Can a North Carolina insurance defense lawyer send detailed bills to the insurer's outside audit company?

Plain-English summary

An insurer required its defense firm to submit detailed bills directly to an unaffiliated outside audit company, which decided whether to pay, reduce, or reject them. The committee addressed whether the firm could send those bills to the audit company.

The opinion held that bills for legal services are confidential and can be revealed only with the affected client's consent after consultation (Rule 1.6). Generally there is no bar to submitting a client's bills to a third party for review at the client's request, but a tripartite relationship exists when a liability insurer hires and pays a lawyer to defend its insured: although the lawyer owes some duty of loyalty to the insurer, the insured, not the insurer, is the primary client (RPC 56; CPR 255, 326), and Rule 5.4(c) bars letting the payor direct the lawyer's professional judgment. With two clients, the lawyer balances duties to each, and on fees their interests usually diverge: the insurer wants to control defense costs, while the insured wants the best defense, and the insured generally gains nothing from releasing confidential information, which may waive the insured's attorney-client or work-product privilege. Under Rule 1.7(b) and Comment [5], the test is whether a disinterested lawyer would conclude the client should not agree; where the insured could be prejudiced and gains nothing, a disinterested lawyer would not conclude the insured should agree absent special circumstances. So the lawyer must reasonably conclude there is a benefit to the insured outweighing any reasonable expectation of prejudice, or that the insured cannot be prejudiced, before seeking the insured's informed consent after adequate consultation. The opinion listed factors to obtain and review first, including the audit company's agreement with the insurer, whether the auditor may share the information, access controls, security, confidentiality assurances, and the consequences of a privilege waiver.

The insured's written consent, when proper to seek it, is recommended but not required. As for the insurer itself releasing the bills, the State Bar does not regulate insurers and cannot prohibit that release, but if the lawyer is aware the insurer does so, the lawyer must tell the insurer she cannot represent its insured if the insurer releases confidential information the lawyer herself could not release consistent with Opinion #1.

Currency note

This opinion was issued in 1998, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it cites the rules under the numbering then in effect (Rule 1.6, Rule 1.7(b) and Comment [5], Rule 5.4(c)), relying on RPC 56 and earlier Code opinions (CPR 255, 326). Later guidance on relying on insurer-obtained consent appears in 99 Formal Ethics Opinion 11. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific requirement mentioned here.

Common questions

Q: Are an insurance defense lawyer's bills confidential in North Carolina?

A: Yes. The opinion held that bills for legal services are confidential and may be revealed only with the affected client's consent after consultation (Rule 1.6).

Q: Who is the primary client when an insurer hires the lawyer to defend its insured?

A: The opinion held the insured, not the insurer, is the lawyer's primary client (RPC 56), and that Rule 5.4(c) bars letting the insurer direct the lawyer's professional judgment.

Q: Can the lawyer send bills to the insurer's audit company with the insured's consent?

A: Only conditionally. The opinion held the lawyer must first reasonably conclude there is a benefit to the insured outweighing the risk of prejudice (including privilege waiver), or that no prejudice is possible, before seeking the insured's informed consent.

Q: What if the insurer itself sends the bills to the audit company?

A: The opinion held the State Bar cannot regulate insurers, but if the lawyer knows the insurer releases information the lawyer could not release herself, the lawyer must tell the insurer she cannot represent its insured under those conditions.

Background and rules framework

The opinion applied North Carolina Rule 1.6 (confidentiality), Rule 1.7 (conflicts of interest, including the disinterested-lawyer test in Comment [5]), and Rule 5.4(c) (no third-party direction of professional judgment), the analogues to Model Rules 1.6, 1.7, and 5.4(c), to the tripartite insurance-defense relationship. It relied on RPC 56 and the predecessor Code opinions CPR 255 and CPR 326.

Citations and references

Rules of Professional Conduct:

• MR 1.6 (confidentiality of information) / NC Rule 1.6
• MR 1.7 (conflicts of interest) / NC Rule 1.7(b), Comment [5]
• MR 5.4 (professional independence) / NC Rule 5.4(c)

Other opinions cited:

• NC RPC 56; CPR 255, 326: the insured is the defense lawyer's primary client and the insurer may not unduly control the representation

See also

• NC State Bar Op. 99 FEO 11: Consent to Submitting Legal Bills to an Audit Company
• NC State Bar Op. 98 FEO 17: Insurance Carrier Billing Guidelines
• ABA Formal Op. 01-421: Lawyer Under Insurance Company Guidelines

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/98-formal-ethics-opinion-10/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry #1:

Law Firm is hired by Insurance Company to defend its insureds under its liability policies. Insurance Company requires great detail in Law Firm's bills for legal services and requires Law Firm to submit its bills directly to an outside audit company that is not affiliated with Insurance Company. The audit company makes all decisions about payment, nonpayment, or adjustment of Law Firm's bills. Bills are submitted on an interim basis during the pendency of the litigation and must contain detailed information about the legal services provided to the insured. May Law Firm submit its bills directly to the audit company rather than to Insurance Company?

