To the Council of Delegates:
The Insurance Audit Practices and Controls Committee is an ad hoc committee of the Ohio State Bar Association. The committee was created in response to growing conflicts relating to the tripartite relationship among insurance companies, their insureds and defense counsel retained by the insurance companies to represent their insureds. The committee was charged with making recommendations to improve the tripartite relationship relating to insurance companies’ use of litigation guidelines and outside auditors.
Members of the committee are Catherine Cordial Geyer, Chair; Cormac B. Delaney; James Hanratty; Jonathon W. Marshall; Phillip R. Moots; John C. Nemeth; Jack L. Neuenschwander; and Richard R. Renner.
The committee respectfully submits the following report. The report identifies the primary issues relating to litigation guidelines and auditing practices and sets forth recommendations to address issues identified by the committee. Significant recommendations include:
1). Enactment of administrative rules by the Department of Insurance;
2) Creation of an OSBA standing committee to address in-house counsel and insurance defense counsel matters; and
3) Adoption of the recommendations of the House Counsel Task Force to amend the Code of Professional Responsibility.
II. The Tripartite Relationship Defined
A. The Insurance Company
B. The Insured
C. The Insurance Defense Attorney
III. Issues Relating to Litigation Guidelines
1. Insurance Companies Have A Legitimate Interest in Using Reasonable
2. Attorneys Have an Ethical Obligation Not to Follow Litigation Guide
lines that are Inconsistent with the Highest Standards of Ethical Conduct.
B. Conflicts of Interest
C. Interference with the Independent Judgment of an Attorney
D. Aiding in the Unauthorized Practice of Law
E. Preservation of Confidences and Secrets of a Client
F. Representing a Client Zealously
IV. Issues Relating to Audit Practices
B. Preservation of Confidences and Secrets of a Client
B. Improved Communication
C. Increased Reliance on the Code of Professional Responsibility
1. DR 2-109 and 2-110
2. DR 3-101(A)
3. DR 4-101
4. DR 5-101
5. DR 5-105
6. DR 5-107
7. DR 7-101
D. Consult Advisory Opinions from the Ohio Supreme Court Board of Commis
sioners on Grievances and Discipline and Request Additional Opinions When Needed
1. Opinion 2000-2
2. Opinion 2000-3
E. Pursue Regulatory Changes Through the Ohio Department of Insurance
F. Amend Existing Code of Professional Responsibility
TABLE OF APPENDICES
The tripartite relationship defined
A. Insurance company: For purposes of this report, insurance company refers, generally, to a property and casualty insurance company that has agreed to defend and/or indemnify an "insured" as that term is defined in the relevant insurance contract.
Under a typical insurance contract, the insurer, in exchange for a premium paid by the named insured, agrees with the named insured to pay fortuitous losses covered by the policy up to the policy coverage limits. The typical insurance contract also provides that an insurance company will provide an "insured" with a defense to legal proceedings. If it is unclear whether a lawsuit against an insured is covered by the insurance policy, an insurer must provide a defense to the insured for any claim that is "potentially or arguably" covered by the insurance policy.1
Since an insurance company only pays claims that are covered under the insurance policy but must defend claims that are potentially or arguably covered by the insurance policy, an insurer’s duty to defend is broader than its duty to indemnify an insured. This distinction becomes relevant when discussing potential conflicts of interest between an insurance company and its insured, because although an insurer may be providing a defense for a particular claim, the claim may ultimately not be covered by the policy, i.e. indemnified, by the insurance company.
B. The Insured: An insurance company’s duty to defend and indemnify is owed to an "insured." A typical personal lines insurance policy specifically defines who is an insured and includes not only the named insured, who must pay the insurance premium, but also members of a named insured’s household. An automobile insurance policy will include a driver and passengers of a vehicle regardless of whether they are family members of the named insured. In a commercial lines insurance policy, generally, an insured includes employees within the course and scope of employment.
