The Meter Is Running.

Opinion: Litigation management, a critical tool for insurers, is being subjected to legal challenges. Policyholders will pay the price if insurers don't fight for the right to manage legal costs.

I recently read that insurance defense work is known by some defense lawyers as "fast-clock work," because it is easy to bill the client--the insurance company--for twice the amount of time actually spent doing the work.

Such billing practices by certain unscrupulous insurance defense lawyers is a convincing argument in favor of insurers' need to preserve the use of litigation guidelines and other litigation-management tools. It also is but one example of how some defense attorneys manage to bill their insurance company clients 35 hours in a single day. Imagine the situation if these same attorneys persuaded state bar associations, legislatures and the courts to block insurers from using litigation guidelines under the erroneous guise that such guidelines are the "unauthorized practice of law."

In the past year, insurers have managed to preserve their ability to manage policyholder litigation. But threats remain from defense attorneys intent on depriving insurers of key management and cost-control tools--tools that allow insurers to keep legal fees in check to the benefit of their policyholders.

Legal Challenges

In Texas, insurance companies prevailed in June 2001 when Gov. Rick Perry vetoed legislation that would have restricted insurance companies' use of litigation guidelines to monitor legal work done on their behalf and on behalf of their policyholders. The bill also would have prohibited guidelines requiring defense counsel to get insurers' approval before performing tasks or incurring expenses. Perry's veto of Texas Senate Bill 1654 was the culmination of a battle that raged throughout this past session of the Texas Legislature. In the last few days of the session, defense lawyers supporting this bill made an all-out effort and were successful, if only by a small margin, in getting it to the governor's desk. Clearly, the governor recognized the negative impact such a bill would have on the cost of insurance in Texas--and the state economy as a whole.

Just days earlier, the Arizona Supreme Court issued a decision in the case of Langerman vs. Paradigm Insurance Co., confirming that insurers and their policyholders may be co-clients of attorneys defending claims as long as their interests do not actually conflict. The state's Supreme Court ruled that the mere potential for conflict of interest that exists in insurance defense cases does not bar an insurance company from being a co-client, nor does it require an express representation agreement between defense counsel and insurer for the insurer to gain client status. It further held that, even in those instances where the facts dictate that an insurer is not a co-client, the insurer is an agent of the insured and, therefore, has the right to manage litigation vis-a-vis that agency relationship. All in all, this was a very reasonable and thoughtful opinion. The American Insurance Association filed a friend of the court brief in this case, supporting a carrier's ability to be a co-client in insurance defense c ases. AIA was joined on the brief by the Metro Phoenix Human Resource Association, the Alliance of American Insurers, the National Association of Independent Insurers and American International Cos.

On another front, the Florida Bar Association Board of Governors recently and unanimously rejected three proposed advisory opinions that would have limited a range of insurance litigation-management tools. AIA worked with the Florida Insurance Council, American International Cos., Liberty Mutual and others arguing for the rejection of these opinions on procedural, jurisdictional and substantive grounds.

A Question of Ethics

In each of these instances, attorneys supporting limitations on insurance litigation-management tools argued that such tools compromise attorney ethics. This is ironic, since restricting the ability of clients to exercise decision-making authority--which is what such attorney-supported limitations on management do--runs counter to attorney ethics rules. All of the recent decisions to reject limitations on insurance litigation management reaffirm what insurance companies and policyholders already know, but some lawyers clearly forget: Policyholders pay premiums in part so that insurers will manage claims-defense work to produce the most efficient, effective results for the policyholder and the company.

Like thousands of other businesses and government agencies, insurance companies use guidelines to manage lawsuits with consistency and efficiency. When lawyers try to prevent the use of guidelines, what they're really doing is silencing the client's right to say what they will or will not pay for, and to reserve to themselves unfettered freedom to do and bill as they please. The recent Texas, Arizona and Florida decisions are victories for client self-determination--the right of all clients to direct their own affairs and control their own bank accounts.

Setting Bounds

Imagine being unable to tell your mechanic that you don't want your radio repaired because, in the mechanic's "independent judgment," the radio is an essential part of your vehicle. Imagine being unable to tell a contractor that you don't want an extra room added to your house because, in the contractor's "independent judgment," your family size demands extra square footage. Imagine being unable to tell your attorney that you don't want him to fly first class or to hire 20 experts simply because, in the attorney's "independent judgment," those things will help the case. As with any other professional, attorneys are paid to make recommendations to their clients--but the clients must have the final say in how their money is spent.

The recent decisions in Texas, Arizona and Florida and similar actions should be brought to the attention of other courts, state legislatures and bar associations, because more attacks on established insurance litigation-management practices are likely. Despite industry successes, efforts continue to undermine litigation-management practices, including use of staff counsel, in many major states including California, Texas and Florida. If insurers fail to monitor these efforts and to be proactive, they--as well as businesses and policyholders--will find that they have lost the ability to stop the lawyers' meter from running.

Stephen Zielezienski is assistant general counsel, American Insurance Association, Washington, D. C.