1998-02

“RO-98-02

QUESTION:

The Office of General Counsel has received numerous
opinion requests from attorneys who represent insureds
pursuant to an employment agreement whereby the attorney is
paid by the insured’s insurance carrier. Some insurance
companies have begun to submit to the attorney billing
guidelines and litigation management guidebooks which place
certain restrictions on discovery, the use of experts and
other third party vendors. The billing guidelines also
restrict the lawyers who will be allowed to work on the
files and require pre-approval of time spent on research,
travel and the taking and summarization of depositions.
Some insurance companies also require the attorneys they
employ to submit their bills to a third party billing
review company for their review and approval. The bills
obviously contain descriptions of work done on behalf of
the
insureds. In most instances, the insureds have not been
consulted and have not approved the use of the billing
guidelines and litigation management guidebook or the
billing review process. The inquiry presented is whether
there is any ethical impropriety in following these
procedures which some insurance companies are attempting to
impose.

ANSWER:

It is the opinion of the Disciplinary Commission of
the Alabama State Bar that a lawyer should not permit an
insurance company, which pays the lawyer to render legal
services to its insured, to interfere with the lawyer’s
independence of professional judgment in rendering such
legal services, through the acceptance of litigation
management guidelines which have that effect. It is
further
the opinion of the Commission that a lawyer should not
permit the disclosure of information relating to the
representation to a third party, such as a billing auditor,
if there is a possibility that waiver of confidentiality,
the attorney-client privilege or the work product privilege
would occur. The Disciplinary Commission expresses no
opinion as to whether an attorney may ethically seek the
consent of the insured to disclosure since this turns on
the
legal question of whether such disclosure results in waiver
of client confidentiality. However, the Commission
cautions
attorneys to err on the side of non-disclosure if, in the
exercise of the attorney’s best professional judgment,
there
is a reasonable possibility that waiver would result. In
other words, if an attorney has any reasonable basis to
believe that disclosure could result in waiver of client
confidentiality, then the attorney should decline to make
such disclosure.

DISCUSSION:

The Disciplinary Commission of the Alabama State
Bar
has addressed the conflict of interest issues raised by
dual
representation of the insurer and the insured in several
earlier opinions. In one of those, RO-87-146, the
Commission concluded as follows:

“”Although you were retained to represent the
insured by the insurance company and are paid by the
company, your fiduciary duty of loyalty to the insured is
the same as if he had directly engaged your services
himself. See, RO-84-122; Nationwide Mutual Insurance
Company v. Smith, 280 Ala. 343, 194 So.2d 505 (1966) and
Outboard Marine Corporation v. Liberty Mutual Insurance
Company, 536 F. 2d 730, 7th Cir. (1976). Since the
interests of the two clients, the insurance company and the
insured, do not fully coincide, the attorney’s duty is
first
and primarily to the insured.””

Similar conclusions were reached in RO-90-99 and RO-81-533.
Additionally, the Alabama Supreme Court discussed the
insurer-insured relationship in Mitchum v. Hudgens, 533
So.2d 194 (Ala. 1988) and confirmed the Disciplinary
Commission’s analysis of that relationship, viz:
“”It must be emphasized that the relationship
between the insured and attorney is that of attorney and
client. That relationship is the same as if the attorney
were hired and paid directly by the insured and therefore
it imposes upon the attorney the same professional
responsibilities that would exist had the attorney been
personally retained by the insured. These responsibilities
include ethical and fiduciary obligations as well as
maintaining the appropriate standard of care in defending
the action against the insured.”” 533 So.2d at 199.

See also, Hazard and Hodes, The Law of Lawyering, 2nd Ed.
§§ 1.7: 303-304. These authorities conclusively establish
the proposition that the insured is the attorney’s primary
client and it is to the insured that the attorney owes his
first duty of loyalty and confidentiality. Effective
January 1, 1991, the Alabama Supreme Court promulgated the
Rules of Professional Conduct of the Alabama State Bar.
Rule 1.8(f) of the Rules of Professional Conduct provides
as
follows:

“”Rule 1.8 Conflict of Interest:
Prohibited Transactions

(f) A lawyer shall not accept compensation
for representing a client from one
other than the client unless:

(1) the client consents after
consultation or the lawyer
is appointed pursuant to an
insurance contract;

(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.””