Whether a claim arises through a personal or commercial lines insurance policy, the insurance contract defines who is an insured. Such insured is owed the defense and/or indemnity and may or may not be the party who has paid a premium to the insurance company.
C. The Insurance Defense Attorney: For purposes of this report, "insurance defense attorney" refers to an attorney who is retained by an insurance company to represent an insured but is not an employee of an insurance company.2 An insurance defense attorney is retained by an insurance company on a case by case basis and is generally paid on an hourly basis. From a practical standpoint, the insurance defense attorney may have a long-standing relationship with the insurance company, and the insurance defense attorney may derive a substantial percentage of his income from the insurance company.
Issues Relating to Litigation Guidelines:
A. Introduction: This section of the report examines the legitimate interests of the parties to the tripartite relationship and identifies areas where issues arise during the course of pursuing each parties’ legitimate interests. Such issues include: conflict of interests between an insurance company and its insured, interference with the independent judgment of an attorney, the unauthorized practice of law by a nonlawyer, protecting client confidences and secrets, and zealously represent an insured.
1. Insurance Companies Have a Legitimate Interest in Using Reasonable Litigation Guidelines:
The Committee recognizes that an insurance company has a right and duty to its shareholders, in the case of stock companies, and policyholders, in the case of mutual companies, to control its expenses, including litigations costs. An efficient, cost-effective and stable insurance industry is a desirable and necessary end and benefits insured consumers by allowing insurance companies to offer a competitive premium consistent with the risk underwritten. If an insurance company can control litigation within certain identifiable and reasonable guidelines, then it can better predict its risk and establish an accurate premium.
To resolve litigation within the requirements of the insurance contract, most insurance companies have created litigation controls, i.e., guidelines, by which an insurance defense attorney must abide. The litigation guidelines of each company vary in detail and in the extent to which they are enforced. Insurance Company A, for example, may simply require its insurance defense attorney to keep the insurer apprised of significant developments and periodically report on the status of the litigation. Conversely, Insurance Company B may require prior approval for all motions, research, depositions, expert witnesses, etc. and may refuse payment if a legal service, although necessary, is performed without such prior approval. Most insurance company’s litigation guidelines fall between these two examples. To the extent an insurance company imposes reasonable guidelines in the direction and control of the litigation, such guidelines are not inherently objectionable and serve a valid purpose.
2. Attorneys Have An Ethical Obligation Not to Follow Litigation Guidelines that are Inconsistent with the Highest Standards of Ethical Conduct:
Equally important to a strong insurance marketplace is an insured consumer’s ability to rely on competent and ethical legal services. As recognized by the Code of Professional Responsibility, a basic tenet of the professional responsibility of lawyers is that every person in our society should have ready access to the independent professional services of a lawyer of integrity and competence. Maintaining the integrity and improving the competence of the bar to meet the highest standards is the ethical responsibility of every lawyer.3 These ethical responsibilities apply to every lawyer, regardless of whether the client or the insurance company is paying the legal bill.
Members of the public are best served if they receive both cost-effective insurance coverage and competent and zealous legal representation. It is with these interests in mind that the following issues are recognized.
B. Conflicts of Interest:
During the course of representation of an insured by an insurance defense attorney conflicts of interest may arise between an insurance company and its insured. For example, a conflict of interest may arise when the potential exists for a verdict in excess of the insurance policy limits. Another example of a potential conflict of interest arises when an insured fails to cooperate with the insurer as required by the policy terms and conditions.
In addition, a potential conflict exists when a claim is defended under a "reservation of rights." Since the duty to defend is broader than the duty to indemnify, an insurer may provide a defense under a reservation of rights, i.e., provide a defense for a claim that is potentially or arguably covered while reserving its rights not to indemnify the insured for such claim should the insurer later determine the claim is not, in fact, covered by the policy. Where a defense is provided under a reservation of rights an insured may obtain personal counsel to monitor the litigation and protect her from potential conflicts.
