Meaning and Applicability of Insurance Company Guidelines

Insurance company dispute management guidelines – dictating carrier protocols for billing and handling the insured’s defense – are the bane of the insurance defense bar’s existence and the subject of controversy. occasional cover lawyers. Although we have (at different times) worn all three hats (defense attorney, coverage attorney for insurers, and coverage attorney for policyholders), in the latter capacity we have recently witnessed a exaggerated behavior on the part of insurers warranting rejection, as set out below. .

In particular, we witnessed the onerous oversight of a defense attorney’s insurer in a complex, high-risk case, including (1) its past handling of defense bills by imposing discounts that were arbitrary and massive and (2) its continuing limiting instructions significantly limiting the defense attorney’s ability to perform the activities necessary to mount an effective defense for the insured client.

In that case, the insurer reduced defense bills by about 25% (out of a total well over six figures) and issued instructions effectively prohibiting a variety of defense activities as basic as participating in depositions. The essence of the insurer’s position was that it was justified in taking these steps based on its guidelines for handling disputes. This rationale should be challenged.

It should be noted from the outset that the applicable policy included a provision granting the insurer the right to lead the defence, as well as an endorsement allowing the insured to choose his own lawyer subject to compliance with the rules for managing disputes. However, it can at least be argued that these facts did not give the insurer an absolute right to control the insured’s defense or to pay what it chooses for that defense, particularly when the policy also sets out the “claims costs” such as “within reason legal fees, costs and expenses”.

The New York case law is clear. The founding decision of the Court of Appeal, Feliberty vs. Damon72 NY2d 112 (1988), said:

“First, … the insurer must necessarily rely on an independent lawyer to conduct the litigation. Second, the primary interest of independent counsel is that of the insured, not the insurer. The insurer is prohibited from interfering with the lawyer’s independent professional judgments in conducting litigation on behalf of its client (Trieber v. Hopson, 27 AD2d 151, 153, 277 NYS2d 241; American Employers Ins. Co v. Goble Aircraft Specialties, 205 Misc. 1066, 1075, 131 NYS2d 393; see also, Code of Professional Responsibility EC 5-17, 5-21, 5-23).

See also Federal Insurance. Co. c. North American Specialty Insurance Co.47 AD2d 52 (1st Dept. 2007) (the duty of the public defender is to the insured and in the event of a dispute between the insured and the insurer, he cannot represent both); Ladner v. American Home Assurance Co.201 AD2d 302 (1st Dept. 1994) (“tactical decisions must be in the hands of a lawyer whose loyalty to [the insured] is undisputed and not an attorney employed by [the insurer] with a potential conflict of interest”).

The ethics rules say the same thing, that the retained defense attorney has a client, the insured, not the insurance company. The fact that the insurer pays the legal costs of the defense has no consequence; the key is knowing who the lawyer is defending. Professional Conduct Rule 5.4(c) states that retained counsel may not permit the insurer to interfere with the representation of the insured defendant:

“Rule 5.4: Professional independence of a lawyer.


(c) Unless authorized by law, a lawyer must not permit a person who recommends, employs or remunerates the lawyer to perform legal services for another to direct or regulate the professional judgment of the lawyer. lawyer in the provision of these legal services…. »

Cases and ethical opinions in other jurisdictions point in the same direction. See D. Wolf, How to Deal With Insurer Dispute Management Guidelines, Law 360 (May 15, 2018); P.Laun, Fiat Litigation Handling: Can an insurer impose litigation guidelines on a defense attorney hired to defend a potentially insured claim?, Insurance Policyholder Advocate Insights (March 18, 2013). See generally Grasing & Associates, When a New York lawyer is appointed by an insurance company to represent an insured, who is the client?Justia (May 10, 2013).

Thus, it appeared here that there was a real conflict between the insured and his insurer, and that the defense lawyer owed his paramount allegiance and was required to make tactical decisions for the benefit of his insured client.

Moreover, with regard to invoicing, it is well established that “[t]Failure to receive defense costs under a professional liability policy at the time they are incurred constitutes immediate and direct damage sufficient to [constitute] irreparable harm…”. Li v certain Lloyd’s underwriters, London, 183 F. Supp. 3d 348 (EDNY 2016); deal XL Specialty Insurance Co. v. Level Global Investors, LP, 874 F. Supp. 2d 263 (SDNY 2012) (citing In re WorldCom Securities Litigation, 354 F. Supp. 2d 455 (SDNY 2005)). See in general Telenor Mobile Communications AS vs. Storm2009 WL 585968 (SDNY 2009) (refusing to impose “axes” discounts on bills).

Here, the fact that the insurer was able to make a partial payment of the invoices and its assumption of responsibility for certain limited defense activities should not eliminate either the existence of a conflict or the irreparable prejudice.

While this specific story is not yet over, we assume that it (like other previous similar storylines) will eventually be settled in light of the insurer’s reluctance to challenge the interpretation and applicability of the guidelines. .

Jeffrey G. Steinberg is a Senior Advisor at Dorf & Nelson.