June 9, 2014

Insurer Litigation Guidelines—The Hidden Landmine In The Duty To Defend

Hands TIed

After considerable effort and expense that can last for months, you finally convince your liability insurance company to pay for the defense of a new lawsuit against your company.  You breathe a sigh of relief, thinking you can now focus on the defense of the suit without worrying about the costs of defending it.  After all, that is the protection you paid for when you bought liability insurance.  But then you get a call from the insurance carrier informing you that counsel must comply with the insurer’s “litigation guidelines.”  What are these “litigation guidelines” and what does it mean for the defense of your case?

Insurance company litigation guidelines are not designed to help the defense of your case.  Rather, they are designed to do one thing and one thing only — save the insurance company money.  These guidelines often drastically limit hourly rates and ban payment for discussions among the defense team, multiple attorneys at meetings and court hearings, travel time, and other items considered by the insurer to be administrative or overhead expenses.  The guidelines also may require insurer approval of hiring of experts and investigators, as well as impose limits on legal research, drafting of pleadings, and delegation to associates and paralegals.  They also may increase the burden on defense counsel by requiring formal periodic reporting not paid for by the insurer.  Worse yet, insurance carries often take the position that these guidelines are imposed retroactively, even if defense counsel has been incurring costs for months before the insurer finally agreed to defend.

In most instances, these guidelines are not part of your insurance policy and most policies do not even reference litigation guidelines.  Fortunately, policyholders don’t have to live with these onerous restrictions in many situations.  The cases and ethical opinions are clear that an insurer cannot substitute its judgment for defense counsel’s judgment, and that insurers cannot interfere with the defense in any way that prejudices the policyholder.  For example, the Montana Supreme Court held that insurer litigation guidelines violate the Rules of Professional Conduct by fundamentally interfering with defense counsel’s exercise of its independent judgment, where the guidelines require insurer approval before scheduling depositions, conducting research, employing experts, or preparing motions.  See In the Matter of the Rules of Professional Conduct, 2 P.3d 806 (Mont. 2000).  Further, a California appellate court held defense counsel owe their primary obligations to the insured and that “[i]nsurer-imposed restrictions on discovery or other litigation costs may well violate the insurer’s duty to defend as well as the attorneys’ ethical responsibilities to exercise their independent professional judgment in rendering legal services.” See Dynamic Concepts, Inc. v. Truck Ins. Exchange, 71 Cal. Rptr.2d 882, 888-89 (Cal. App. 1998).

In order to avoid or mitigate the litigation guideline landmine, policyholders should:

  • Set up a direct line of communication between the lead defense counsel and the insurer representative who actually reviews the bills;
  • Raise the guideline issue at the very beginning of the case;
  • Challenge retroactive applicability of guidelines that were not provided at the start of the litigation;
  • Complain immediately to the insurer that the guidelines are improperly restricting defense counsel’s ability to litigate the case and are prejudicing the policyholder; and
  • Consult with coverage counsel if the insurer refuses to relent.

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage.  Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results.  Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series. For additional information about this post, please call 202-760-3160.

Subscribe for Updates