It is not uncommon for business litigation to involve insurance companies. In some instances, an insurance policy may provide coverage or a defense for litigation, such that an insurance company may pay the reasonable fees incurred by the policyholder's defense counsel. A client may be able to select their own counsel, or sometimes the insurance company selects an attorney to represent the client—then the insurance company contributes to the legal fees.

This can be a complex relationship by which insurer and policyholder can share a privilege, but where the insurer may have the right to control or direct the defense. Thus, attorneys may not always sufficiently appreciate their obligations to insurance companies and may assume that their only duties flow to the clients. Indeed, defense counsel can get into trouble—or risk the rights of their clients—by failing to treat insurance companies fairly in these situations.

Here are some tips for defense counsel working with an insurance company.

Keep the Insurer Informed

Under many policies that provide coverage for a legal defense, the insurer typically has certain rights of information. Although defense counsel is generally tasked with representing the client's interests, the defense counsel usually is not permitted to cut the insurer out of discussions on recent developments or strategy. Indeed, even if there is a coverage dispute, defense counsel may not be permitted to withhold important litigation-related information from the client.

For example, California's Cumis statute provides that, even if there is a coverage dispute between insurer and client that has resulted in the appointment of independent counsel, “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 timely to inform and consult with the insurer on all matters relating to the action.” Cal. Civ. Code 2860(d).

If an insurer is not properly kept informed as to the risks and developments of the litigation, that can be a basis for the insurance company to refuse to pay funds in support of a case. Then the defense counsel may be in a difficult situation with a client, who is asking why the insurance company is no longer supporting the case. It can be particularly awkward if it is because of the defense counsel's failure to properly inform the insurer.

Determining the right balance of what information to provide to the insurance company and how often can be unique to each case. Many lawyers in this situation find it helpful to just ask the insurance company representative regarding what information they need to assess the case and how often they expect to receive reporting. Sometimes, as discussed below, the insurance company will adopt litigation guidelines that provide guidance regarding how often communications are expected.

Follow the Billing Guidelines

Most insurance companies have adopted billing guidelines for use by defense counsel. Indeed, many clients throughout the corporate world have begun issuing guidelines for defense counsel to help manage skyrocketing costs of litigation.

In the insurance industry, billing guidelines may specify the rates, what costs will be reimbursed by the insurance company, how attorneys are to describe their time entries, and what tasks are considered outside the representation. These guidelines help insurance companies track expenses and confirm an efficient representation.

Some defense counsel, if unfamiliar with billing guidelines, may simply treat them as suggestions instead of requirements. However, courts nationwide have upheld the use of litigation guidelines to control billing. Thus, by failing to account for the guidelines, defense counsel may be doing themselves and their clients a disservice. Counsel may find that they are not getting paid as quickly as they would like, or that their fees are not being covered in full.

Again, if defense counsel is unsure of how to proceed, it is often helpful to just ask and avoid the risks associated with simply putting one's head in the sand.

Be Transparent About Settlement

The culmination of a representation by defense counsel, funded by an insurance company, may be the settlement of the matter. However, most attorneys handling such a settlement on behalf of an insurer-funded client will take care that they continue to meet their obligations to the insurance company, including by providing timely updates and information regarding the possibility of settlement or a proper valuation of settlement.

Typically, a client/policyholder may not settle or even offer settlement of a matter without the insurer's knowledge or consent. Thus, if a defense counsel enters into a settlement arrangement with an opposing party without keeping the insurance company in the loop, the insurance company may be supported in refusing to participate. Then, the client may blame the attorney for failing to keep everyone on the same page.

Further, defense counsel who are not used to working with insurance companies may view the amount of limits available as “free money.” For example, if a policy has $1 million limits, the defense counsel may feel justified in negotiating a settlement for $1 million because that is the amount available, even if the case is worth significantly less. Defense counsel may even feel tempted to instruct opposing counsel to demand $1 million, as if they are on the same team.

However, if the case is actually worth far less than $1 million, negotiating or working with opposing counsel to compel the insurance company to pay more for the case than it is worth can backfire or even lead to future litigation. Defense counsel in such a situation should be wary of gambling with the insurance company's money, as many insurers can sense a “set up” (or hire counsel to help them navigate such issues).

For those defense counsel who are less experienced in working with insurance companies, there can be concern that they are harming their client's interests by failing to follow the rules. However, by considering their obligations to the insurer, defense counsel can help ensure a positive resolution for both client and insurer.

Shari L. Klevens is a partner at Dentons US in Atlanta and Washington and serves on the firm's U.S. board of directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons' global insurance sector team.

Alanna Clair is a partner at Dentons US in Washington and focuses on professional liability and insurance defense. Shari and Alanna are co-authors of “The Lawyer's Handbook: Ethics Compliance and Claim Avoidance” and the upcoming 2019 edition of “Georgia Legal Malpractice Law.”