Insurers sometimes audit defense counsel’s fee bills as a cost control measure. A billing audit “encompasses a range of services, from an examination of the face of the legal bill for improper charges or errors to a detailed analysis of original time records, attorney work product, expenses and hourly rate benchmarks, and more.” Audits examine hourly rates, background information about the legal matter and lawyer work product to gauge quality, tactics, strategy and performance in context. Ethical problems arise when bills contain confidential or privileged information. Billing records and underlying documentation may reveal the motive of the client in seeking representation, litigation strategy, or the specific nature of the services provided to the insured – information that is generally protected by confidentiality rules, attorney-client privilege, or both. Disclosure of the information required to perform an audit may be particularly problematic when coverage issues exist, as work product by defense counsel could harm the insured’s interests with regard to the coverage issue.
Formal Opinion 01-421, addresses ethical obligations when an insurer instigates a third-party audit. The opinion states: “A lawyer may not…disclose the insured’s confidential information to a third-party auditor hired by the insurer without the informed consent of the insured.” In general, defense counsel may inform the insurer about the litigation through periodic status reports, detailed billing statements and the submission of other information, which usually advances the interests of both the insured and the insurer in the representation. These disclosures are impliedly authorized to carry out the representation. However, a lawyer may not disclose the insured’s confidential information to a third-party auditor designated by the insurer without the insured’s informed consent. The attorney should advise the insured in writing as to:
- the nature of the information sought;
- the legal and non-legal consequences of the client’s decision to disclose or not disclose the information;
- the extent of his obligation under the insurance policy to authorize disclosures to third parties;
- consequences of consenting or not consenting to disclosure where the insurance policy requires the insured to cooperate in the defense of the claim and where failure to agree to disclosure could risk loss of coverage;
- the fact that the insurer may interpret the “duty to cooperate” clause in its policy as meaning that the insurer has the right to disclose confidential information to third-party contractors; and
- the risk that the information disclosed to the auditor could be obtained by others directly or indirectly as a result of the disclosure, the risk that a disclosure could involve a waiver of the attorney-client privilege, and the risk that the disclosure could be used to the insured’s disadvantage.The attorney must respond to the auditor’s requests in a manner that safeguard’s the client’s interests, including minimizing the extent to which information relating to the representation is disclosed to the auditor and avoiding (if possible) disclosures that could result in a waiver of the attorney-client privilege (for example, by redacting certain descriptive portions of fee bills).