“Is That Reasonable?” – Efforts to Control the Cost of Defense
Simple Strategies to Manage and Reduce Defense Costs
Adam P. Doherty, Esq.
Assistant Vice President, Professional Liability Claims
Allied World Assurance Company
Charles A. (“Tony”) Jones
Practice Group Leader – Professional Liability Coverage and Defense
Troutman Sanders LLP
Matthew So
Associate - Professional Liability Coverage and Defense
Troutman Sanders LLP
A claim has been tendered, reviewed and accepted. Now what? This is the oft-repeated
question many liability insurance carriers ask themselves. The simple answer to this question is
that it must now establish a clear strategy to move forward with the insured’s defense and
manage the costs of the defense. Providing coverage, however, does not necessarily mean that a
policyholder has a carte blanche right to defend the underlying litigation to his desire. Rather,
the insurance carrier is only responsible for those defense costs that are reasonable and
necessary.1 Accordingly, the insurance carrier may implement practical strategies to help
manage and reduce the costs of the defense.
1
See Barratt American, Inc. v. Transcontinental Ins. Co., 102 Cal. App. 4th 848, 857
(2002) (“[W]when an insurer breaches a duty to defend, the damages the insured is entitled to
recover may include the reasonable costs of defending the underlying action.”) Defense costs
are “reasonable and necessary” if (1) the costs sought are associated with actions conducted
within the temporal limits of [insurer’s] duty to defend, i.e., between tender of the defense and
conclusion of the action; (2) the actions taken amount to a reasonable and necessary effort to
avoid or at least minimize liability; and (3) the actions taken are reasonable and necessary for
1
I.
Rates and Hours
An effective way to manage defense costs is to set a reasonable maximum rate for the
insured’s defense counsel. What constitutes “reasonable” is hardly an exact science, but courts
have generally adopted a basic framework (with slight variations among jurisdictions) in
determining the “reasonableness” of attorney’s fees: (1) the novelty and difficulty of the
questions involved and the requisite skill to perform the legal service properly; (2) the fee
customarily charged in the locality for similar legal services; (3) the amount of the fee in
proportion to the value of the legal services performed; (4) the amount involved and the results
obtained; and (5) the experience, reputation and ability of the lawyer or lawyers performing the
services.2 Carriers typically set the maximum rate based on comparable rates of its panel
attorneys, on the basis that such panel attorneys have like skill and experience and defend claims
of similar nature. However, carriers should be mindful that a higher rate may nonetheless be
deemed reasonable3, and therefore, should make each determination on a case-by-case basis. An
insurance carrier can also reserve itself the sole and absolute discretion in determining what is
“reasonable,” which may be achieved through proper policy language.4
that purpose. Barratt American, 102 Cal. App. 4th at 858; KLA-Tencor Corp. v. Travelers
Indem. Co., 2004 U.S. Dist. LEXIS 15376, *13-14 (N.D. Cal. Aug. 4, 2004) (applying California
law). The analysis of whether costs incurred in defense of a claim are reasonable is made under
an objective standard. Aerojet-General Corp. v. Transport Indem. Co., 17 Cal. 4th 38, 62
(1997).
2
Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974);
People ex rel. Dept. of Transportation v. Yuki, 31 Cal. App. 4th 1754, 1770-71 (1995); Vicor
Corp. v. Vigilant Ins. Co., 2012 U.S. Dist. LEXIS 139589, at *6-7 (D. Mass. Sept. 28, 2012);
Lamensdorf v. Welin, 2011 U.S. Dist. LEXIS 142326, 14-16 (M.D. Ga. Dec. 12, 2011);
Knowledge Learning Corp. v. Nat’l Union Fire Ins. Co., 2011 U.S. Dist. LEXIS 57174, at *7-8
(D. Or. Apr. 18, 2011); Barnes v. Am. Int’l Life Assur. Co., 2010 U.S. Dist. LEXIS 27606, at *26 (S.D.N.Y. Mar. 16, 2010); Emplrs Ins. Co. of Wausau v. Harleysville Ins. Co., 2008 U.S. Dist.
LEXIS 95003, at *9-13 (D.N.J. Nov. 20, 2008).
