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No. 98-612
IN THE SUPREME COURT OF THE STATE OF MONTANA
2000 MT 110
299 Mont. 321
2 P. 3d 806
IN THE MATTER OF THE RULES OF
PROFESSIONAL CONDUCT AND INSURER
IMPOSED BILLING RULES AND PROCEDURES
UGRIN, ALEXANDER, ZADICK & HIGGINS, P.C.,
and JAMES, GRAY, BRONSON & SWANBERG, P.C.,
Petitioners.
ORIGINAL PROCEEDING: Declaratory Relief
COUNSEL OF RECORD:
For Petitioners:
Neil E. Ugrin (argued) Gary M. Zadick (argued); Ugrin, Alexander, Zadick & Higgins,
Great Falls, Montana
Robert James (argued) , Bert Fairclough (argued); James, Gray, Bronson & Swanberg,
Great Falls, Montana
For Respondents:
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Ronald F. Waterman, Thomas E. Hattersley, III; Gough, Shanahan, Johnson
& Waterman, Helena, Montana
Lloyd E. Williams, Jr. (argued), David E. Morgans; Williams & Montgomery,
Chicago, Illinois
Lawrence R. Samuels, Jacquelyn F. Kidder, Robert L. Carter; Ross & Hardies,
Chicago, Illinois (for St. Paul Fire and Marine Insurance Company, USF&G Company,
TIG Insurance Company)
Thomas M. Welsch; Poore, Roth & Robinson, Butte, Montana
William T. Barker, Jeffrey P. Lennard, Tracy T. Segal; Sonnenschein, Nath
& Rosenthal, Chicago, Illinois (for Allstate Insurance Company, Zurich
American Insurance Company, Universal Underwriters Insurance Company)
For Amicus Curiae Supporting Petitioners:
Sam E. Haddon, Esq. (argued), Missoula, Montana; Rockwood Brown, Esq. (argued),
Billings, Montana (for Montana Defense Trial Lawyers)
Steven H. Gurnee, Esq., San Francisco, California (for Association of Defense
Counsel of Northern California); Robert A. Davidson, Esq., Los Angeles,
California (for Association of Southern California Defense Counsel)
Mark L. Stermitz, Esq., Missoula, Montana (for Montana Appleseed Center
for Law & Justice, Inc.)
Brian M. Morris; Goetz, Gallik, Baldwin & Dolan, Bozeman, Montana;
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Elizabeth Brennan; Rossbach Brennan, Missoula, Montana; Patricia O'Brien
Cotter (argued); Cotter & Cotter, Great Falls, Montana (for Montana Trial
Lawyers Association)
For Amicus Curiae Supporting Respondents:
Jacqueline T. Lenmark; Keller, Reynolds, Drake, Johnson & Gillespie,
Helena, Montana (for American Insurance Association)
Charles Silver, Esq., University of Texas School of Law, Austin, Texas
(on his own behalf)
Allen B. Chronister; Chronister, Moreen & Larson, Helena, Montana; John
S. Piece, David J. McMahon, Gary A. Bresee; Barger & Wolen, San
Francisco, California (for Legalguard, Inc.)
Mark D. Parker; Parker Law Firm, Billings, Montana (for National
Association of Independent Insurers)
Argued and Submitted: September 28, 1999
Decided: April 28, 2000
Filed:
__________________________________________
Clerk
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Justice W. William Leaphart delivered the Opinion of the Court.
¶1 In an original application for declaratory judgment, Petitioners assert that insurer-
imposed billing rules and procedures violate the Rules of Professional Conduct.
¶2 We address the following issues:
¶3 1. May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree
to abide by an insurer's billing and practice rules which impose conditions limiting or
directing the scope and extent of the representation of his or her client, the insured?
¶4 2. May an attorney licensed to practice law in Montana, or admitted pro hac vice, be
required to submit detailed descriptions of professional services to outside persons or
entities without first obtaining the informed consent of his or her client and do so without
violating client confidentiality?
