A lawsuit is filed, the defendant gives notice to the insurers, and in the meantime engages counsel to start the defense.  Several rounds of coverage opinion letters go back and forth, and finally – the insurer accepts the defense of the lawsuit (usually subject to a reservation of rights).  Meanwhile, defense counsel has been doing his or her job.  So surely, now all is well.  Defense bills incurred before the insurer agreed to defend are submitted for reimbursement. 

But then the insurer’s “litigation guidelines” arrive – explaining just how much of the insured’s defense the carrier will NOT pay for.  These guidelines often include completely unrealistic restrictions on the way the defense must be conducted.  Frequently, the guidelines exclude reimbursement for (and thus can be looked at as an insurer-imposed bar) such things as discussions between members of the defense team working on the case; emails between the defense team; leaving or listening to voicemails; and the attendance of more than one attorney at hearings or meetings, without regard for the requirement of attorneys with specialist knowledge.  Additionally, litigation guidelines regularly impose arbitrary restrictions on legal research; and arbitrary time limits on drafting of pleadings, no matter how complex.  And often, insurers impose these guidelines retroactively – back to the beginning of the case and long before they sent them to either the insured or to defense counsel.

These guidelines are a constant source of tension between independent defense counsel and insurer, and a potential financial drain for the insured – already hit by the reality that insurers pay absolute rock bottom hourly rates for defense counsel, no matter how complex the case and no matter what the wording of Civil Code Section 2860.

So what are the insured’s rights with regard to these onerous and often completely unrealistic “litigation guidelines”?  First, it’s worth remembering that the Litigation Guidelines do not form any part of the policies, and the policies make no reference to them.  As such, they are not part of any contract, and – at least in theory – are not binding on the insured.
It’s also worth arguing that the defense invoices submitted for reimbursement reflect the considered judgment of experienced defense counsel, acting in the client’s best interest and in a manner consistent with ethical obligations.  Insurers cannot supplant defense counsel’s judgment with its own, and California courts have questioned the propriety of litigation guidelines:

Under no circumstances can such guidelines be permitted to impede the 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.

Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1009 n.9 (1998) (emphasis in original); see also In the Matter of the Rules of Prof. Conduct and Insurer Imposed Billing Rules and Procedures, 2 P.3d 806, 334-36 (Mont. 2000) (concluding that a litigation guideline which requires defense counsel to obtain insurer approval before making strategic decisions “fundamentally interferes with defense counsels’ exercise of their independent judgment.”)

Additionally, Rule 1-600(A) of the California Rules of Professional Conduct prohibits attorneys from participating in non-governmental activities or programs “furnishing, recommending or paying for legal services, which allows any third person or organization to interfere with the member’s independence of professional judgment, or with the client-lawyer relationship.”  Notes to the Rule clarify that the rule is “not intended to override any contractual agreement or relationship between insurers and insureds regarding the provision of legal services.”  Since an insurer’s Litigation Guidelines never formed part of any contract the insured, implementation of those guidelines, to the extent they interfere with defense counsel’s professional judgment or interfere with the client-lawyer relationship, is barred by Rule 1-600(A).

And clearly, imposing the sort of restriction listed earlier interferes with the defense of the case.  Insurers, though, strongly defend the guidelines, arguing that they simply seek to impose “reasonableness” on defense counsel.  This ignores the fact that defense counsel has an ethical obligation to be reasonable in any event.  And usually, it is the guidelines that are unreasonable.

As with most disputes, the best answer lies in clear lines of communication.  This includes setting up a direct line of contact with the person who actually audits the bills is essential – as he or she is the person wielding the red pen, and who probably has no other knowledge of the case other than what’s written on the bills. 

Also helpful is an understanding that in the real world, the insured will most probably not get full reimbursement.  The goal becomes to find the cost effective balance – getting the biggest amount of reimbursement possible with the least amount of time spent arguing about it – time that is itself not reimbursable.