Consider obligations owed to both clients and insurers

Insurance often plays a significant role in litigation. This is reflected by the fact that initial disclosures filed in federal court often require information regarding potentially applicable insurance. But even where applicable, insurance is not simply available to satisfy a judgment or settlement. Instead, policies may give insurers the right to control the litigation on behalf of a policyholder defendant. This control can include the right to select defense counsel and to make strategic decisions, including the decision of whether or not to settle.

For defense counsel retained to represent a policyholder, there can be complex dynamics in balancing the obligations owed to the policyholder client and those owed to the insurer. For one, the law defining that relationship can vary by jurisdiction. In some jurisdictions, the insurer is may be a client on equal footing with the policyholder, which may not be the case in others. Either way, attorneys typically owe obligations to the insurer, even if they may not be the “client” in a traditional sense.

This can be a complex issue. Lawyers may not always sufficiently appreciate their obligations to insurance companies and may assume that their only duties flow to the policyholder. Defense counsel can get into trouble — or risk the rights of the policyholder — by failing to treat insurance companies fairly in these situations.

Here are some tips for defense counsel working with an insurance company.

Provide Regular Updates

Although defense counsel is generally tasked with representing the policyholder’s interests, counsel usually is not permitted to cut the insurer out of discussions on recent developments or strategy. Indeed, even if there is a coverage dispute between the policyholder and the insurer providing the defense, defense counsel may still not be permitted to withhold important litigation-related information from the insurance company.

The insurer’s right to information is often set forth in the policy, including as part of the policyholder’s duty to cooperate with the insurer in the defense of claims. In California, even where there are coverage disputes, the so-called Cumis statute generally requires defense counsel to provide certain information to the insurer. The statute applies where a conflict regarding coverage results in the appointment of independent counsel to defend the policyholder. In such circumstances, “it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action.” Cal. Civ. Code 2860(d).

If an insurer is not properly kept informed as to the risks and developments of the litigation, that can be a basis for the insurance company to refuse to pay funds in support of a case. Then the defense counsel may be in a difficult situation with a client, who is asking why the insurance company is no longer supporting the case. It can be particularly awkward if it is because of the defense counsel’s failure to properly inform the insurer.

Determining the right balance of what information to provide to the insurance company and how often can be unique to each case. Many lawyers in this situation find it helpful to just ask the insurance company representative about what information they need to assess the case and how often they expect to receive reporting.

Adhere to Billing Guidelines

Most insurance companies have adopted billing guidelines for defense counsel retained to defend their policyholders. Indeed, many clients throughout the corporate world have begun issuing guidelines for defense counsel to help manage skyrocketing costs of litigation and to ensure they receive necessary information regarding the status of the matter.

In the insurance industry, billing guidelines may specify the rates, what costs will be reimbursed by the insurance company, how attorneys are to describe their time entries, and what tasks are considered outside the representation. These guidelines help insurance companies track expenses and confirm an efficient representation.

Some defense counsel, if unfamiliar with billing guidelines, may simply treat them as suggestions instead of requirements. However, courts in California and nationwide have upheld the use of litigation guidelines to control billing. Thus, by failing to account for the guidelines, defense counsel may be doing themselves and their clients a disservice. Counsel may find that they are not getting paid as quickly as they would like, or that their fees are not being covered in full.

Don’t Hide the Ball on Settlement

Nearly every lawsuit gives rise to settlement discussions at some point. Most lawyers handling potential settlement on behalf of an insurer-funded client will take care that they continue to meet their obligations to the insurance company, including by providing timely updates and information regarding the possibility of settlement or a proper valuation of settlement.

Typically, a client/policyholder may not settle or even offer settlement of a matter without the insurer’s knowledge or consent. Thus, if a defense counsel enters into a settlement arrangement with an opposing party without keeping the insurance company in the loop, the insurance company may be supported in refusing to participate. Then, the client may blame the attorney for failing to keep everyone on the same page.

Further, defense counsel unfamiliar with insurance issues may view the limits as “free money.” For example, if a policy has $1 million limits, the defense counsel may feel justified in negotiating a settlement for $1 million because that is the amount available, even if the case is worth significantly less. Defense counsel may even feel tempted to instruct opposing counsel to demand $1 million, as if they are on the same team.

However, it goes without saying that the amount of available policy limits has no relevance to the settlement value of a claim. If the case is actually worth far less than $1 million, negotiating or working with opposing counsel to compel the insurance company to pay more for the case than it is worth can backfire or even lead to future litigation. Defense counsel in such a situation should be wary of gambling with the insurance company’s money, as many insurers can sense a “set up” (or hire counsel to help them navigate such issues).

Although the relationship between a policyholder, the insurance company, and defense counsel can be complex, it works best when defense counsel understands that she owes obligations to both the policyholder and the insurance company. Ignoring obligations owed to the insurance company not only can harm the client’s interest by jeopardizing its insurance coverage, it can also create risks for defense counsel. 