Factual and Procedural Background
¶5 In June, 1985 we adopted the Rules of Professional Conduct "as rules governing the
conduct of persons admitted to practice law before this Court and all state courts in the
State of Montana." In November, 1998 Petitioners filed an application for original
jurisdiction and declaratory relief. Petitioners requested a declaratory ruling on two issues:
1. May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree to
abide by an insurer's billing and practice rules which impose conditions limiting or
directing the scope and extent of the representation of his or her client, the insured? 2.
May an attorney licensed to practice law in Montana, or admitted pro hac vice, be required
to submit detailed descriptions of professional services to outside persons or entities
without first obtaining the informed consent of his or her client and do so without
violating client confidentiality?
¶6 We accepted original jurisdiction. We ordered that Petitioners identify insurers doing
business in Montana whom they sought to have bound by this Court's determination of the
issues, that the insurers (Respondents) file copies of the billing rules that they enforce in
Montana, directly or through an auditing agency, and that the parties advise the Court
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whether they needed an evidentiary hearing.
¶7 Respondents moved this Court for an evidentiary hearing and Petitioners filed a brief in
opposition. In March, 1999 we issued an order denying the request for an evidentiary
hearing but allowing Respondents to jointly file an expert opinion. In September, 1999
this matter was argued before the Court.
Discussion
¶8 As a preliminary matter, we note that Respondents argue that this Court erred in
accepting original jurisdiction of this case and in denying their request for an evidentiary
hearing. Respondents argue in part that there is no justiciable case, that the Petitioners lack
standing, and that there is no issue of statewide importance.
¶9 Respondents' arguments are wholly without merit. We have a constitutional mandate to
fashion and interpret the Rules of Professional Conduct. See Article VII, Section 2 of
Montana's Constitution, providing that "[the supreme court] may make rules governing
appellate procedure, practice and procedure for all other courts, admission to the bar and
the conduct of its members." Art. VII, Sec. 2(3), Mont. Const. Compare §§ 37-61-101,
MCA, et. seq (providing procedures for licensing and regulation of members of Montana's
bar). Further, whether insurers' billing and practice rules conflict with the Rules of
Professional Conduct is a question of law that requires no evidentiary hearing. The tension
between insurers' billing and practice rules and the Rules of Professional Conduct presents
an appearance of impropriety that is a sufficient basis for this Court to exercise its inherent
powers and its Constitutional mandate to address the issues presented here. Compare
Bergeron v. Mackler (Conn. 1993), 623 A.2d 489, 494 (recognizing that "considering the
appearance of impropriety may be part of the inherent power of the court to regulate the
conduct of attorneys"); First American Carriers v. Kroger Co. (Ark. 1990), 787 S.W.2d
669, 671 (concluding "fact that Canon 9 [which provided that lawyers should avoid
appearance of impropriety] is not in the Model Rules does not mean that lawyers no
longer have to avoid the appearance of impropriety"); Matter of Weinroth (N.J. 1985), 495
A.2d 417, 421 (citations omitted) (concluding " 'even the appearance of impropriety' that
casts doubt upon the integrity of the legal process must be avoided").
¶10 Moreover, Respondents' contentions that the issues presented in this case are not of
statewide importance and that no urgency attends them are belied by the numerous amici
briefs and expert opinions that Respondents have submitted. Nor is Respondents'
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contention that Petitioners lack standing tenable. Petitioners clearly have a personal stake
in the issue whether their compliance with insurers' billing and practice rules violates the
Rules of Professional Conduct. Finally, Respondents' claim that they have not had notice
and an opportunity to respond are flatly contradicted by the more than 1000 pages of
affidavits, expert opinions, and billing and practice rules that they have filed with this
Court, not to mention the numerous supporting amicus curiae briefs that also have been
filed.
¶11 May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree
to abide by an insurer's billing and practice rules which impose conditions limiting or
directing the scope and extent of the representation of his or her client, the insured?
¶12 In addressing this issue, there are several Rules of Professional Conduct that we keep
in mind.
¶13 Rule 1.1 provides: "Competence. A lawyer shall provide competent representation to
a client. Competent representation requires the legal knowledge, skill, thoroughness and
preparation reasonably necessary for the representation." Rule 1.1, M.R.Prof.Conduct.