C. Interference With the Independent Judgment of an Attorney:
An insurance defense attorney must not, under the Code of Professional Responsibility, accept employment of an insured if the exercise of the lawyer’s independent professional judgment will or reasonably may be impaired by the lawyer’s own financial interest.
DR 5-101, DR 5-105, DR 5-107. When the insurance defense attorney is required to follow litigation guidelines that limit the representation of an insured or require prior approval for certain discovery, issues may arise relating to whether or not such guidelines limit or interfere with an attorney’s independent professional judgment.
D. Aiding in the Unauthorized Practice of Law:
The Code of Professional Responsibility prohibits a lawyer from aiding a nonlawyer in the unauthorized practice of law. DR 3-101. Since insurance companies often employee non-lawyer claims adjusters to direct and control litigation, issues arise over whether or not an insurance defense attorney is violating an ethical obligation by following the direction of such non-lawyer in the representation of the insured.
E. Preservation of Confidences and Secrets of a Client:
All attorneys have an ethical obligation to preserve the confidences and secrets of clients. An insurance company’s litigation guidelines typically require an insurance defense attorney to report periodically to the insurance company. Such reporting is often to nonlawyer employees of the insurance company. Issues arise relating to such disclosure where, for example, an insurance company shares the information with persons outside the insurance company, e.g., auditors, or where the insured has not been made aware of disclosures to third parties and has not provided fully-informed consent to such disclosure.
G. Representing a Client Zealously:
An insurance defense lawyer has an obligation to zealously represent the insured through reasonably available means permitted by law and by the Code of Professional Responsibility. Such responsibility is not excused or diminished by the nature of the relationship, i.e., where the insurance company has retained and is compensating the attorney. Issues arise where an insurance company’s litigation guidelines prohibit or limit a lawyer’s activities in zealously representing an insured. DR 7-101.
IV. Issues Relating to Audit Practices:
A. Introduction: As with litigation guidelines, the parties to the tripartite relationship have legitimate interests in the issues relating to audit practices. To that extent, Sections IV.A.1. and IV.A.2. apply and are incorporated as if fully rewritten herein. In addition, this section of the report examines issues relating to an insurance company’s use of outside auditors to examine an insurance defense attorney’s legal bills.
B. Preservation of Confidences and Secrets of a Client:
The primary issue relating to an insurance company’s audit practices relate to a potential breach of the attorney-client privilege through the use of an outside auditor. As discussed above, all attorneys have an ethical obligation to preserve the confidences and secrets of clients. An insurance company’s audit practices may require an insurance defense attorney to provide his or her legal bills directly to an outside auditor for review and payment. Such outside auditor is not an employee of the insured and not a client. Issues arise relating to the preservation of the insured’s confidences and trusts as required by DR 4-101.
A. Introduction: This section of the Report provides a series of recommendations to address each of the issues identified above. The Committee gathered and reviewed myriad of information in reaching these recommendations. A portion of such information is included as an appendix to this report. The Committee recognizes that all parties have an indispensable role in reducing and/or eliminating conflicts arising from the use of litigation guidelines and audit practices. The recommendations consist of the following:
· Improve communication
· Increase Reliance on the Code of Professional Responsibility
· Rely on Existing Advisory Opinions and Request Additional Advisory Opinions
to address specific issues when necessary
· Pursue Regulatory Changes through the Ohio Department of Insurance
· Amend Existing Code of Professional Responsibility
B. Improved Communication:
It seems an obvious response to resolving issues, but because of frustrations, distrust or a lack of mutual understanding, improved communication may be overlooked as an efficient and effective solution to issues that arise during the course of representation of an insured. A vast majority of issues can be resolved if the parties to the tripartite relationship engage in early and open communication. Survey responses from attorneys who have successfully handled issues with insurance companies emphasize the need to communicate.
