Consent for Defence Costs in Insurance Policies – when are lawyers rates unreasonable and how to avoid disputes with insurers

Approaching twenty-five years since I attended my first university lecture, I am probably slightly misquoting my law professor whom I recall advising an attentive audience that “when the world doth well, the law doth well.  And when the world doth badly, the law doth well”.  Nonetheless, I hope I have captured the sentiment expressed by Professor Hopkins (sadly, no longer with us), and which continues apace a quarter of a century later, with increasing hourly rates for lawyers apparently flying in the face of economic, political and environmental strife elsewhere.

D&O and Professional Indemnity Insurance policies (amongst others) provide coverage for “reasonable” defence costs in dealing with a claim made against an Insured.  A perennial question is how is “reasonable” to be judged with some lawyer rates now touching $2,300 (more than £1,800) an hour[1], and with other law firms charging closer to £300 per hour, apparently for the same job?

The short answer is that there is no answer, or at least no one-size-fits-all answer.  Each claim will turn on its context.  In our article, we look at the ways to bring insurers with you on your journey defending a claim and strategies to avoid the frequent areas of dispute on legal costs.

Obtaining Insurer Approval

Appointing lawyers and incurring costs without consent is likely a breach of policy terms.  It puts you on the backfoot when seeking recovery of those costs and results in frustration for policyholders to have their good faith decisions on an appropriate defence questioned by insurers, in respect of what is, otherwise, a covered claim.

The key, above all else, therefore, is obtaining insurer approval at an early stage.  Involving insurers, making them part of the team, and explaining your decisions will foster goodwill from insurers and develop trust in your actions.  If you require a particular lawyer with a high rate, explain why they are best suited to the role.  If other lawyers have been considered and rejected, provide your reasons.  Have you sought a discount on headline rates, or made any arrangements regarding staffing of your matter?

Some policies allow insurers to select the lawyers or require you to appoint from their panel (often at the lower end of the fee scale, due to the repeat work insurers can offer).  Some insurers also have billing guides which may or may not be part of your policy and can be prescriptive on how matters are to be administered.  Be aware that your policy may contain such a clause, and in case of doubt as to who can select legal representation or whether billing guides apply, discuss with your broker.  Appointing your own lawyers when the policy requires a panel appointment is a recipe for conflict.

Importantly, the requirement to obtain consent continues throughout the course of the claim.  Regular engagement with insurers as the matter progresses is key.

The Benefit of Insurer and Broker knowledge

Brokers and insurers deal regularly with defence lawyers on insured claims and so will likely have a view on lawyers with relevant expertise and their rates.  Whilst it is fundamental that you are comfortable with the lawyer defending the claim, insurer and broker knowledge can be useful in, for example, leveraging panel rates to obtain a discount from your preferred law firm, and for providing views on appropriate lawyers for disputes in an area unfamiliar to you.

Many claims settle with costs and compensation below the policy excess.  There is, therefore, a potential direct benefit to insureds in using that knowledge, whether to lower the rates of their own lawyers or by using a lawyer on a preferred rate.

Bill Narratives

Insurers (either directly, or via appointed monitoring lawyers) will need to have a basis to monitor and approve legal spend, for their own compliance.  Detailed bill narratives perform that function and ease the path from request to payment.  Sparse or incomplete narratives lead to queries and delays, with lawyers then spending time going back through files to identify the work done - time that could be spent on defending the claim.

As a general proposition, UK lawyers are well used to providing fulsome narratives.  Queries arise more frequently when engaging other professionals less used to producing detailed narratives (e.g. expert witnesses, or IT forensic firms in a cyber context) or lawyers in other jurisdictions where narratives are less ingrained.  In the latter case, there may be queries around the legal privilege, and whether passing narratives to insurers could make discoverable a document that details litigation strategy or concerns about the defence.  These hurdles can be overcome, but communication is key.

Staffing Appropriately

A frequent area of dispute is whether work has been done by someone of the right seniority (e.g. could a more junior lawyer have done that research memorandum)?  Multiple people attending the same meeting is another source of insurer queries.  Again, there are usually good reasons for decisions made on who attends meetings and performs tasks, and explaining these will avoid conflict.

Covered and Uncovered Claims

Narratives become particularly important if there are claims that are only partly covered by insurance.  For example, a claim against a director alleging employment related discrimination will usually be covered under a D&O policy, but if the company is also a target of the claim, it will not be covered (unless there is a separate Employment Practices Liability policy).  It is often in the interests of the director and the company to present a united front and use the same law firm in the defence. 

If that is the case, there will need to be a way of partitioning costs between covered and uncovered.  That can be via narratives, separate files, or an agreement on allocation.  Discuss with your lawyers, broker and the insurers what works for your claim.

Conflicts and multiple lawyers

Equally, there can be conflicts between different insureds on the same matter.  If two directors are sued, and each blames the other for the claim, it would be reasonable to expect each to have separate legal representation.  Policies usually allow for separate representation, subject to insurer consent.

Budgets – Not just a government problem

Like global financial markets, Insurers don’t like surprises.  Budgeting is a way for you to do your own pitch rolling, so insurers know what to expect and can reserve an appropriate sum to pay for legal costs (and is an important part of the ongoing consent requirement).  Of course, litigation has unpredictable elements, and budgets may need to change, but requiring your legal team to produce one and then keeping it updated helps manage insurers (and allows the claims handler to manage internal processes).

Lawyers are likely to be familiar with budgeting, with a costs budget now a mandatory part of the litigation process for many court claims.  A secondary impact of budgeting is that parties can then see what a claim will cost to trial, which may focus minds on a settlement, depending on the amounts at stake.

Ask for Permission, Not Forgiveness

The theme running through this article is giving insurers what they need to be part of your defence team, enabling you to obtain consent to your actions and swift payment of legal fees.  It is one of those rare areas of life where it is better to obtain permission than to ask for forgiveness.