98 Formal Ethics Opinion 10

July 16, 1998

Submission of Legal Bills to Audit Company at Request of Insurance Carrier

 

Opinion rules that an insurance defense lawyer may not disclose confidential information about an insured's representation in bills submitted to an independent audit company at the insurance carrier's request unless the insured consents.

 

Inquiry #1:

 

Law Firm is hired by Insurance Company to defend its insureds under its liability policies. Insurance Company requires great detail in Law Firm's bills for legal services and requires Law Firm to submit its bills directly to an outside audit company that is not affiliated with Insurance Company. The audit company makes all decisions about payment, nonpayment, or adjustment of Law Firm's bills. Bills are submitted on an interim basis during the pendency of the litigation and must contain detailed information about the legal services provided to the insured. May Law Firm submit its bills directly to the audit company rather than to Insurance Company?

 

Opinion #1:

 

Rules 1.6 and 1.7 provide in part:

 

Rule 1.6, Confidentiality of Information

 

(a)... .

 

(b)... .            

 

(c) Except when permitted under paragraph (d), a lawyer shall not knowingly:

 

(1) reveal confidential information of a client;

 

(2)....

 

(3) use confidential information of a client for the advantage of the lawyer or a third person, unless the client consents after consultation.

 

(d) A lawyer may reveal:

 

(1) confidential information, the disclosure of which is impliedly authorized by the client as necessary to carry out the goals of the repre sentation;

 

(2) confidential information with the consent of the client or clients affected, but only after consultation with them; ... .

 

Rule 1.7, Conflict Of Interest: General Rule

 

(a)....

 

(b) A lawyer shall not represent a client if the representation of that client may be material ly limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

 

(1) the lawyer reasonably believes the repre sentation will not be adversely affected; and

 

(2) the client consents after consultation which shall include explanation of the implications of the common representation and the advantages and risks involved.

 

(c) A lawyer shall have a continuing obligation to evaluate all situations involving potentially conflicting interests, and shall withdraw from the representation of any party the lawyer cannot adequately represent without using the confidential information of another client or a former client except as Rule 1.6 allows.

 

Bills for legal services are confidential and can, therefore, only be revealed with the consent of the client or clients affected, but only after consultation with them. Generally, there is no prohibition on submitting a client's legal bills to a third party for review at the client's request after consultation with the client. However, a tripartite relationship exists when a liability insurance carrier employs and pays the lawyer to represent and defend its insured. While the lawyer owes some duty of loyalty to the insurance carrier, the insured, rather than the insurance carrier, is the lawyer's primary client. See RPC 56 and CPR 255. "The attorney's responsibility is to the court and client which he serves before the court," and an insurance company may not exercise such control over the lawyer that would unduly dilute the lawyer's responsi bility to the court and the insured-client. CPR 326. The opinions cited here, while decided pursuant to the Code of Professional Responsibility and the Rules of Professional Conduct that were replaced by the Revised Rules of Professional Conduct now in effect, are consistent with current Rule 5.4(c) which provides that: "[a] lawyer shall not permit a person who recommends, engages, or pays the lawyer to render legal services for another to direct or regulate the lawyer's profession al judgment in rendering such legal services."

 

When the lawyer represents two clients, there is a delicate balance of the rights and duties owed by the lawyer to each client. With respect to the payment of legal fees, the interest of the insurance company and the insured are usually not the same. The insurance company usually has a paramount interest in control ling or reducing its defense costs, while the interest of the insured is generally to receive the best possible defense particularly if the claim may exceed the policy limits available for the insured's protection. Even when policy limits are adequate, the insured will not generally benefit from the release of any confidential information and 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 return benefit.

 

While a client may consent in some instances, notwithstanding a conflict, as provided by Rule 1.7(b), the official comment to the rule states that the test of whether the client's consent is sufficient to waive a material limitation of the lawyer's responsi bility, and whether the lawyer may properly ask a client to consent, is whether a "disinterested lawyer would conclude that the client should not agree." Rule 1.7, cmt.[5]. 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. There fore, the lawyer must reasonably conclude that there is some benefit to 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.

 

Some of the things that may be necessary for the lawyer to obtain, consider, and review in making this decision and consulting with the insured are:

 

(a) a copy of the agreement between the audit company and the insurance company;

 

(b) whether the audit company or the auditor may use or share the information with any other third party, including another insurance company;

 

(c) how the audit company controls access to the information;

 

(d) the level of security provided by the audit company;

 

(e) how the confidentiality of the information is maintained;

 

(f) the assurances given that the confidentiality of the information will be maintained; and

 

(g) the consequences for the client, if the release of confidential information waives the attorney-client or the work product privileges.

 

Inquiry #2:

 

Before divulging detailed information about the representation to the audit company, should Law Firm have the prior written consent of the insured?

 

Opinion #2:

 

While the client's written consent, when proper to seek such consent, is recommended, it is not required by the Revised Rules of Professional Conduct.

 

Inquiry #3:

 

May Insurance Company release the information in Law Firm's bills to the audit company without the consent of Law Firm or Insured?

 

Opinion #3:

 

The State Bar does not regulate insurance companies and, therefore, cannot prohibit an insurance company's release of information to third parties. However, if the lawyer is aware of this practice by the insurance company, the lawyer must inform the insurance company that she cannot represent an insured of the company if the company releases confidential information that the lawyer could not release in accordance with Opinion #1.

 


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