C. Increase Reliance on the Code of Professional Responsibility:
As with all other attorneys, insurance defense attorneys must abide by the Disciplinary Rules ("DR") set forth in the Code of Professional Responsibility ("CPR"). A heightened awareness of the mandates and ethical considerations of the CPR will resolve some of the issues facing an insurance defense attorney. Pertinent provisions of the Code are set forth below. For additional guidance, the Ethical Considerations interpreting the DRs should be consulted. It is the responsibility of all attorneys to follow these mandates.
1. DR 2-109 and DR 2-110: These rules govern acceptance and withdrawal of employment. DR 2-110 establishes a mandatory withdrawal from employment requirement if the lawyer know or it is obvious that his continued employment will result in a violation of a DR. DR2-110 provides for permissive withdrawal if his client insists that the lawyer pursue a course of conduct that is illegal or that is prohibited under the DRs, by other conduct renders it unreasonably difficult for the lawyer to carry out his employment effectively, insists, in a matter not pending before a tribunal, that the lawyer engage in conduct that is contrary to the judgment and advice of the lawyer but not prohibited under the DRs, or deliberately disregards an agreement or obligation to the lawyer as to expenses or fees.
2. DR 3-101(A): DR 3-101(A) provides that a lawyer shall not aid a nonlawyer in the unauthorized practice of law. The following Ethical Considerations ("EC") provide useful insights into the rationale for DR 3-101:[emphasis has been added]
EC 3-1 states that the prohibition against the practice of law by a layman is grounded in the need of the public for integrity and competence of those who undertake to render legal services. Because of the fiduciary and personal character of the lawyer-client relationship and the inherently complex nature of our legal system, the public can better be assured of the requisite responsibility and competence if the practice of law is confined to those who are subject to the requirements and regulations imposed upon members of the legal profession.
EC 3-3 provides that a non-lawyer who undertakes to handle legal matters is not governed as to integrity or legal competence by the same rules that govern the conduct of a lawyer. A lawyer is not only subject to that regulation but also is committed to high standards of ethical conduct. The public interest is best served in legal matters by a regulated profession committed to such standards. The Disciplinary Rules protect the public in that they prohibit a lawyer from seeking employment by improper overtures, from acting in cases of divided loyalties, and from submitting to the control of others in the exercise of his judgment. Moreover, a person who entrusts legal matters to a lawyer is protected by the attorney-client privilege and by the duty of the lawyer to hold inviolate the confidences and secrets of his client.
EC 3-4 states that a layman who seeks legal services often is not in a position to judge whether he will receive proper professional attention. The entrustment of a legal matter may well involve the confidences, the reputation, the property, the freedom, or even the life of the client. Proper protection of members of the public demands that no person be permitted to act in the confidential and demanding capacity of a lawyer unless he is subject to the regulations of the legal profession.
EC 3-5 provides that it is neither necessary nor desirable to attempt the formulation of a single, specific definition of what constitutes the practice of law. Functionally, the practice of law relates to the rendition of services for others that call for the professional judgment of a lawyer. The essence of the professional judgment of the lawyer is his educated ability to relate the general body and philosophy of law to a specific legal problem of a client; and thus, the public interest will be better served if only lawyers are permitted to act in matters involving professional judgment. Where this professional judgment is not involved, non-lawyers, such as court clerks, police officers, abstracters, and many governmental employees, may engage in occupations that require a special knowledge of law in certain areas. But the services of a lawyer are essential in the public interest whenever the exercise of professional legal judgment is required.
3. DR 4-101: (A) defines "confidence" and provides:
(B) [e]xcept when permitted under DR 4-101(C), a lawyer shall not knowingly (1) [r]eveal a confidence or secret of his client, (2) [u]se a confidence or secret of his client to the disadvantage of the client; or (3) use a confidence or secret of his client for the advantage of himself or third persons, unless the client consents after full disclosure. (C) A lawyer may reveal: (1) [c]onfidences or secrets with the consent of the client or clients affected, but only after a full disclosure to them, (2) [c]onfidences or secrets when permitted under [DRs] or required by law or court order…(4) [c]onfidences or secrets necessary to establish or collect his fee…(D) A lawyer shall exercise reasonable care to prevent his employees, associates, and others whose services are utilized by him from disclosing or utilizing confidences or secrets of a client, except that a lawyer may reveal the information allowed through DR 4-101(C) through an employee.