¶14 Rule 1.8 provides in pertinent part:
Conflict of Interest, Prohibited Transactions
....
(f) A lawyer shall not accept compensation for representing a client from one other
than the client unless:
(1) the client consents after consultation;
(2) there is no interference with the lawyer's independence of professional judgment
or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected as required by Rule
1.6.
Rule 1.8, M.R.Prof.Conduct (emphasis added).
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¶15 Rule 2.1 provides in part: "Advisor. In representing a client, a lawyer shall exercise
independent professional judgment and render candid advice." Rule 2.1, M.R.Prof.
Conduct. Rule 5.4 provides in pertinent part: "Professional Independence of a
Lawyer . . . . (c) A lawyer shall not permit a person who recommends, employs, or pays
the lawyer to render legal services for another to direct or regulate the lawyer's
professional judgment in rendering such legal services." Rule 5.4, M.R.Prof.Conduct.
¶16 In the present case, the parties do not dispute that insurers' billing and practice rules
typically "impose conditions [upon an attorney appointed by an insurer to represent an
insured] limiting or directing the scope and extent of the representation of his or her
client." The Petitioners have focussed on the requirement of prior approval in insurers'
billing and practice rules. We therefore address that condition of representation while
recognizing that other conditions limiting or directing the scope and extent of
representation of a client may also implicate the Rules of Professional Conduct.
¶17 As a representative set of litigation guidelines, we briefly consider the guidelines
submitted by the St. Paul Companies (hereafter, St. Paul). The declared policy of St. Paul's
Litigation Management Plan (hereafter, the Plan) is to "[p]rovide a systematic and
appropriate defense for St. Paul and its insureds, and to vigorously defend nonmeritorious
claims and claims where the demands are excessive."
¶18 St. Paul promotes a "team" approach to litigation in which each member has distinct
responsibilities. The claim professional is "responsible for disposition of claims, whether
in suit or not. We expect the St. Paul claim professional to take the lead in initiating
settlement negotiations . . . . We also expect the claim professional to have significant
input into development of the litigation strategy (i.e., settle or try)." The Plan also
"recognizes that defense counsel's primary responsibility and obligation are to protect and
further the interests of the insured in the conduct of the litigation. Our goal is to cooperate
with the insured and defense counsel to achieve the best result possible."
¶19 However, the Plan states that "[m]otion practice, discovery and research are items that
have historically caused us some concern and which we plan to monitor closely. While we
foresee very few differences of opinion, we require that defense counsel secure the
consent of the claim professional prior to scheduling depositions, undertaking research,
employing experts or preparing motions" (emphasis added).
¶20 Thus, the Plan expressly requires prior approval before a defense attorney may
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undertake to schedule depositions, conduct research, employ experts, or prepare motions.
The Plan concludes that "[w]e understand that any conflicts between the St. Paul
Litigation Management Plan and the exercise of your independent judgment to protect the
interests of the insured must be resolved in favor of the insured. We expect, however, to
be given an opportunity to resolve any such conflicts with you before you take any action
that is in substantial contravention of the Plan."
A. Whether Montana has recognized the dual representation doctrine under the Montana
Rules of Professional Conduct.
¶21 Petitioners assert that the insured is the sole client of a defense attorney appointed by
an insurer to represent an insured pursuant to an insurance policy (hereafter, defense
counsel) and that a requirement of prior approval in insurance billing and practice rules
impermissibly interferes with a defense counsel's exercise of his independent judgment
and his duty of undivided loyalty to his client. Petitioners argue that because the
relationship of insurer and insured is permeated with potential conflicts, they cannot be co-
clients of defense counsel.
¶22 Respondents argue that under Montana law, the rule is that in the absence of a real
conflict, the insurer and insured are dual clients of defense counsel. From this fundamental
premise, Respondents argue that as a co-client of defense counsel, the insurer may require
pre-approval of attorney activities to assure adequate consultation. Respondents argue
further that defense counsel must abide by a client's decisions about the objectives of
representation and that defense counsel are obliged to consult with a client about the
means for the objectives of representation. Respondents also argue that under Montana
law, an insurer is vicariously liable for the conduct of defense counsel and that an insurer's
control of litigation justifies holding an insurer vicariously liable for the conduct of
defense counsel.