A similar and related prohibition is found in Rule
5.4(c) of the Rules of Professional Conduct which provides
as follows:

“”Rule 5.4 Professional Independence
of a Lawyer

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

The Disciplinary Commission has examined a “”Litigation
Management Guidebook”” which the Commission understands to
be one example among many of the procedures which some
insurance companies have requested attorneys to follow in
representing insureds. This guidebook contains various
provisions and requirements which are of concern to the
Commission. The guidebook requires a “”claims
professional””,
who in most instances is a non-lawyer insurance adjuster,
to
“”manage”” all litigation. An excerpt from the guidebook
provides as follows:

“”Accountability for the lawsuit rest with the defense team.
This team is composed of the claims professional and the
defense attorney. The claims professional is charged with
fulfilling all the responsibilities enumerated below and is
the manager of the litigation.””

Other responsibilities of the claims professional include
“”evaluation of liability, evaluation of damages,
recommendation of discovery and settlement/disposition.””
The
guidebook requires the claims professional and the defense
attorney to jointly develop an “”Initial Case Analysis”” and
“”Integrated Defense Plan”” which are “”designed for the
claims
professional and defense attorney to reach agreement on the
case strategy, investigation and disposition plan.””
Furthermore, the attorney “”must secure the consent of the
claims professional before more than one attorney may be
used at depositions, trials, conferences, or motions.”” The
claims professional must approve “”[e]ngaging experts
(medical and otherwise), preparation of charts and
diagrams,
use of detectives, motion pictures and other extraordinary
preparation ….”” The Litigation Management Guidebook also
requires that all research, including computer time, over
three hours be pre-approved by the insurance company and
restricts deposition preparation by providing that the
“”person attending the deposition should not spend more time
preparing for the deposition than the deposition lasts.””
It is the opinion of the Disciplinary Commission of the
Alabama State Bar that many of the requirements of the
Litigation Management Guidebook such as described above
could cause an “”interference with the lawyer’s independence
of professional judgment or with the client-lawyer
relationship”” in violation of Rule 1.8(f)(2) and also
possibly constitute an attempt “”to direct or regulate the
lawyer’s professional judgment”” in violation of Rule 5.4
(c).
The Commission is of the opinion that foremost among an
attorney’s ethical obligations is the duty to exercise his
or her independent professional judgment on behalf of a
client and nothing should be permitted to interfere with or
restrict the attorney in fulfilling this obligation. An
attorney should not allow litigation guidelines, or any
other requirement or restriction imposed by the insurer,
to in any way impair or influence the independent and
unfettered exercise of the attorney’s best professional
judgment in his or her representation of the insured.

The Commission has also examined the insurance company’s
“”Billing Program”” pursuant to which attorneys are required
by the insurance company to submit their bills for
representation of the insureds to a third party auditor for
review and approval. Not only are the bills themselves to
be submitted to the auditor, but all invoices must be
accompanied by the most recent Initial Case Analysis and
Integrated Defense Plan which contains the defense
attorney’s strategy, investigation and disposition plans.
Each activity for which the attorney bills “”must be
described adequately so that a person unfamiliar with the
case may determine what activity is being performed.””

It is the opinion of the Disciplinary Commission that
disclosure of billing information to a third party billing
review company as required by the billing program of the
insurance company may constitute a breach of client
confidentiality in violation of Rules 1.6 and 1.8(f)(3)
and,
if such circumstances exist, such information should not be
disclosed without the express consent of the insured.
However, the Commission also has concerns that submission
of
an attorney’s bill for representation of the insured to a
third party for review and approval may not only constitute
a breach of client confidentiality, but may also result in
a
waiver of the insured’s right to confidentiality, as well
as
a waiver of the attorney-client or work product privileges.
While it is not within the purview of an ethics opinion
to address the legal issues of whether and under what
circumstances waiver may result, the fact that waiver is a
possibility is a matter of significant ethical concern. A
recent opinion of the United States First Circuit Court of
Appeals, U.S. v. Massachusetts Institute of Technology, 129
F.3d 681 (1st Cir. 1997), held that the IRS could obtain
billing information from MIT’s attorneys, which would
otherwise be protected under the attorney-client privilege
and as work product, because MIT had previously provided
this same information to Defense Department auditors
monitoring MIT’s defense contracts. The Court held that
the
disclosure of these documents to the audit agency forfeited
any work product protection and waived the attorney-client
privilege. MIT argued that disclosure to the audit agency
should be regarded as akin to disclosure to those with a
common interest or those who, though separate parties, are
similarly aligned in a case or consultation, e.g.,
investigators, experts, codefendants, insurer and insured,
patentee and licensee. The Court rejected this argument
holding that an outside auditor was not within the “”magic
circle”” of “”others”” with whom information may be shared
without loss of the privilege.