4. DR 5-101: provides that a lawyer must refuse employment when the interests of the lawyer may impair his independent professional judgment:
(A)(1) Except with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests…
5. DR 5-105 Refusing to accept or continue employment if the interests of another client may impair the independent professional judgment of the lawyer:
DR 5-105(A) A lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, except to the extent permitted under DR 5-105(C).
DR 5-105(B) A lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, except to the extent permitted under DR 5-105(C).
DR 5-105(C) In the situations covered by DR 5-105 (A) and (B), a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.
6. DR 5-107: Avoiding influence by others than the client:
(A) Except with the consent of his client after full disclosure, a lawyer shall not:
(1) Accept compensation for his legal services from one other than his client.
(2) Accept from one other than his client any thing of value related to his
representation of or his employment by his client.
(B) A lawyer shall not permit a person who recommends, employs, or pays him to
render legal services for another to direct or regulate his professional judgment in
rendering such legal services…
The Ethical Considerations to DR 5 are particularly instructive. The following ECs provide relevant guidance:
EC 5-1 Loyalty to client
The professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client.
EC 5-2 Conflict of interests between attorney and client
A lawyer should not accept proffered employment if his personal interests or desires will, or there is a reasonable probability that they will, affect adversely the advice to be given or services to be rendered the prospective client. After accepting employment, a lawyer carefully should refrain from acquiring a property right or assuming a position that would tend to make his judgment less protective of the interests of his client.
EC 5-16 Interests of Multiple Clients
A lawyer representing a fiduciary that owes fiduciary duties to third parties does not solely by representation of the fiduciary engage in multiple representation even if the third parties interest conflict with the interests of the fiduciary or other third parties. As used in this Ethical Consideration, "fiduciary" includes only a trustee under an express trust or an executor, administrator, or personal representative.
EC 5-18 Typical potentially differing interests
Typically recurring situations involving potentially differing interests are those in which a lawyer is asked to represent co-defendants in a criminal case, co-plaintiffs in a personal injury case, an insured and his insurer, and beneficiaries of the estate of a decedent. Whether a lawyer can fairly and adequately protect the interests of multiple clients in these and similar situations depends upon an analysis of each case. In certain circumstances, there may exist little chance of the judgment of the lawyer being adversely affected by the slight possibility that the interests will become actually differing; in other circumstances, the chance of adverse effect upon his judgment is not unlikely.
EC 5-22 Influence of third parties on attorney
The obligation of a lawyer to exercise professional judgment solely on behalf of his client requires that he disregard the desires of others that might impair his free judgment. The desires of a third person will seldom adversely affect a lawyer unless that person is in a position to exert strong economic, political, or social pressures upon the lawyer. These influences are often subtle, and a lawyer must be alert to their existence. A lawyer subjected to outside pressures should make full disclosure of them to his client; and if he or his client believes that the effectiveness of his representation has been or will be impaired thereby, the lawyer should take proper steps to withdraw from representation of his client.
The ECs listed herein are not an exhaustive list, but they serve to illustrate to the broad range of an attorneys ethical obligations under DR 5.
7. DR 7-101: Representing a client zealously
(A) A lawyer shall not intentionally:
(1) Fail to seek the lawful objectives of his client through reasonably available
means permitted by law and the Disciplinary Rules, except as provided by DR
7-101(B). A lawyer does not violate this Disciplinary Rule, however, by
acceding to reasonable requests of opposing counsel which do not prejudice
the rights of his client, by being punctual in fulfilling all professional commit
ments, by avoiding offensive tactics, or by treating with courtesy and consid
eration all persons involved in the legal process.
