Litigation Management: What Legal Defense Costs Are Reasonable and Necessary?

Article excerpt

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.

A. 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. …