will not pay fees and/or expenses associated with the following: ... Legal research and/or preparation of motions which exceed three total hours, unless approved in advance ... Proofreading, editing mistakes, reworking, redrafting, and textual changes necessitated by substandard work product (edits/revisions in work is only billable if new information is obtained or if requested by [the insurer]. ... Work that could have been more cost effectively performed [by the insurer's] personnel, unless approved in advance ... ."

• "Counsel may engage outside investigative agencies only with specific, documented, direction by the claim representative in advance of the engagement."

• "Prior consultation with the claim representative is required for any of the following: ... Undertaking any research project; ... Preparing for trial."

• "[The insurer] considers local time spent traveling as part of a law firm's overhead, and will not pay for local travel time. A claim representative cannot waive this guideline." (Bold in original)

• "We require that you conduct prior consultation before scheduling any depositions."

• "You must consult with [the insurer] before conducting any legal research."

• "We should not be charged for routine legal research. Legal research concerning matters of common knowledge among reasonable experienced counsel in the locale is considered to be routine or elementary and, therefore, is non-chargeable."

• "It is expected that paralegals or junior associates will be utilized in research matters."

• "Local travel, defined as travel less than 100 miles roundtrip [is] a cost integral to running the law firm. It is therefore overhead."

• "[The insurer] will not pay for fees associated with time spent traveling unless outside counsel works on [the insurer's] business while doing so, or unless agreed to in advance by lead inside counsel."

• "[The insurer] will not pay any fees and/or expenses associated with or exceeding the following: ... Legal research and/or preparation of motions which exceeds [sic] .5 hours, unless approved in advance ... More than one attendee at a trial, hearing, court appearance, arbitration, mediation, deposition, third-party meeting, conference call, or any similar event unless approved in advance ...."

• "You must have approval prior to initiating any of the following: 1. All discovery including depositions, interrogatories, requests to produce and requests for admissions; 2. All motions; ... 5. All legal research requiring more than 1/2 hour ... ."

At least three rules of the Rules of Professional Conduct are implicated in a review of such guidelines. Rule 1.8(f) provides as follows:

(f) A lawyer 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.

(Underlining added.) It is noted that the use of the conjunctive "and" requires that all three conditions be met. Included in the Comment to Rule 1.8 is the following:

Paragraph (f) requires disclosure of the fact that the lawyer's services are being paid for by a third-party. Such an arrangement must also conform to the requirements of Rule 1.6 concerning confidentiality and Rule 1.7 concerning conflict of interest.

Rule 1.7(b) provides:

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third-party, or by the lawyer's own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation.

(Underlining added.) Again, the use of the conjunctive "and" requires that both conditions be satisfied. The Comment to Rule 1.7 includes the following:

Loyalty to a client is also impaired when a lawyer who cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer's other responsibilities or interests. ... The critical questions are the likelihood that a conflict will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.

...

A lawyer may be paid from a source other than the client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer's duty of loyalty to the client. See Rule 1.8(f). For example, when an insurer and its insured have conflicting interests in a matter arising from a liability insurance agreement, and the insurer is required to provide special counsel for the insured, the arrangement should assure the special counsel's professional independence.

Perhaps most pointedly pertinent to the issue is Rule 5.4(c):

(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal service for another to direct or regulate the lawyer's professional judgment in rendering such legal services.

The Comment to Rule 5.4 states, in part,

When someone other than a client pays the lawyer's fee or salary, ... that arrangement does not modify the lawyer's obligation to the client. As stated in paragraph (c), such arrangement should not interfere with the lawyer's professional judgment.

In addition, the Comment to Rule 1.5, which relates to attorneys' fees, states as follows:

An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client's interest.