(2) Fail to carry out a contract of employment entered into with a client for
professional services, but he may withdraw as permitted under DR 2-110, DR
5-102, and DR 5-105.
(3) Prejudice or damage his client during the course of the professional
relationship, except as required under DR 7-102 (B).
(B) In his representation of a client, a lawyer may:
(1) Where permissible, exercise his professional judgment to waive or fail to
assert a right or position of his client.
(2) Refuse to aid or participate in conduct that he believes to be unlawful,
even though there is some support for an argument that the conduct is legal.
By relying on these, and other applicable provisions of the CPR, an insurance defense attorney can resolve issues that arise by an insurance company’s improper use of litigation guidelines and audit practices.
D. Consult Advisory Opinions From the Ohio Supreme Court Board of Commissioners on Grievances and Discipline Interpreting the Code of Professional Responsibility and Request Additional Opinions if Necessary:
In addition to the CPR, guidance for resolving issues can also be found in advisory opinions. The Supreme Court of Ohio for the Board of Commissioners on Grievances and Discipline (the "Board of Commissioners") is the administrative entity charged with addressing grievances of the Code of Professional Responsibility. In 2000, the Board of Commissioners, in response to a request from the Cleveland Bar Association’s Professional Ethics Committee, published Opinion 2000-2, answered the following question: "Is it proper for an insurance defense attorney to submit legal bills incurred in defending an insured to an outside auditing company hired by an insurer?" The Board of Commissioners answered as follows:
SYLLABUS: Under DR 4-101(B)(3) and DR 4-101(C)(1), an attorney may not submit detailed legal bills to an outside audit company hired by an insurer without first obtaining client consent after full disclosure. Full disclosure includes informing the client of the type of information required by the insurer in the billing invoice, the type of supporting documentation, if any, required by the audit, and that waiver of attorney-client privilege might be raised as a consequence. Whether submission of legal bills to an audit company waives the attorney-client privilege or work product doctrine is a question of law beyond the scope of this opinion.
The full text of Opinion 2000-2 provides an instructive interpretation of DR 4-101.
In 2000, the Board of Commissioners, in response to the same request from the Cleveland Bar Association’s Professional Ethics Committee, published Opinion 2000-3 which answered the following question: "Is it proper for an insurance defense attorney to abide by an insurance company’s litigation management guidelines in the representation of an insured?" The Board of Commissioners answered by addressing specific guidelines, e.g., guidelines that restrict or require prior approval or dictate how work is to be allocated. The syllabus states in pertinent part as follows:
SYLLABUS: It is improper under DR 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...
The full text of Opinion 2000-3 should be consulted for further guidance.
Opinions 2000-2 and 2000-3 represented the first statewide advisory opinions in Ohio addressing the issues of litigation guidelines and audit practices in the context of the tripartite relationships.
E. Pursue Regulatory Changes through the Ohio Department of Insurance:
The Superintendent of Insurance is vested with the authority to enact administrative regulations in the best interest of the public.4 Because of actual and potential conflicts of interest between an insurance company and its insured, exercise of the Superintendent’s authority is warranted to improve the tripartite relationship and to protect the best interest of the insured consumer. To ensure the best interest of the insured is not diluted, an insurance company must not be permitted to encroach on an attorney’s ethical obligations.
Where an insured faces potential personal exposure not covered by the insurance contract, e.g., excess verdicts or judgments and reservation of rights defenses, it is of paramount importance that the insured receive the highest degree of ethical representation, including the independent professional judgment of an attorney. The Code of Professional Responsibility requires that attorneys provide such independent judgment. Advisory opinions from the Ohio Supreme Court Board of Commissioners on Grievances and Discipline provide guidance on the extent to which an insurance company’s litigation guidelines violate an attorney’s professional responsibility.
