Chapter 2. Ethics & Professionalism - Insurance defense practice - scope & fees
Rule 1.2(4) provides that “[w]hen a lawyer has been retained by an insurer to represent an insured, the representation may be limited to matters covered by the insurance policy.”1 But the terms of an insurance policy may not limit the obligations owed by insurance company lawyers to insured clients, including the duty to inform the insured defendant of settlement offers and of the opportunity to settle within policy limits.24:15. Insurance Defense Practice-- Fee Arrangements
Cost cutting efforts by insurance companies have led to concerns about the ability of defense counsel to fulfill duties of professional independence, competence and loyalty to the insured client, with concerns about “managed advocacy” paralleling the concerns about the quality of “managed care” in the health care field.
The use of in-house or “staff counsel” defense counsel, in which all lawyers and staff are actually salaried employees of the insurance company, is the oldest and perhaps the most frequently used cost-cutting strategy. Georgia, along with other jurisdictions, has rejected the argument that use of such “staff counsel” constitutes unauthorized practice of law by a corporation, although such staff counsel are subject to Bar rules like any other attorney.1
Another example of cost-cutting measures is bundled flat fee or capitation contracts whereby a defense firm agrees to handle all of an insurer's cases in an area for set rate per case, or per stage of each case, or all the cases collectively for a flat monthly or annual compensation. While these arrangements are not per se unethical, scrutiny is required. A ruling from the Oregon Bar suggests that such arrangements should be viewed on a case by case basis, and that if flat fee were “so low as to compel the conclusion that Insurer was seeking to shift its duties to Insureds and to enlist Attorney's assistance in doing so, Attorney could not ethically accept the representation.” 2 An Iowa ruling concluded that flat fees are improper unless each of the following conditions are met: “(1) The service is inherently capable of being specifically stated and circumscribed, and (2) There appears to be no probability of further professional services (other than those specified) being required in handling the matter, and (3) The agreement provides that in any instance where counsel believes additional professional service has become necessary he shall furnish it at his or her regular hourly rate.” 3 However, the Kentucky Supreme Court has held that it is a violation of ethics rules for attorneys to enter arrangements whereby a defense firm will handle all of the insurer's work for a flat fee.4
Any form of cost-cutting and corner-cutting defense arrangements raises concerns when an insured has potential liability exposure above the amount of policy limits and the insurer refuses to settle.5 It appears, however, that some of the insurers most likely to “low ball” the settlement offers in every case attempt to resolve the ethical and bad faith issues by paying, with little question, the occasional judgment in excess of policy limits.
1 State Bar of Georgia, Rules of Professional Conduct, Rule 1.2 cmt. 4.
2 See, e.g., Hartford Acc. & Indem. Co. v. Foster, 528 So. 2d 255 (Miss. 1988).
1 Coscia v. Cunningham, 250 Ga. 521, 299 S.E.2d 880 (1983); American Home Assur. Co., Inc. v. Unauthorized Practice of Law Committee, 121 S.W.3d 831, 2 A.L.R.6th 783 (Tex. App. Eastland 2003). See generally Michelle Brown Cashman, Annotation, Propriety of Insurers' Use of Staff Attorneys to Represent Insureds, 2 A.L.R.6th 537, §§3, 4 (2005).
2 Ore. State Bar Ass'n, Formal Op. 1991-98 at 2 (1991).
3 Iowa Ethics Advisory Comm., Formal Op. 86-13 at 3 (1987). See also Utah State Bar, Ethics Advisory Op. Comm., Op. 02-03 (2002) (fixed fee agreement is permissible, but cannot “impair materially the lawyer's independent professional judgment in representing an insured”); Supreme Court of Ohio, Bd. of Comm'rs on Griev. and Disp., Op. 97-7 (1997) (fixed fee agreement is permissible, but “must provide reasonable and adequate compensation; it must not be excessive or ... inadequate ...; and the expenses of litigation ... must ultimately be borne by the insurer). See also Compensation Or Direction Of A Lawyer By A Third Person, Restatement (Third) of Law Governing Law. §134 (2000); Annotation, Propriety of Insurers' Use of Staff Attorneys to Represent Insureds, 2 A.L.R.6th 537.
4 American Ins. Ass'n v. Kentucky Bar Ass'n, 917 S.W.2d 568 (Ky. 1996).
5 See Cotton States Mut. Ins. Co. v. Brightman, 276 Ga. 683, 684, 580 S.E.2d 519 (2003) (“insurance company may be liable for the excess judgment entered against its insured based on the insurer's bad faith or negligent refusal to settle a personal claim within the policy limits”).
On May 22, 2018, former State Bar of Georgia president Ken Shigley will be a candidate for election to the Georgia Court of Appeals. The only other candidate is Ken Hodges, a former Dougherty County District Attorney. Ken Hodges was the Democratic Party nominee for Attorney General in 2010.