Abstract

This Article will use the current controversy over the professional responsibilities of insurance defense lawyers to argue that state bars and other authorities should regulate attorney-client relationships only when reliable information demonstrates the advantage of doing so. Since the mid-1990s, advisory committees and courts have issued a plethora of opinions on insurance defense practices." These opinions question or prohibit long-standing practices, including the use of staff counsel, litigation management guidelines, flat fees, and fee audits. Yet, there is no evidence that these practices are harmful. Regulators sprang into action because defense lawyers asked them to, not because policyholders or insurers complained or because there was any evidence of danger to anyone. This is precisely the situation in which one should expect regulations to be counterproductive.

Several reasons support the choice of insurance defense ethics as an example. First, defending covered lawsuits is a private interest activity. The lawsuits concern mainly money sought as compensation for physical or economic injuries, and the point of the tripartite relationship is to save carriers and policyholders money by minimizing losses to claimants. Second, defense lawyering is a mainstay of litigation. Insurance companies provide lawyers in a sizeable fraction of all civil cases. The decision to subject defense lawyers to significant regulations is therefore a momentous one. Third, insurance companies are sophisticated, high volume purchasers who participate in the market for legal services over the long haul. They should develop excellent working relationships with attorneys without the help of paternalistic regulations. Fourth, there is reasonably good empirical data relating to covered claims. One can gauge some matters, such as the frequency with which policyholders incur losses above the policy limits, with precision. One can therefore evaluate empirical claims instead of taking them on faith. Fifth, defense lawyering has been a practice area for over a century, and defense lawyers have handled millions of cases. Their practices are well known, and professed needs to change their practices for ethical reasons should be easy to evaluate.

This Article will proceed as follows. Part I will provide a brief overview of recent regulatory developments relating to the practice of insurance defense. Part II will argue that these developments occurred because lawyers pressured advisory committees and other authorities to give them greater control of decisions and easier access to fees. Part II will explain the danger of waste that arises when lawyers are free to spend insurance companies' dollars. Part IV will show that no empirical evidence of harm to policyholders supports the contention that defense lawyers should have greater freedom from carriers' efforts to manage litigation. Separate sections on staff counsel operations, flat fee arrangements, litigation guidelines, and third-party fee audits will tailor this general point to the specific activities that have recently been the targets of so much regulation. Part V will draw a brief conclusion.

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