In addition to the safeguards of a lawyer’s professional responsibility, further regulation is needed, because an insurance company is not bound by an attorney’s Code of Professional Responsibility. Nor are the parties bound by advisory opinions. As such, an insurance company which acknowledges the professional responsibility of an attorney does so on a voluntary basis. There is no provision, with the force and effect of law, that requires an insurance company to create or modify litigation guidelines to conform to an attorney’s professional responsibility. A formal acknowledgement of an attorney’s professional responsibility, and limits on litigation guidelines are necessary in the best interest of the insured and the public, for the protection of the people of Ohio.
The Committee recommends regulations be adopted by the superintendent of insurance. An example of such proposed regulation follows:
OAC ANN. 3901-__-__
Unfair property/casualty litigation guidelines and controls.
(A) This rule is issued pursuant to the authority vested in the superintendent of insurance under sections 3901.04, 3901.041 and 3901.19-3901.26 of the Revised Code.
The purpose of this rule is to establish forth uniform minimum standards for an insurer’s supervision and control of litigation arising out of the Duty to Defend and/or Indemnify obligations of a property and casualty insurance contract. The provisions of this rule are intended to protect the best interests of the insured by removing financial and political pressure on an attorney to yield his professional independent judgment.
As used in this rule:
(1) "Control" shall mean to exercise authority over;
(2) "Insurance defense fee counsel" shall be defined as an attorney who is retained, but
not as an employee, by an "insurer" to represent the interests of an insured in third
(3) "Insurance defense staff counsel" shall be defined as an attorney who is employed
by an "insurer" to represent the interests of an insured in third party actions;
(4) "Insurer" shall be defined as set forth in division (D) of section 3901.32 of the
(5) "Litigation guidelines" shall be defined as written or verbal requirements establish
ing or attempting to exercise control over the representation of an insurance defense
(5) "Person" shall be defined as set forth in section 3901.19 of the Revised Code;
(6) "Practice" means a type of activity or conduct engaged in by an insurer with such
frequency as to constitute a customary procedure or policy routinely followed in the
supervision of insurance litigation brought by a third party against an person insured
by such insurer;
(7) "Professional responsibility" as used herein shall be defined to include the Ohio
Code of Professional Responsibility as interpreted by the accompanying ethical
considerations, case law and advisory opinions of the Ohio Supreme Court Board of
Commissioners on Grievances and Discipline.
(8) "Third party action" shall be defined as litigation, arbitration, mediation or other
similar means of dispute resolution;
(9) "Third party claimant" means any individual, corporation, association, partnership
or other legal entity asserting a claim against any other individual, corporation,
association, partnership or legal entity.
(D) Litigation guidelines
An insurer shall not promulgate, adopt or enforce litigation guidelines that interfere with the professional responsibility of insurance defense fee counsel or insurance defense staff counsel.
(E) An insurer shall not promulgate, adopt or enforce auditing practices that interfere with the professional responsibility of insurance defense fee counsel or insurance defense fee counsel to maintain client confidences and secrets.
(F) An insurer shall file a copy of its litigation guidelines with the superintendent of insurance pursuant to 3901.04(B)(1) of the Revised Code.
If any provision of this rule or the application of this rule is held invalid, such invalidity shall not affect any other provision or application of the rule which can be given effect without the invalid provision or application and to this end, the provisions of this rule are declared to be severable.
(H) Imposition of fine
Purusant to 3901.22 of the Revised Code and a consent agreement with the insurer, the superintendent may recover the cost of an investigation under this rule and/or a penalty from the insurer.
(I) Violation of this rule does not create a private right of action.
F. Amend Existing Code of Professional Responsibility:
The Committee agrees with the House Counsel Task Force Report that the CPR should be amended to recognize the Ohio Supreme Court Board of Commissioners on Grievances and Discipline’s finding in Opinion 2000-2 and 2000-3 that it is incumbent on the attorney to make required disclosures to an insured. As such, the Committee adopts the proposed rule set forth in the House Counsel Task Force Report, including the proposed Statement of Insured Client’s Rights. For reference purposes, a copy of the House Counsel Task Force Report is attached hereto as Appendix A.