¶23 We conclude that Respondents have misconstrued our past decisions. This Court has
not held that under the Rules of Professional Conduct, an insurer and an insured are co-
clients of defense counsel. The Montana decisions chiefly relied upon by Respondents are
inapposite because each one concerns situations where the insurer had "absolute" control
of the litigation. None of the Montana decisions cited by Respondents addresses whether
an insurer is a co-client under the Rules of Professional Conduct.
¶24 The central case underlying the Montana decisions cited by Respondents is Jessen v.
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O'Daniel (D.Mont. 1962), 210 F.Supp. 317. Jessen concerned a bad faith action brought
by an insured against his insurer following underlying litigation in which the insurer had
hired an attorney to represent its interests and those of its insured. Further, there was "the
unique situation of the insured paying a fee to the attorney selected by the insurer, to do
what in effect the attorney was already required to do under his contract of employment by
the insurance company." Jessen, 210 F.Supp. at 331. In the course of negotiations between
the parties in the underlying litigation, the insurer's attorney failed to communicate all of
the offers that the parties made to each other. The court in Jessen found that "[h]ad [the
attorney] communicated the respective offers to the other parties, the case would probably
have been settled." Jessen, 210 F.Supp. at 324.
¶25 The insurer in Jessen argued that the attorney was "acting as a mutual attorney or
agent for both [the insurer] and [the insured], and accordingly 'neither party can be held
accountable for knowledge that the mutual attorney had, but did not transfer to the other
parties or to either of them.' " Jessen, 210 F.Supp. at 330. The court in Jessen
acknowledged a conflict in the authorities regarding whether "the insurance carrier
becomes an agent of the insured with respect to settlement and trial, or is in the nature of
an independent contractor." Jessen, 210 F.Supp. at 331 (citations omitted). However, the
court concluded that
The precise relationship is unimportant. The authorities agree that these provisions
of the contract have the effect of placing absolute and exclusive control over the
litigation in the insurance carrier, with "the correlative duty to exercise diligence,
intelligence, good faith, honest and conscientious fidelity to the common interests of
the parties."
Jessen, 210 F.Supp. at 331 (citation omitted) (emphasis added). The Jessen court concluded that "[t]
(1)
here can be no question that in the absence of the special fee arrangement with [the insured], [the
attorney's] conduct and knowledge would be imputed to [the insurer]. Under the circumstances here,
the special [fee] arrangement cannot relieve [the insurer] from its responsibility for [the attorney's]
conduct in failing to disclose the various offers to the respective parties." Jessen, 210 F.Supp. at 332.
¶26 The court in Jessen emphasized the complete control over litigation that the insurer
held under the insurance contract. Jessen did not address whether the attorney's
compliance with that contract violated the Rules of Professional Conduct. Nor did Jessen
determine whether the insured and the insurer were co-clients under the Rules of
Professional Conduct.
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¶27 As Respondents point out, subsequent Montana decisions have recognized Jessen's
conclusion that an insurance contract may place absolute control of litigation in the hands
of the insurer. In Safeco Ins. Co. v. Ellinghouse (1986), 223 Mont. 239, 725 P.2d 217, the
Court rejected an insurer's claim that because the attorney it hired was an independent
contractor, the insurer was not responsible for the mistakes of the attorney. Relying on
Jessen, the Court in Ellinghouse concluded that "[t]he provisions of an insurance contract
which give the insurance company the right and impose a correlative duty to defend suits
against the insured have the effect of placing absolute and exclusive control over the
litigation in the insurance carrier." Ellinghouse, 223 Mont. at 252-53, 725 P.2d at 226
(citations omitted).