It might be suggested that the troublesome guidelines do not actually preclude the attorney from exercising unfettered professional judgment and undertaking activities and performing services contrary to the guidelines, because the only consequence to the attorney is nonpayment (or partial nonpayment) by the insurer and, perhaps, loss of future referrals from the insurer. But, such an argument ignores reality. In a utopian world, an attorney would not be influenced by economic considerations; in the real world, however, it would be naive to believe that economic consequences do not impinge upon an attorney's exercise of professional judgment. Indeed, albeit in a somewhat different context, the Lawyer Disciplinary Board has previously discussed this dichotomy between an ideal world and reality, and the Board has recognized that in the real world personal economic considerations may affect an attorney's professional judgment: "decisions often involve the exercise of judgment that may be influenced, consciously or unconsciously, by the pressures inherent in an employer-employee relationship, particularly where the employment relationship is 'at will' and there are no guarantees of job security." See L.E.I. 99-01, "Ethical Proprietary of Insurance Company Captive Law Firms". Although that L.E.I. involved attorneys working for insurance companies' "captive" law firms, the logic is equally applicable to outside counsel who depend for their livelihood on payment from insurers.

Legal ethics authorities in several other jurisdictions have reviewed this issue. Some have recognized the attorney's conundrum, but have merely cautioned that attorneys need to exercise care without providing any practical resolution or specific guidance. See, for example, Formal Opinion 107 by the Ethics Committee of the Colorado Bar Association adopted September 18, 1999; Florida Bar Staff Opinion 20591, December 31, 1997; State Bar of Wisconsin Ethics Opinion E-99-1, "Ethical Risks Inherent In Representing Both Insureds And Insurers".

Others have opined that a lawyer may follow insurance companies' guidelines if the client consents after being informed. See, Informal Opinion No. 980188, from the Office of Chief Disciplinary Counsel of the Missouri Bar; 98 Formal Ethics Opinion 17, North Carolina State Bar, January 15, 1999; Ethics Opinion 1723. As the inquirer notes in his letter to the Board, however,

This conclusion begs the question of whether a 'fully informed' discussion would have to include advice that many provisions are inherently restrictive and thus a recommendation against giving consent.

Legal ethics authorities in several states have concluded that guidelines of the sort quoted above do interfere with an attorney's independent professional judgment and, accordingly, an attorney may not ethically agree to abide by such guidelines. Opinion No. 99-18 of the Rhode Island Supreme Court Ethics Advisory Panel (issued October 27, 1999) states,

The litigation management guidelines submitted to the Panel in this inquiry contain provisions which in the opinion of the Panel interfere with the independent professional judgment of defense counsel and ultimately with the quality of legal services provided to the insureds. As such, the inquiring attorney and his/her lawyer firm may not ethically agree to abide by these guidelines in their entirety.

In reaching it's conclusion, the Rhode Island Panel noted, "It is reasonably apparent to this Panel that certain of the guidelines under consideration, even though intended to achieve cost efficiency, infringe upon the independent judgment of counsel and induce violations of our rules."

In Opinion No. 99-01 of the Iowa Supreme Court Board of Professional Ethics and Conduct (dated September 8, 1999), it is stated,

It is the opinion of the Board that: (1) it would be improper for an Iowa lawyer to agree to, accept or follow Guidelines which seek to direct, control or regulate the lawyer's professional judgment or details of the lawyer's performance; dictate the strategy or tactics to be employed; or limit the professional discretion and control of the lawyer.

The Legal Ethics Committee of the Indiana State Bar Association, in Opinion 3 of 1998, stated,

The terms of the specific [insurance company] contract that prompts the ethical inquiry do infringe upon the professional and independent judgment of defense counsel, and upon the quality of legal services that may be provided. The defense attorney may not ethically enter into such an agreement.

And, in the very specific Syllabus of Opinion No. 2000-3 of the Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio (dated June 1, 2000) it was stated,

It is improper under D.R. 5-107(B) for an insurance defense attorney to abide by an insurance company's litigation management guidelines in the representation of an insured when the guidelines directly interfere with the professional judgment of the attorney. Attorneys must not yield professional control of their legal work to an insurer.

Guidelines that restrict or require prior approval before performing computerized or other legal research are an interference with the professional judgment of an attorney. ...