The Committee finds there is a potential conflict of interest in having an insurance defense attorney be responsible for asking the insured to sign the Statement of Insured Client’s Rights. The conflict of interest arises because it may not be in the insured’s best interest to have the insurance defense attorney be limited by any litigation guidelines. Nevertheless, the Committee recognizes that Opinion 2000-3 states "it is incumbent upon defense counsel" to clarify the parameters of the relationship at the beginning of the engagement. Placing the burden on the insurance defense attorney is consistent with other models. For example, the Florida Statement of Insured Client’s Rights and Rule 4-1.8(j) of the Florida Rules of Professional Responsibility also places the burden on the insurance defense attorney. Accordingly, the Committee adopts the proposed rule amendment of the House Counsel Task Force.
G. Form Industry Working Group to Monitor and Respond to Evolving Issues:
Many of the issues confronting an insurance defense counsel also apply to staff counsel employees hired to represent an insured. Both defense counsel and staff counsel must abide by the Code of Professional Responsibility. To address these common issues, the Committee recommends that the Ohio State Bar Association form a permanent committee that addresses BOTH staff counsel issues and insurance defense counsel issues and that such committee include representatives of the insurance industry.
Because there are many overlapping issues, it would be beneficial for staff counsel and insurance defense attorneys to work together to address those issues in a consistent manner. Although two separate permanent committees could be formed, many of the issues would be redundant. Addressing both staff counsel issues and defense counsel issues together would maximize the efficiency and consistency of a new permanent committee of the OSBA.
The Committee urges the Counsel of Delegates to take further action to adopt the recommendations contained herein. Further action is needed to pursue regulatory action, amendments to the CPR and forming an OSBA permanent committee.
Catherine Cordial Geyer, Dublin
1Willoughby Hills v. Cincinnati Ins. Co. (1984), 9 Ohio St.3d 177. Where the insurer’s duty to defend is not apparent from the pleadings in the action against the insured, but the allegations do state a claim which is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must accept the defense of the claim.
2For more information relating to the tripartite relationship involving attorneys who are employed by insurance companies see the Report of the House Counsel Task Force, 2000 attached hereto as Appendix A.
3 EC 1-1.
Report of the House Counsel Task Force
Summary of Resources
In developing the recommendations herein, the Committee gathered myriad of information from many sources. For example, the Committee analyzed the responses of nearly 30 other states to similar issues. Many states have confronted and addressed the issues of litigation guidelines and the use of outside auditors. For example, in Montana, an insurance defense firm petitioned that state’s supreme court for original jurisdiction in an application for declaratory judgment. The case addressed both the use of litigation guidelines and third party auditors to review legal bills. The Montana Supreme Court held that attorneys who abide by the requirement of prior approval violated their duties under the Rules of Professional Conduct to exercise their independent judgment and to give their individual loyalties to their insureds. The Court also held that disclosure by defense counsel of detailed descriptions of professional services to third party auditors without first obtaining the contemporaneous fully-informed consent of insureds violates client confidentiality under their Rules of Professional Conduct.
California enacted legislation that authorized a liability insurer to conduct a third party review of bills provided that the method of compensation was not prohibited, e.g., a method based on the number of claims denied or the amount of reduction of the bills. In Florida, the Insurance Practices Special Studies Committee held public hearings and proposed a disclosure be made to insureds through the use of a "Statement of Client’s Rights." The proposed Statement of Client’s Rights explains that an insured is entitled to know the litigation guidelines and the extent and level of legal services being provided to the insured
DRI Model Litigation Guidelines
Opinions 2000-2 and 2000-3 of the Ohio Supreme Court Commission on Grievances and Discipline
Montana Supreme Court Decision