¶28 Similarly, in State v. Second Judicial Dist. Court (1989), 240 Mont. 5, 783 P.2d 911,
the Court considered whether communication between an insurer and its attorneys, which
occurred after litigation began, was privileged from disclosure in a bad faith action. Citing
Jessen and Ellinghouse, the Court determined that "[a]bsent a conflict of interest, the
attorney hired by the insurance company to defend its insured, represents both." Second
Judicial Dist. Court, 240 Mont. at 10, 783 P.2d at 914. We note, however, that the Court
considered client identity only in determining whether insurer-defense counsel
communications were privileged.
¶29 In Tigart v. Thompson (1990), 244 Mont. 156, 796 P.2d 582, the district court granted
plaintiff's motions for a new trial and attorney fees and costs under § 37-61-421, MCA.
The insurer appealed the award of attorney fees and costs, arguing in part that it was not a
"party" under § 37-61-421, MCA. The Court in Tigart noted the Jessen court's
determination that insurance contracts place exclusive control of the litigation in the
insurer and concluded that "[i]f an insurer may be held liable for the actions of its attorney,
as was the case in Ellinghouse, under a theory of agency, it is axiomatic that the insurer
may be responsible for costs, expenses and attorney fees when the insurer 'multiplies the
proceedings in any case unreasonably and vexatiously.' " Tigart, 244 Mont. at 160, 796
P.2d at 585. Thus, relying on Jessen, the Tigart Court concluded that the insurer was liable
for the conduct of its attorney because of the insurer's complete control over the litigation.
¶30 In Palmer By Diacon v. Farmers Ins. (1993), 261 Mont. 91, 861 P.2d 895, the insured
brought suit against the insurer, arguing that the insurer's denial of his claim for uninsured
motorist benefits was made in bad faith. The insured claimed that an unidentified truck ran
his motorcycle off a road. When the insurer denied his claim based on the statement of a
witness that the truck was in its own lane, the insured filed suit. The district court ordered
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the insurer to produce all claim file materials dated before the time when the insured
indicated that he would bring a bad faith action against the insured. Those materials
"included confidential reports sent to [the insurer] by the attorneys who represented it in
the uninsured motorist case." Palmer, 261 Mont. at 100, 861 P.2d at 900. Subsequently,
the district court ruled for the insured. On appeal, the insurer raised the issue whether the
attorney-client privilege applied in "first-party bad faith cases in which the insurer's
attorney did not represent the insured's interests in the underlying case." Palmer, 261
Mont. at 107, 861 P.2d at 905.
¶31 Defining first-party bad faith actions as cases where the plaintiff is the insured, the
Palmer Court distinguished two kinds of first-party bad faith cases. The Court determined
that one kind "involves dual representation by the attorney." Palmer, 261 Mont. at 108,
861 P.2d at 905. Such cases often arise when "a third-party claimant obtains a judgment in
excess of policy limits and the insured later sues the insurance company for failure to
settle within policy limits." Palmer, 261 Mont. at 108, 861 P.2d at 905. Quoting Jessen,
the Palmer Court determined that in such first-party bad faith cases, "[u]nder an insurance
contract . . . the insurer initially employs the attorney to represent the interests of both the
insured and the insurer." Palmer, 261 Mont. at 108, 861 P.2d at 905. The Palmer Court
recognized that other courts have held that under that kind of first-party bad faith action,
"the insured is entitled to the entire claim file prepared for the underlying lawsuit, because
the insurer created the file primarily on behal of the insured." Palmer, 261 Mont. at 108,
861 P.2d at 905 (citation omitted).
¶32 However, under the facts in Palmer, the Court concluded that the action was a distinct
kind of first-party bad faith action and that when the insurer denied the insured his
uninsured motorist coverage, the insurer stepped into the shoes of the unidentified third-
party motorist. Palmer, 261 Mont. at 108, 861 P.2d at 905-06. The Palmer Court further
concluded that "[t]he attorneys who represented [the insurer] in the uninsured motorist
case have not represented [the insured], therefore the dual representation reasoning does
not apply in this case." Palmer, 261 Mont. at 108, 861 P.2d at 906. Like the Court in
Second Judicial Dist. Court, the Palmer Court recognized the dual representation doctrine
only in determining whether the communications between an insurer and its attorneys are
subject to the attorney-client privilege.
