Litigation management: what legal defense costs are reasonable and necessary?

• Author: Tollin, Howard M.
• Position: Insurance company coverage of insured's costs

WHAT are the proper legal standards and guidelines for determining the reasonableness of acceptable legal fees and costs, particularly when insurance companies retain counsel to defend claims against their covered insureds and to defend themselves against coverage claims by insureds?

In defending their insureds, insurance companies are responsible to pay only reasonable and necessary defense costs. In order to minimize legal fees and costs, defense counsel should be given guidelines by the insurer or follow standards that comport with established case law. In various types of settings, insurance companies may lose the "right to control" the insured's defense, but still must pay or reimburse the insured's reasonable and necessary defense costs.

The duty to defend clause not only obligates the insurer to provide a defense, but it also gives the insurer the right to control the insured's defense. After the insured has tendered notice of a lawsuit, the insurer must determine whether there is a conflict of interest between it and the insured as to how the lawsuit should be defended. When the insurer reserves its right to deny coverage later, there is the potential for a conflict of interest. Courts have held that in such conflict of interest scenarios, the insurance company has a choice between either hiring independent counsel to control the defense or reimbursing the insured for its selection of private counsel.(1)

Particularly in situations in which the insurance company does not control the defense, it should monitor and audit claimed defense costs carefully. The company should review bills carefully on receipt, and it may decide to audit the file periodically. It also may decide to litigate the unreasonableness of defense costs. Legal audits and litigation over excessive fees and disbursements have proved successful in reducing past costs and dissuading future excessive costs.

RECOVERY OF ATTORNEY'S FEES

The case law is well settled that an insurance company is liable only for the reasonable and necessary expenses incurred by the insured in defending the claim.(2) The party seeking recovery of attorney's fees has the burden of establishing that both fees and expenses are reasonable and necessary.(3) The key factors for courts to consider in determining attorney's fees are the time spent by each attomey handling the matter and the reasonable hourly rate for each attorney in a firm. In order to avoid litigating retrospective legal costs, however, the insurance company should establish its own written guidelines and provide them to defense counsel.

GUIDELINES

Insurance companies should provide guidelines to defense firms and not only evaluate compliance with the guidelines periodically but also provide constructive feedback to counsel. Among the items to be discussed, along with handling the claim and litigation strategy, are staffing and billing. The following suggested billing guidelines may be instructive to both the insurance company and defense counsel as to reasonable and necessary defense costs.

1. Litigation Team

   The defense firm should designate a team of lawyers and legal assistants who will be involved in the defense of the case.(4) Although there may be future additional personnel assignments as the case progresses to reflect attrition or heightened activity, defense counsel should identify to the insurance company all individuals who will be billing on the file. The company should receive notice of additional personnel assignments concurrent with the first bill presented after the biller commences working on the case.

   Defense counsel should identify the individuals as senior partner, junior partner, senior associate, junior associate, paralegal or clerk and provide the billing rate or rates for each. It is not unusual for trial work by a lead trial attorney to be billed at a higher rate than pretrial litigation work.(5) The litigation team and billing rates for each member should be approved by the company prior to or contemporaneously with commencement of work on the file. Defense counsel also must seek the company's consent before retaining local counsel, experts, vendors, consultants or other third parties. Retention agreements and rates should receive prior approval.

2. Hourly Rates

   To establish reasonable hourly rates, courts will consider the prevailing market rate in the relevant community for sinlilar insurance defense work paid by the insurance industry.(6) The fee is calculated by multiplying the necessary number of hours by the reasonable hourly rate, referred to as the "lodestar." The lodestar may be enhanced because of the quality of representation.(7) One federal court listed these factors for primary consideration:

   ... (1) the time and labor required, (2) the novelty and difficulty of the questions, (3) the skill required to perform the legal service properly, (4) the preclusion of other employment by the attorney due to acceptance of the case, (5) the customary fee for similar work attorney due to acceptance of the case, (5) the customary fee for similar work in the community, (6) the contingency of the fee, (7) time limitations imposed by the client or the circumstance, (8) the amount involved in the results obtained, (9) the experience, reputation and ability of the attomey, (10) the undesirability of the case, (11) the nature and length of the professional relationship with the client and (12) awards in similar cases.(8)

   After that, the court stated that other factors should be given secondary consideration to increase or decrease the fee.

3. Hours Billed

   1. Training

      The tasks performed by the litigation team should be assigned by the senior partner in order to ensure that work is being performed in an efficient and cost-effective manner. The insurance company should not be obligated to pay for time spent on training or general improvement of legal skills - such as computer training,(9) training a recent graduate,(10) or educating untrained personnel or leaming basic law,(11) or educating people on the case to "get up to speed," or to replace prior personnel.(12) The insurance company will only pay for the acquisition of case specific knowledge.(13)

      Research Projects

      While an insurance company will pay for all appropriate defense-related research, it will not pay for research projects that are unnecessary or excessive, such as researching well-known points of law,(14) but it should pay for updating research. Time spent on research projects should be reasonably conducted and properly supervised. Defense counsel should notify the company conceming research projects that will exceed an agreed-on number of hours.

   3. Excessive Charges

      Lawyers are ethically obligated to exercise their "billing judgment" to remove from the fee requests charges for hours that are "excessive, redundant, or otherwise unnecessary."(15) Courts examining applications for attorneys, fees will review the legal invoices or analyses in order to determine whether the application seeks recovery for hours that are excessive, redundant or otherwise unnecessary. Some examples are spending 90.65 hours responding to a petition for certiorari;(16) spending time on overkill or a standard of perfection;(17) spending $1,873.50 on drafting and responding to press inquiries when that activity had no bearing on counsel's investigation," spending time on multiple memoranda on a single issue, supplementary repetitious pleadings, separate motions and reply briefs for tag- along cases; notice of filings and additional notice of relevant filings, unnecessary paperwork, billing unrecorded time and fighting on dead issues;(19) allowing student law clerk to spend 20 hours reviewing file and hours assembling and reviewing legal structure and case file;(20) and allowing several lawyers to read the same documents as a matter of interest.(21)

      The most obvious requisite is that the work billed be related to the case for which the fee is sought. If a defense firm is defending more than one case for an insurer, it must carefully, clearly and separately allocate its time to each case.(22)

   4. Contemporaneous Time Records

      At all times, defense counsel must maintain contemporaneous time records supporting all time entries on invoices submitted for payment, and fees have been reduced by courts when this has not been done.(23) Each billing invoice should contain each individual's time, usually recommended in...