Insurance companies want rigid cost control. Health maintenance organizations pioneered this approach to profitability during the last seven or eight years. Casualty insurers now use the same methods. They limit work, time and expenses of lawyers who defend you.

Under their policies, insurers pay damages against you and pay lawyers to defend claims. There is no uniform approach to reducing defense costs. Typically, however, companies prepare "litigation management guidebooks," which bind defense counsel under contracts between insurance company and lawyer.

Companies then assign attorneys to defend policyholders, who are their actual "clients."

Invalid Charges
Guidebooks require that billings go to independent auditors, who decide whether charges are valid. If a charge is outside the guidelines, the insurance company won't pay it. Restrictive provisions limit numbers of depositions, research time greater than a fixed number of hours, use of experts, purchases such as models, maps and drawings, and use of expert witnesses.

All this leaves you, the insured person, out in the cold. An adjuster frequently controls the case. The adjuster isn't a lawyer, and he or she is paid by the insurance company.

Conflicts between loyalties to the carriers who provide ongoing business and to you as an insured person are commonplace. What is happening now is a new determination of insurance bureaucrats to micro- manage every aspect of defense litigation.

Some companies require elaborate case-management plans, evaluating liability and damages and recommending settlement or litigation. Also, just as insurers impose new requirements, they reduce willingness to pay for increased administrative burdens.

Ethics To The Rescue
Until late last year, the legal profession's response didn't amount to much. Slowly, however, ethics committees are taking on insurance-company over regulation.

The Indiana State Bar's ethics committee issued two opinions. In the first, the committee ruled that attorneys cannot contract for legal services with casualty-insurance companies whose agreements put the lawyer at risk of ethical violations when representing a policyholder.

The committee looked at 22 pages of insurance bureaucrats' "litigation guidelines and procedures for defense counsel." These required a senior litigator, an associate and a paralegal or law clerk for each defense. The guidelines set hourly rates for each category.

If the adjuster decided that work assigned to a senior lawyer should have gone to a law clerk, the company paid only the clerk's rate.

In Conference
If two or more team members conferred, only the senior attorney could bill for time unless the adjuster approved the conference in advance.

Large tasks such as organizing and indexing medical records were "clerical," for which the carrier would not pay.

Indiana committee members said lawyers can't allow anyone to impair duties to clients. "The insured," said the committee, "is the primary client to whom all ethical duties are owed."

If counsel can't negotiate away the problems, "the representation must be declined." Check Indiana State Bar Assn. Legal Ethics Comm., Op.3 of 1998.

Second Opinions
Indiana's second opinion challenged contracts requiring that lawyers' bills go to auditors hired by insurance companies. Contracts required detailed bills. These details included charges for letters and telephone calls, with names of persons receiving calls and letters. Other required details included names of persons interviewed, the substance of discussions and of research.

All such information is confidential and privileged, said the Indiana committee. Lawyers can't release this data unless the insured person approves. Statements may become available to opponents if disclosed to independent auditors, who have no duty to the client.

Such disclosure may waive lawyer-client and work-product privileges, which protect information about you, and information that your lawyer generates. Insurance bureaucrats don't know about privileges, because the secrets are not theirs.

At a minimum, said the committee, a lawyer must consider carefully what to say in bills. If counsel were to follow this advice, of course, nothing would be left for auditors to read.

Remember, privileges and confidentiality are not waived piecemeal. Once any part is gone, everything is unprotected. Your consequences could be profound.

For details, check Indiana State Bar Assn. Legal Ethics Comm., Op. 4 of 1998.

Don't Bother Asking
Alabama's ethics commission went further than Indiana's on disclosures to auditors. The danger to privilege is so great, it said, that a lawyer shouldn't even ask a client to approve a waiver.

The Alabama commission responded to many inquiries about insurance-industry contracts similar to those used in Indiana, and came out in just about the same place. This, said Alabama in State Bar Disciplinary Comm'n, Op. RO-98-02, is out of line.

These issues will go in two directions. States will impose their ethical rules on defense lawyers and their contracts with insurance companies. Insurance bureaucrats won't give up.

In addition, the word inevitably will get out. Unhappy clients, perhaps those hit with judgments more than policy limits, will believe themselves inadequately defended. They will believe that depositions were too few, research too scanty, expertise too slight and preparation too modest. They'll chase defense counsel and insurers for resulting damages.

Insurance bureaucrats will prosper. The first law of bureaucracy says that empires, once built, never go away.