Opinion #1:

Rules 1.6 and 1.7 provide in part:

Rule 1.6, Confidentiality of Information

(a)... .

(b)... .

(c) Except when permitted under paragraph (d), a lawyer shall not knowingly:

(1) reveal confidential information of a client;

(2)....

(3) use confidential information of a client for the advantage of the lawyer or a third person, unless the client consents after consultation.

(d) A lawyer may reveal:

(1) confidential information, the disclosure of which is impliedly authorized by the client as necessary to carry out the goals of the repre sentation;

(2) confidential information with the consent of the client or clients affected, but only after consultation with them; ... .

Rule 1.7, Conflict Of Interest: General Rule

(a)....

(b) A lawyer shall not represent a client if the representation of that client may be material ly limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1) the lawyer reasonably believes the repre sentation will not be adversely affected; and

(2) the client consents after consultation which shall include explanation of the implications of the common representation and the advantages and risks involved.

(c) A lawyer shall have a continuing obligation to evaluate all situations involving potentially conflicting interests, and shall withdraw from the representation of any party the lawyer cannot adequately represent without using the confidential information of another client or a former client except as Rule 1.6 allows.

Bills for legal services are confidential and can, therefore, only be revealed with the consent of the client or clients affected, but only after consultation with them. Generally, there is no prohibition on submitting a client's legal bills to a third party for review at the client's request after consultation with the client. However, a tripartite relationship exists when a liability insurance carrier employs and pays the lawyer to represent and defend its insured. While the lawyer owes some duty of loyalty to the insurance carrier, the insured, rather than the insurance carrier, is the lawyer's primary client. See RPC 56 and CPR 255. "The attorney's responsibility is to the court and client which he serves before the court," and an insurance company may not exercise such control over the lawyer that would unduly dilute the lawyer's responsi bility to the court and the insured-client. CPR 326. The opinions cited here, while decided pursuant to the Code of Professional Responsibility and the Rules of Professional Conduct that were replaced by the Revised Rules of Professional Conduct now in effect, are consistent with current Rule 5.4(c) which provides that: "[a] lawyer shall not permit a person who recommends, engages, or pays the lawyer to render legal services for another to direct or regulate the lawyer's profession al judgment in rendering such legal services."

When the lawyer represents two clients, there is a delicate balance of the rights and duties owed by the lawyer to each client. With respect to the payment of legal fees, the interest of the insurance company and the insured are usually not the same. The insurance company usually has a paramount interest in control ling or reducing its defense costs, while the interest of the insured is generally to receive the best possible defense particularly if the claim may exceed the policy limits available for the insured's protection. Even when policy limits are adequate, the insured will not generally benefit from the release of any confidential information and the release of such information to a third party may constitute a waiver of the insured's attorney-client or work product privileges. Therefore, in general, by consenting, the insured agrees to release confidential information that could possibly (even if remotely) be prejudicial to her or invade her privacy without any return benefit.

While a client may consent in some instances, notwithstanding a conflict, as provided by Rule 1.7(b), the official comment to the rule states that the test of whether the client's consent is sufficient to waive a material limitation of the lawyer's responsi bility, and whether the lawyer may properly ask a client to consent, is whether a "disinterested lawyer would conclude that the client should not agree." Rule 1.7, cmt.[5]. When the insured could be prejudiced by agreeing and gains nothing, a disinterested lawyer would not conclude that the insured should agree in the absence of some special circumstance. There fore, the lawyer must reasonably conclude that there is some benefit to insured to outweigh any reasonable expectation of prejudice, or that the insured cannot be prejudiced by a release of the confidential information, before the lawyer may seek the informed consent of the insured after adequate consultation.

Some of the things that may be necessary for the lawyer to obtain, consider, and review in making this decision and consulting with the insured are:

(a) a copy of the agreement between the audit company and the insurance company;

(b) whether the audit company or the auditor may use or share the information with any other third party, including another insurance company;

(c) how the audit company controls access to the information;

(d) the level of security provided by the audit company;

(e) how the confidentiality of the information is maintained;

(f) the assurances given that the confidentiality of the information will be maintained; and

(g) the consequences for the client, if the release of confidential information waives the attorney-client or the work product privileges.

Inquiry #2:

Before divulging detailed information about the representation to the audit company, should Law Firm have the prior written consent of the insured?

Opinion #2:

While the client's written consent, when proper to seek such consent, is recommended, it is not required by the Revised Rules of Professional Conduct.

Inquiry #3:

May Insurance Company release the information in Law Firm's bills to the audit company without the consent of Law Firm or Insured?

Opinion #3:

The State Bar does not regulate insurance companies and, therefore, cannot prohibit an insurance company's release of information to third parties. However, if the lawyer is aware of this practice by the insurance company, the lawyer must inform the insurance company that she cannot represent an insured of the company if the company releases confidential information that the lawyer could not release in accordance with Opinion #1.