3
Northern Sec. Ins. Co. v. R.H. Realty Trust, 78 Mass. App. Ct. 691, 695 (2011) (“[T]he
insured was entitled to have a reasonable fee paid, based on market rather than panel rates. Panel
rates … often reflect, first, what [the insurer] was able to bargain for as a large insurance
company handling various cases involving many attorneys, who presumably wish to continue
receiving referrals; and second, the justifiable interest of a company such as [the insurer] to keep
its legal costs down, especially in routine cases, which may be at odds with an insured’s desire to
pay more for legal representation in the hope of minimizing legal exposure.”).
4
See Endurance Am. Specialty Co. v. Lance-Kashian & Co., 2011 U.S. Dist. LEXIS
129330, at *78-79 (E.D. Cal. Nov. 8, 2011) (upholding the defense counsel rates set forth by the
insurer based on the policy language, which stated, “[Insurer’s] determination as to the
reasonableness of defense costs shall be conclusive on the insureds.”).
2
In addition, insurers may set forth guidelines to limit defense counsel’s time on certain
discreet legal tasks because the amount of hours spent on such tasks must also be reasonable.5
For example, insurers may limit defense counsel’s intra-office conferences and communications,
which are often excessive and unproductive.6
II.
Staffing
Defense counsel must also staff the insured’s case in a reasonable manner. A large staff
may result in wasting time keeping the whole team apprised of the case, reviewing each others’
work, and assigning work to different team members.7 For example, an associate may waste
time redoing similar work of another associate and a partner may duplicate the work of an
associate, not knowing that the work has already been done. Moreover, in certain circumstances,
an insured may request to staff a case with two sets of attorneys. In such an event, an insured
should justify having two sets of attorneys, especially where one set of attorneys has a
substantially higher rate than the other set of attorneys, because such staffing often lends to
wasted time or disproportional contribution by the attorneys.8 Thus, another effective strategy is
to provide clear guidelines regarding attorney staffing.
III.
Enforcement of Litigation Management Guidelines
Insurance carriers commonly implement the foregoing strategies by requiring defense
counsel to follow their litigation management guidelines. Such guidelines generally include a
statement of the insurance company’s goals, a breakdown of the respective duties of the claims
professional and defense counsel, and standard procedures for handling lawsuits. They also
5
See Ohio Cas. Ins. Co. v. Chugach Support Servs., 2011 U.S. Dist. LEXIS 105187, at
*17-18 (W.D. Wash. Sept. 16, 2011); Morgan v. Chi. Title Ins. Co., 2008 U.S. Dist. LEXIS
22628, at *10-15 (D. Haw. Mar. 20, 2008) (reducing defense counsel’s time because a majority
of his work on the motion was unnecessary and irrelevant); Pfeifer v. Sentry Ins., 745 F. Supp.
1434, 1445 (E.D. Wis. 1990) (concluding that defense counsel’s 70 hours billed for research for
twenty legal citations was excessive).
6
See, e.g., In re Olsen, 884 F.2d 1415, 1428 (D.C. Cir. 1989) (lawyers with high hourly
rates should not need a substantial amount of time to discuss strategy); Pfeifer v. Sentry Ins., 745
F. Supp. 1434, 1445 (E.D. Wis. 1990) (finding unreasonable 41 hours of intra-office
conferences).
7
See, e.g., Leroy v. Houston, 906 F.2d 1068 (5th Cir. 1990); Pfeifer v. Sentry Ins., 745 F.
Supp. 1434, 1445 (E.D. Wis. 1990) (reducing the time which insurer labeled as “redundant”
because it was the result of having so many different lawyers working on the same case); Real v.
Continental Group, Inc., 653 F. Supp. 736 (N.D. Cal. 1987).
8
See Vicor Corp. v. Vigilant Ins. Co., 2012 U.S. Dist. LEXIS 139589, at *9 (D. Mass.
Sept. 28, 2012) (holding that the insured failed to demonstrate that its local counsel made any
exceptional contribution to the defense that would have warranted reimbursement at a higher
blended rate).
3
describe certain tasks that require the insurer’s prior approval, including, but not limited to,
selection and retention of investigators and experts, filing of motions, discovery, performance of
computer research, intra-office conferences and staffing. But are these litigation management
guidelines really enforceable?