¶33 As the foregoing decisions demonstrate, we have followed Jessen in holding insurers
responsible for the conduct of defense counsel and we have applied the attorney-client
privilege to communications between insurers and defense counsel in cases where by
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contract the insurer was deemed to have assumed absolute control of the litigation. None
of these decisions addressed whether insurers and insureds are co-clients under the Rules
of Professional Conduct, and none of them addressed whether defense counsels'
compliance with insurance contracts that repose "absolute" control of litigation in insurer
violated the Rules of Professional Conduct.
¶34 We note that Respondents argue that insurance contracts effectively place absolute
control of litigation with insurers. However, Respondents' claim of absolute control of
litigation cannot be reconciled with their insistence that whenever a conflict may arise
between their litigation guidelines and an attorney's ethical obligations, the attorney is to
follow the ethical course of action. Respondents' assertion that defense counsel are not
only free to but must follow their independent judgment is inconsistent with their claim
that insurers have absolute control of litigation.
B. Whether insurers and insureds are co-clients under Montana's Rules of Professional
Conduct.
¶35 We turn to the question whether an insurer is a client of defense counsel under the
Rules of Professional Conduct. We note that some other courts have concluded that the
insurer is not a client of defense counsel. In Atlanta Int. Ins. Co. v. Bell (Mich. 1991), 475
N.W.2d 294, the court addressed whether defense counsel retained by an insurer to defend
its insured may be sued by the insurer for professional malpractice. Recognizing the
general rule that an attorney will only be held liable for negligence to his client, the court
determined that "the relationship between the insurer and the retained defense counsel [is]
less than a client-attorney relationship." Bell, 475 N.W.2d at 297. The court further
determined, however, that although the insurer is not a client of defense counsel, the
defense counsel nevertheless "occupies a fiduciary relationship to the insured, as well as to
the insurance company." Bell, 475 N.W.2d at 297. Recognizing further that "the tripartite
relationship between insured, insurer, and defense counsel contains rife possibility [sic] of
conflict," Bell, 475 N.W.2d at 297, the court reasoned that "[t]o hold that an attorney-
client relationship exists between insurer and defense counsel could indeed work mischief,
yet to hold that a mere commercial relationship exists would work obfuscation and
injustice." Bell, 475 N.W.2d at 297.
¶36 Nor is Michigan unique in concluding that the insured is the sole client of defense
counsel. See Jackson v. Trapier (Sup. Ct. 1964), 247 N.Y.S.2d 315, 316 (concluding that
once defense undertaken, "defendant is the client and not the insurance carrier even
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though the latter may have chosen the counsel and may be paying his fee"); Continental
Cas. v. Pullman, Comley, et al. (2nd Cir. 1991), 929 F.2d 103, 108 (citation omitted)
(concluding "[i]t is clear beyond cavil that in the insurance context the attorney owes his
allegiance, not to the insurance company that retained him but to the insured defendant");
Point Pleasant Canoe Rental v. Tinicum Tp. (E.D. Pa. 1986), 110 F.R.D. 166, 170
(concluding "[w]hen a liability insurer retains a lawyer to defend an insured, the insured is
considered the lawyer's client"); First American Carriers v. Kroger Co. (Ark. 1990), 787 S.
W.2d 669, 671 (citation omitted) (concluding that " 'when a liability insurer retains a
lawyer to defend an insured, the insured is the lawyer's client'").
¶37 Respondents argue vigorously that the interests of an insurer and an insured usually
coincide and that most litigation is settled within an insured's coverage limits. These
arguments gloss over the stark reality that the relationship between an insurer and insured
is permeated with potential conflicts. Compare Thomas D. Morgan, What Insurance
Scholars Should Know About Professional Responsibility, 4 Conn.Ins.L.J. 1, 7-8, 1997
(concluding that designating insurer "a second client . . . would routinely create the
potential for conflicts of interest"); Kent D. Syverud, What Professional Responsibility
Scholars Should Know About Insurance, 4 Conn.Ins.L.J. 17, 23-24, 1997 (recognizing "[b]
oth insurance companies and insureds have important and meaningful stakes in the
outcome [of] a lawsuit against the insureds, stakes that include not just the money that the
insurance company must pay in defense and settlement, but also the uninsured liabilities of
the insured, which include not just any judgment in excess of liability limits, but also the
insured's reputation and other non-economic stakes. The history of liability insurance
suggests that unbridled control of the defense of litigation by either the insurance company
or the insured creates incentives for the party exercising that control to take advantage of
the other"). Compare also Restatement (Third) of the Law Governing Lawyers § 215,
Comment f(5) (Proposed Final Draft No. 2, 1998) (emphasis added) (recognizing "[m]
aterial divergence[s] of interest might exist between a liability insurer and an insured . . . .
