In Re the Rules of Professional Conduct
2000 MT 110, 2 P.3d 806, 299 Mont. 321 (2000)
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Rule of Law:
An attorney hired by an insurer to defend an insured owes a duty of undivided loyalty to the insured, who is the attorney's sole client. Therefore, an attorney violates the Rules of Professional Conduct by agreeing to insurer litigation guidelines that require prior approval for legal services, and by submitting confidential billing information to third-party auditors without the client's contemporaneous, fully informed consent.
Facts:
- Insurance companies hire and pay for attorneys to represent their policyholders (the insureds) in litigation.
- Insurers frequently impose 'billing and practice rules' or 'litigation management plans' on the attorneys they retain.
- These rules often require the defense attorney to secure the insurer's prior approval before performing professional services such as scheduling depositions, undertaking legal research, employing experts, or preparing motions.
- The rules also commonly require attorneys to submit detailed descriptions of their professional services for review.
- Insurers sometimes use third-party auditing companies to review these detailed billing statements to evaluate compliance with the guidelines and the reasonableness of charges.
Procedural Posture:
- Petitioners, a group of attorneys, filed an application for original jurisdiction and declaratory relief directly with the Supreme Court of Montana.
- The Supreme Court of Montana accepted original jurisdiction over the matter.
- The Court ordered the Petitioners to identify insurers (Respondents) doing business in Montana who would be bound by the decision.
- The Respondents moved for an evidentiary hearing to develop a factual record.
- The Supreme Court of Montana denied the request for an evidentiary hearing, ruling that the issues presented were purely questions of law.
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Issue:
Do insurer-imposed litigation guidelines that require defense counsel to (1) obtain the insurer's prior approval for litigation tasks and (2) submit detailed billing statements to third-party auditors violate Montana's Rules of Professional Conduct regarding independent professional judgment and client confidentiality?
Opinions:
Majority - Justice Leaphart
Yes, insurer-imposed guidelines that require prior approval for litigation tasks and the submission of detailed billing information to third-party auditors violate the Rules of Professional Conduct. Regarding prior approval, the court held that the insured is the sole client of the defense counsel, rejecting the 'dual representation' or 'co-client' model. Because the attorney's duty of undivided loyalty and independent professional judgment is owed exclusively to the insured, an insurer's requirement for pre-approval of legal tasks constitutes impermissible interference under Rules 1.8(f) and 5.4(c). The threat of withholding payment for unapproved work compromises the attorney's ability to provide competent representation and creates a conflict of interest, as well as a substantial appearance of impropriety. Regarding third-party auditors, the court held that submitting detailed billing statements without the client's informed consent violates the duty of confidentiality under Rule 1.6. Third-party auditors are not within the 'magic circle' of privileged communication, as they do not share a common legal interest with the insured and are potential adversaries. A blanket consent provision in an initial insurance contract is insufficient; for consent to be valid, it must be contemporaneous with the disclosure and fully informed, meaning the client understands the specific information being shared and the potential legal consequences, such as waiver of privilege.
Analysis:
This decision firmly establishes the insured as the sole client of defense counsel in Montana, prioritizing the attorney's ethical duties of loyalty and confidentiality over the insurer's financial interest in controlling litigation costs. The ruling significantly impacts the tripartite relationship (insurer-attorney-insured) by invalidating common cost-containment practices like prior-approval requirements and third-party audits without specific, contemporaneous consent. This precedent strengthens protections for insureds, ensuring their representation is governed by the attorney's independent professional judgment rather than an insurer's business directives. Consequently, insurers operating in Montana must revise their litigation management programs to comply with these ethical boundaries.