The majority view is that insurer-imposed guidelines are not enforceable because they
violate the defense attorney’s ethical responsibilities to exercise independent professional
judgment.9 As the California Court of Appeal noted, “[u]nder no circumstances can such
guidelines be permitted to impede the [defense] attorney’s own professional judgment about how
best to competently represent the insureds. If the attorney’s representation is to be limited in any
way that unreasonably interferes with the defense, it is the insured, not the insurer, who should
make that decision.”10 Another court suggested that compliance with an insurer’s litigation
management guidelines are not dispositive on the issue of reasonableness where the insurer has
not agreed to provide coverage—the rationale being that the insured has every incentive to keep
the defense expenditures low.11
However, some jurisdictions take the position that an insurer’s litigation management
guidelines is not a per se violation of a defense attorney’s professional responsibility.12 Under
such an approach, defense counsel should follow the insurer’s litigation management guidelines
so long as they do not appear to involve any substantial risk to any interest of the insured.13
Nevertheless, defense counsel must inform the insurer at the outset that he may cease to follow
the guidelines in the event they become harmful to the interests of his client (i.e., the
policyholder).14 If a conflict arises, defense counsel must disclose such risk to the insurer and
the policyholder. Defense counsel may only continue representing the insured if the insurer
changes its position or the policyholder provides written consent that defense counsel may
9
See, e.g., Supreme Court of Ohio Bd. of Comm’rs on Grievances & Discipline, Op.
2000-3 (2003); In re Rules of Prof. Conduct, 2 P.3d 806 (Mont. 2000); N.Y.S.B.A. Ethics Op. 721
(1999); Kentucky Bar Ass’n, Op. E-331 (1988); Cincinnati Bar Ass’n, Op. 98-99-02 (undated);
Indiana State Bar Ass’n, Opinion 3 of 1998; Rhode Island Sup Ct, Ethics Advisory Panel, Op.
99-18 (1999); Vermont Bar Ass’n, Op. 98-7 (undated); Sup Ct Tennessee, Bd of Professional
Responsibility, Ops. 88-F-113 (1988), 99-F-143 (1999), 99-F-143(a)(1999).
10
Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999 (1998).
11
Philadelphia Indem. Ins. Co. v. Chicago Title Ins. Co., 2012 U.S. Dist. LEXIS 82751,
at *15-21 (N.D. Ill. June 10, 2012).
12
Pennsylvania Bar Ass’n Comm. on Legal Ethics and Prof. Resp., Formal Op. 2001200; Tenn Bd. of Prof. Resp., Formal Ethics Op. 2000-F-145; ABA Opinion 01-421.
13
ABA Opinion 01-421; Restatement (Third) of the Law Governing Lawyers § 134 cmt.
f, Illus. 5 (perm. Vol. 2000).
14
ABA Opinion 01-421.
4
continue to represent him in light of the conflict of interest. Otherwise, defense counsel must
withdraw from representation.15
While the California Court of Appeal expressed in Dynamic Concepts Inc. v. Truck Ins
Exch., 61 Cal. App. 4th 999 (1998), that insurer-imposed guidelines may potentially violate the
insurer’s duty to defend, the District Court of California, in Pepsi-Cola Metro. Bottling Co. v.
Ins. Co. of N. Am., Inc., 2010 U.S. Dist. LEXIS 144401, at *32-33 (C.D. Cal. Dec. 28, 2010) (in
the context of independent counsel), expressly authorized insurance companies to issue and
enforce billing guidelines. “This Court agrees that the use of ‘billing guidelines’ and reducing
hourly rates was not a breach of the duty to defend in this case.”16 The court in Pepsi-Cola
suggested that as long as the litigation management guidelines do not impede the defense
counsel’s professional judgment about how best to competently represent the insureds, the
guidelines may be used to reduce overall fees based on objective standards relating to billing
practices.17 The court further suggested that it is a good practice for insurers to separate
themselves from direct involvement in the management of the insured’s case by hiring a thirdparty auditor to make recommendations regarding the areas where determined costs may be
duplicative, excessive, or unnecessary.18 Thus, as the law currently stands in California,
litigation management guidelines appear to be enforceable.
IV.
Independent or Cumis Counsel
Many of the strategies described above regarding insurer-retained defense counsel may
also apply to situations involving independent counsel.19 For example, the insurer may consider
setting a maximum rate for independent counsel because the insurer is only responsible to pay
for those defense costs that are reasonable and necessary.20 In California, the Civil Code
provides that defense costs of Cumis counsel are limited to those “which are actually paid by the
insurer to attorneys retained by it in the ordinary course of business in the defense of similar
15
ABA Opinion 01-421.
