Jeffrey Steinberg’s article entitled “Meaning and Enforceability of Insurance Company Guidelines” has been published in the New York Law Journal. Access the full article by following the “Read More” link below.

Insurance company litigation management guidelines—dictating the carrier’s protocols for billing and for handling of the insured’s defense—are the bane of existence of the insurance defense bar and the subject of occasional controversy for coverage counsel. Although we have (at different times) worn all three hats (defense counsel, coverage counsel for insurers and coverage counsel for insureds), in the latter capacity we have recently witnessed some over-the-top behavior by insurers warranting pushback, as discussed below.

In particular, we have witnessed one insurer’s onerous oversight of defense counsel in a complex high exposure matter, including (1) its past handling of defense bills by imposing reductions which have been arbitrary and massive and (2) its ongoing restrictive instructions severely limiting defense counsel’s ability to perform activities necessary to mount an effective defense for the insured client.

In that matter, the insurer reduced the defense bills by approximately 25% (out of a total well in excess of six figures) and issued instructions effectively prohibiting a variety of defense activities as basic as attendance at depositions. The crux of the insurer’s position was that it was justified in taking these steps based upon its litigation management guidelines. There is room to dispute that justification.

At the outset, it should be noted that the applicable policy contained a provision granting the insurer the right to direct the defense, as well as an endorsement enabling the insured to select its own defense counsel subject to compliance with the litigation management guidelines. However, it is at least arguable that those facts did not give the insurer the unfettered right to control the insured’s defense or to pay whatever it choose for that defense, especially where the policy also defined “claims expenses” as “reasonable legal fees, costs and expenses.”

The case law in New York is clear. The seminal Court of Appeals decision, Feliberty v. Damon, 72 N.Y.2d 112 (1988), stated:

“First, … the insurer necessarily must rely on independent counsel to conduct the litigation. Second, the paramount interest independent counsel represents is that of the insured, not the insurer. The insurer is precluded from interference with counsel’s independent professional judgments in the conduct of the litigation on behalf of its client (Trieber v. Hopson, 27 A.D.2d 151, 153, 277 N.Y.S.2d 241; American Employers Ins. Co. v. Goble Aircraft Specialties, 205 Misc. 1066, 1075, 131 N.Y.S.2d 393; see also, Code of Professional Responsibility EC 5-17, 5-21, 5-23).”

See also Federal Insurance. Co. v. North American Specialty Insurance Co., 47 A.D.2d 52 (1st Dept. 2007) (assigned counsel’s duty is to insured and where there is a conflict between insured and insurer, it cannot represent both); Ladner v. American Home Assurance Co., 201 A.D.2d 302 (1st Dept. 1994) (“tactical decisions should be in the hands of an attorney whose loyalty to [the insured] is unquestioned and not an attorney employed by [the insurer] with a potential for a conflict of interest”).

The ethics rules say the same, to wit, that retained defense counsel has one client, the insured, not the insurance company. The fact that the insurer pays the legal fees for the defense is of no consequence; the key is who the lawyer is defending. Rule of Professional Conduct 5.4(c) states that retained counsel cannot allow 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 shall not permit a person who recommends, employs or pays the lawyer to render legal service for another to direct or regulate the lawyer’s professional judgment in rendering such legal services ….”

Cases and ethics opinions in other jurisdictions are to the same effect. See D. Wolf, How To Deal With Insurers’ Litigation Management Guidelines, Law 360 (May 15, 2018); P. Laun, Managing Litigation by Fiat: Can an Insurer Impose Litigation Guidelines on Defense Counsel Hired To Defend a Potentially Insured Claim?, Insurance Policyholder Advocate Insights (March 18, 2013). See generally Grasing & Associates, When a New York Attorney Is Assigned by an Insurance Company To Represent an Insured, Who’s the Client?, Justia (May 10, 2013).

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

Furthermore, as to billing, it is well settled that “[t]he failure to receive defense costs under a professional liability policy at the time they are incurred constitutes an immediate and direct injury sufficient to [constitute] irreparable harm ….” Li v. Certain Underwriters at Lloyd’s, London, 183 F. Supp. 3d 348 (E.D.N.Y. 2016); accord XL Specialty Insurance Co. v. Level Global Investors, L.P., 874 F. Supp. 2d 263 (S.D.N.Y. 2012) (citing In re WorldCom Securities Litigation, 354 F. Supp. 2d 455 (S.D.N.Y. 2005)). See generally Telenor Mobile Communications AS v. Storm, 2009 WL 585968 (S.D.N.Y. 2009) (refusing to impose “meat-ax” reductions to bills).

Here, the fact that the insurer may have made partial payment of the bills and its allowance of some limited defense activities should not obviate either the existence of a conflict or the irreparable harm.

Although this specific story is not yet over, we presume that it (like other similar preceding scenarios) will ultimately be settled in light of the insurer’s reluctance to litigate the interpretation and enforceability of the guidelines.

This article is also on Meaning and Enforceability of insurance Company Guidelines