Guidelines that dictate how work is to be allocated among defense team members by designating what tasks are to be performed by a paralegal, associate or senior attorney are an interference with an attorney's professional judgment. ...

Guidelines that require approval before conducting discovery, taking a deposition, or consulting with an expert witness are an interference with an attorney's professional judgment.

(The provision of the Code of Professional Responsibility cited in the Ohio decision DR 5-107(B) is identical to Rule 5.4(c) of the West Virginia Rules of Professional Conduct.)

Additionally, the Supreme Court of Appeals of West Virginia, stated in Barefield v. DPIC Companies, Inc., 215 W.Va. 544, 600 S.E.2d 256 (2004), amongst other things, that a defense attorney is ethically obligated to exercise independent professional judgment in the defense of a client. Moreover, the court stated that an insurance company possesses no right to control the methods or means chosen by the attorney to defend the insured.

The Lawyer Disciplinary Board concurs in the logic and conclusions of these opinions and the Barefield decision.

The guidelines that are quoted earlier in this opinion, by their very nature, interfere with an attorney's exercise of independent professional judgment. Although the apparent purpose of these guidelines is to effect economy, the ineluctable result is to constrain or limit an attorney's exercise of independent professional judgment, either by (1) precluding payment for certain activities (even if the attorney deems the activities to be appropriate) or (2) requiring the attorney to submit to "second guessing" of the attorney's judgment and decisions and then precluding payment if the attorney acts in a manner contrary to such "second guessing". Even those guidelines that provide that travel time is either non-payable or payable at a reduced rate create economic pressure on an attorney to elect to not engage in investigation, discovery, or motion practice that, in the absence of such pressure, the attorney might be more inclined to consider prudent and to undertake.

At first blush, Rules 1.8(f) and 1.7(b) might appear to allow an attorney to agree to and operate under insurance company guidelines of the sort in question if "the client consents after consultation". However, the use of the conjunctive "and" in both of those Rules requires that, in addition to obtaining client consent after consultation, there must also be "no interference with the lawyer's independence of professional judgment" (Rule 1.8(f)(2)) and the lawyer must reasonably believe "the representation will not be adversely affected" (Rule 1.7(b)(1)). Accordingly, merely obtaining client consent after consultation would not resolve the problem. Moreover, as the inquirer astutely observes in his letter to the Board, the appropriate scope and content of an attorney's "consultation" with a client regarding the issue would be extremely difficult to determine.

Furthermore, although Rules 1.8(f) and 1.7(b) might appear to provide some "wiggle room" by obtaining a client's consent, Rule 5.4(c) does not: "A lawyer shall not permit a person who ... pays the lawyer to render legal service for another to direct or regulate the lawyer's professional judgment in rendering such legal services."

CONCLUSION

It is the opinion of the Lawyer Disciplinary Board that when an attorney is retained and paid by an insurance company to defend an insured, the attorney cannot ethically agree to adhere to insurance company guidelines of the sort that are quoted above in this opinion or, in a more general sense, guidelines that

(1) Dictate how work is to be allocated among defense team members by designating what tasks are to be performed by a secretary, paralegal, associate, or senior attorney;

(2) Restrict or require approval before conducting discovery, engaging in motion practice, preparing for trial, or otherwise performing substantive work with respect to the matter for which the attorney has been engaged; or

(3) Otherwise impose a financial penalty or create an economic disincentive with respect to the lawyer's exercise of independent professional judgment.

The Board cautions, however, that it is not the intent of this opinion to suggest that an attorney who is engaged and paid by an insurance company has, in essence, an open checkbook or unlimited carte blanche discretion. Rule 1.5(a) states, "A lawyer's fees shall be reasonable." Furthermore, an attorney is always obligated to exercise his or her professional judgment in a reasoned and reasonable manner.

Approved by the Lawyer Disciplinary Board this date, [date illegible in source].

David A. Jividen, Vice-Chairperson
Lawyer Disciplinary Board