“”Decisions do tend to mark out, although not with
perfect consistency, a small circle of ‘others’
with
whom information may be shared without loss of the
privilege (e.g., secretaries, interpreters,
counsel for a cooperating codefendant, a parent
present when a child consults a lawyer).
Although the decisions often describe such
situations as one in which the client ‘intended’
the disclosure to remain confidential, the
underlying concern is functional: that the lawyer
be able to consult with others needed in the
representation and that the client be allowed to
bring closely related persons who are appropriate,
even if not vital, to a consultation. An intent to
maintain confidentiality is ordinarily necessary to
continue protection, but it is not sufficient.

On the contrary, where the client chooses to
share communications outside this magic circle, the
courts have usually refused to extend the privilege.””
129 F.3d at 684.

As indicated above, the question of whether disclosure of
billing information to a third party auditor constitutes a
waiver of confidentiality or work product is essentially a
legal, as opposed to ethical, issue which the Commission
has
no jurisdiction to decide. The Commission is also aware
that this may be a developing area of the law which could
be
affected, or even materially altered, by future decisions.
However, while the Commission recognizes that the MIT
opinion may not be the definitive judicial determination on
this issue, the possibility that other courts could follow
the 1st Circuit makes it incumbent on every conscientious
attorney to err on the side of caution with regard to such
disclosures. If disclosure to a third party auditor waives
confidentiality, the attorney-client privilege or work
product protection, then such disclosure is clearly to the
detriment of the insured to whom the defense attorney owes
his first and foremost duty of loyalty. Attorneys who
represent the insured pursuant to an employment contract
with the insurer should err on the side of non-disclosure
when there is any question as to whether disclosure of
confidential information to a third party could result in
waiver of the client’s right to confidentiality or
privilege.

Furthermore, while a client may ordinarily consent to the
disclosure of confidential information, the Commission
questions whether an attorney may ethically seek the
client’s consent if disclosure may result in a waiver of
the client’s right to confidentiality, the attorney-client
privilege or the work product privilege. This concern was
specifically addressed by the State Bar of North Carolina
in Proposed Ethics Opinion 10. The opinion points out that
“”the insured will not generally benefit from the release of
any confidential information.”” To the contrary, release of
such information could work to the detriment of the
insured.

“”The release of such information to a third party may
constitute a waiver of the insured’s attorney-client or
work product privileges. Therefore, in general, by
consenting, the insured agrees to release confidential
information that could possibly (even if remotely) be
prejudicial to her or invade her privacy without any
returned benefit.””

The North Carolina opinion discusses the comment to Rule
1.7(b) which states that the test of whether an attorney
should ask the client to consent is “”whether a
disinterested
lawyer would conclude that the client should not agree.””
The opinion concludes as follows:

“”When the insured could be prejudiced by agreeing and gains
nothing, a disinterested lawyer would not conclude that the
insured should agree in the absence of some special
circumstance. Therefore, the lawyer must reasonably
conclude that there is some benefit to the insured to
outweigh any reasonable expectation of prejudice, or that
the insured cannot be prejudiced by a release of the
confidential information, before the lawyer may seek the
informed consent of the insured after adequate
consultation.””

In reaching the above stated conclusions, the Disciplinary
Commission has examined and considered, in addition to
opinion of the North Carolina Bar referenced above,
opinions
issued by, or on behalf of, the Bar Associations of
Florida,
Indiana, Kentucky, Louisiana, Missouri, Montana, North
Carolina, Pennsylvania, South Carolina, Utah, Washington
and
the District of Columbia. All of these opinions appear to
be consistent with the conclusions and concerns expressed
herein. Only Massachusetts and Nebraska have released
opinions which may, in part, be inconsistent with this
opinion, and it appears that the opinions from these two
states are not official or formal opinions of those states’
Bar Associations.

In summary, and based upon the foregoing, it is the opinion
of the Disciplinary Commission of the Alabama State Bar
that
a lawyer should not permit an insurance company, which pays
the lawyer to render legal services to its insured, to
interfere with the lawyer’s independence of professional
judgment in rendering such legal services, through the
acceptance of litigation management guidelines which have
that effect. It is further the opinion of the Commission
that a lawyer should not permit the disclosure of
information relating to the representation to a third
party,
such as a billing auditor, if there is a possibility that
waiver of confidentiality, the attorney-client privilege or
the work product privilege would occur.

The Disciplinary Commission expresses no opinion as to
whether an attorney may ethically seek the consent of the
insured to disclosure since this turns on the legal
question
of whether such disclosure results in waiver of client
confidentiality. However, the Commission cautions
attorneys
to err on the side of non-disclosure if, in the exercise of
the attorney’s best professional judgment, there is a
reasonable possibility that waiver would result. In other
words, if an attorney has any reasonable basis to believe
that disclosure could result in waiver of client
confidentiality, then the attorney should decline to make
such disclosure.

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