16
Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am., Inc., 2010 U.S. Dist. LEXIS
144401, at *32 (C.D. Cal. Dec. 28, 2010).
17
Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am., Inc., 2010 U.S. Dist. LEXIS
144401, at *32-33 (C.D. Cal. Dec. 28, 2010).
18
Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am., Inc., 2010 U.S. Dist. LEXIS
144401, at *33-34 (C.D. Cal. Dec. 28, 2010).
19
Some states like California and Alaska codify the rules governing independent counsel.
Cal. Civ. Code § 2860(c); Alaska Stat. § 21.89.100.
20
Behnke v. State Farm General Ins. Co., 196 Cal. App. 4th 1443, 1460 (2011); Aquino
v. State Farm Ins. Co., 793 A.2d 824, 832 (N.J. Super. 2002) (“While [the insured] may have
been entitled to an attorney of his selection to handle the claim of intentional conduct, he does
not have the right to dictate to the insurers the hourly rate they must pay.”).
5
actions in the community where the claim arose or is being defended….”21 While the California
statute sets forth the basic parameters of independent counsel’s fees, it does not, however,
provide any further guidance on what is “reasonable.” The lack of case law interpreting the
statute is due to the fact that a dispute about independent counsel’s fees, including a dispute as to
whether the insurer improperly reduced counsel’s billed hours and cut counsel’s hourly rates, is
subject to arbitration.22 Nevertheless, case law in other jurisdictions provides valuable insight.
For example, in Louisiana, the reasonableness of independent counsel’s fees is determined by
looking at the following factors: (1) the ultimate result obtained; (2) the responsibility incurred;
(3) the importance of the litigation; (4) the amount of money involved; (5) the extent and
character of the work performed; (6) the legal knowledge, attainment, and skill of the attorneys;
(7) the number of appearances involved; (8) the intricacies of the facts involved; (9) the diligence
and skill of counsel; and (10) the court’s own knowledge.23 Courts in Texas use a similar multifactor test to evaluate the reasonableness of independent counsel’s fees.24 Also, some states
leave it up to the insurer to determine what is reasonable,25 while other states leave this role to
the trial courts.26
In addition, litigation management guidelines are enforceable (at least in California)
insofar as they do not impede Cumis counsel’s professional judgment about how best to
competently represent the insured.27 In fact, consultation with the insurer is impliedly authorized
by statute to the extent necessary to avoid the risk of breaching the insurance policy, so long as
21
Cal. Civ. Code § 2860(c); Endurance Am. Specialty Co. v. Lance-Kashian & Co., 2011
U.S. Dist. LEXIS 129330, at *78-79 (E.D. Cal. Nov. 8, 2011).
22
See Cal. Civ. Code § 2860(c); Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am.,
Inc., 2010 U.S. Dist. LEXIS 144401 (C.D. Cal. Dec. 28, 2010).
23
Rivet v. State, 680 So. 2d 1154, 1161 (La. 1996) (citing State v. Williamson, 597 So. 2d
439, 441-42 (La. 1992).
24
Housing Auth. of City of Dallas v. Northland Ins. Co., 333 F. Supp. 2d 595 (N.D. Tex.
2004).
25
Armstrong Cleaners, Inc. v. Erie Ins. Exch., 364 F. Supp 2d 797, 801 (S.D. Ind. 2005)
(“[T]he policyholders are entitled to select their own counsel to defend the underlying claim,
subject to reasonable approval by the insurer, with reasonable fees and expenses paid by the
insurer.”).
26
Aquino v. State Farm Ins. Co., 793 A.2d 824, 832 (N.J. Super. 2002) (“The trial court
here should have determined a reasonable hourly rate for defense work of this nature and set a
fee accordingly.”).
27
Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am., Inc., 2010 U.S. Dist. LEXIS
144401, at *32-33 (C.D. Cal. Dec. 28, 2010).
6
disclosure does not endanger any policyholder interests and so long as the policyholder has not
directed that such information be kept confidential.28
V.
Conclusion
Once an insurer accepts a claim and agrees to provide coverage, it should develop a
strategy not only to manage the insured’s underlying litigation but also to manage the costs of the
defense. Insurance carriers may use the steps articulated above (and the authority cited herein)
as an aid to help prepare an effective strategy to reduce defense costs.
28
Cal. Civil Code § 2860(d) (“When independent counsel has been selected by the
insured, 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
to timely inform and consult with the insurer on all matters relating to the action….”).
7