Such occasions for conflict may exist at the outset of the representation or may be created
by events that occur thereafter"). In cases where an insured's exposure exceeds his
insurance coverage, where the insurer provides a defense subject to a reservation of rights,
and where an insurer's obligation to indemnify its insured may be excused because of a
policy defense, there are potential conflicts of interest.
¶38 We reject Respondents' implicit premise that the Rules of Professional Conduct need
not apply when the interests of insurers and insureds coincide. The Rules of Professional
Conduct have application in all cases involving attorneys and clients. Moreover, whether
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the interests of insurers and insureds coincide can best be determined with the perfect
clarity of hindsight. Before the final resolution of any claim against an insured, there
clearly exists the potential for conflicts of interest to arise. Further, we reject the
suggestion that the contractual relationship between insurer and insured supersedes or
waives defense counsels' obligations under the Rules of Professional Conduct. We decline
to recognize a vast exception to the Rules of Professional Conduct that would sanction
relationships colored with the appearance of impropriety in order to accommodate the
asserted economic exigencies of the insurance market. Compare Kroger, 787 S.W.2d at
671 (concluding "[w]e have consistently taken strong positions in situations where the
public's confidence in attorneys might be eroded by the appearance of a conflict of
interest"). We hold that under the Rules of Professional Conduct, the insured is the sole
client of defense counsel.
¶39 We caution, however, that this holding should not be construed to mean that defense
counsel have a "blank check" to escalate litigation costs nor that defense counsel need not
ever consult with insurers. Under Rule 1.5, M.R.Prof.Conduct, for example, an attorney
must charge reasonable fees. See Rule 1.5, M.R.Prof.Conduct (providing in part that "[a]
lawyer's fees shall be reasonable"). Nor, finally, should our holding be taken to signal that
defense counsel cannot be held accountable for their work.
¶40 Respondents argue further, however, that even if an insurer is not a co-client of
defense counsel, an insurer's control of litigation is necessary and appropriate.
Respondents argue that the insurer must control the litigation in order to meet its duties to
the insured to indemnify and to provide a defense. Further, Respondents argue that the
insured has a good faith duty to cooperate with the insurer in defense of a claim that
warrants an insurer's control of litigation, and that in any event insureds agree to insurers'
control of litigation. Respondents also argue that insureds typically contract for a limited
defense that does not protect their reputational interests and that they are not entitled to
unlimited expenditures on their behalf. Further, Respondents assert that insurers and
insureds have "aligned" interests in minimizing litigation costs and settlements.
¶41 None of these arguments is persuasive. Animating them is the deeply flawed premise
that by contract insurers and insureds may dispense with the Rules of Professional
Conduct.
¶42 Respondents also argue that insurers' control of litigation is justified under the
Restatement and that, for example, under the proposed draft for § 215 of the Restatement
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(Third) of the Law Governing Lawyers, an insurer's direction of a defense is justified
regardless whether the insurer is a co-client "when the insurer 'will pay any judgment
rendered against the [insured] client and [the insurer] makes a decision that defense costs
beyond those designated by [the insurer] would not significantly change the likely
outcome.' " We decline to join the parties' arguments over the Restatement. We note that
in the draft cited by Respondents, the Restatement states that it "has not been considered
by the members of the American Law Institute and does not represent the position of the
Institute on any of the issues with which it deals. Restatement (Third) of the Law
Governing Lawyers (Proposed Final Draft No. 2, 1998). More importantly, we are in no
way bound by the Restatement in interpreting Montana's Rules of Professional Conduct.
¶43 Respondents also suggest that the billing and practice rules' requirement of prior
approval is not as strict as it appears, that insurers employ it to ensure that they are
consulted, and that they "rarely" withhold approval. They contend that preapproval is
permissible because the insurer "is entitled not to pay for services that are overpriced or
unnecessary to the case."
¶44 We conclude that whether the requirement of prior approval seldom results in denials
of authorization for defense counsel to perform legal services begs the question whether
the requirement of prior approval violates the Rules of Professional Conduct. Without
reaching the issue here, moreover, we caution further that a mere requirement of
consultation may be indistinguishable, in its interference with a defense counsel's exercise
of independent judgment and ability to provide competent representation, from a
requirement of prior approval. Further, the entitlement of insurers not to pay for
overpriced or unnecessary services, which Petitioners do not dispute, also begs the
question whether the requirement of prior approval violates the Rules of Professional
Conduct.
¶45 Finally, Respondents argue that their billing and practice rules do not interfere with
defense counsels' freedom of action. As previously discussed, they suggest that when an
insurer denies approval for particular actions that defense counsel propose, nothing
prevents defense counsel from exercising their independent judgment and doing the very
thing for which the insurer has denied approval. We reject Respondents' underlying
dubious premise that the threat of withholding payment does not interfere with the
independent judgment of defense counsel. The very action taken by Petitioners in seeking
declaratory relief in the present case is a blunt repudiation of that speculative premise.
Further, if the threat of withholding payment were quite as toothless as Respondents
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suggest, we doubt that they would make such a threat, let alone that they would expressly
incorporate it in their billing and practice rules.
C. Whether the requirement of prior approval violates the Rules of Professional Conduct.
¶46 Having concluded that the insured is the sole client of defense counsel, we turn to the
fundamental issue whether the requirement of prior approval in billing and practice rules
conflicts with defense counsels' duties under the Rules of Professional Conduct. The
parties appear to agree that defense counsel may not abide by agreements limiting the
scope of representation that interfere with their duties under the Rules of Professional
Conduct. Compare Annotated Model Rules of Professional Conduct (Fourth ed. Center for
Professional Responsibility American Bar Association) Rule 1.2, p. 12, Comment [4]
(concluding "[t]he objectives or scope of services provided by a lawyer may be limited by
agreement with the client or by the terms under which the lawyer's services are made
available to the client. . . . [5] An agreement concerning the scope of representation must
accord with the Rules of Professional Conduct and other law. Thus, the client may not be
asked to agree to representation so limited in scope as to violate Rule 1.1").
¶47 We conclude that the requirement of prior approval fundamentally interferes with
defense counsels' exercise of their independent judgment, as required by Rule 1.8(f), M.R.
Prof.Conduct. Further, prior approval creates a substantial appearance of impropriety in its
suggestion that it is insurers rather than defense counsel who control the day to day details
of a defense.
¶48 Montana is not alone in rejecting arrangements that fetter lawyers' undivided duty of
loyalty to their clients and their independence of professional judgment in representing
their clients. In Petition of Youngblood (Tenn. 1995), 895 S.W.2d 322, the court
determined that for inhouse attorney employees of an insurance company to represent
insureds was not a per se ethical violation. However, the Youngblood court emphasized
the loyalty that an attorney owes an insured and concluded that
Some of the usual characteristics incident to [the employer-employee] relationship
cannot exist between the insurer and the attorney representing an insured. The
employer cannot control the details of the attorney's performance, dictate the
strategy or tactics employed, or limit the attorney's professional discretion with
regard to the representation. Any policy, arrangement or device which effectively
limits, by design or operation, the attorney's professional judgment on behalf of or
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loyalty to the client is prohibited by the Code, and, undoubtedly, would not be
consistent with public policy.
Youngblood, 895 S.W.2d at 328. The court went to conclude that "[t]he same loyalty is owed the client
whether the attorney is employed and paid by the client, is a salaried employee of the insurer, or is an
independent contractor engaged by the insurer." Youngblood, 895 S.W.2d at 328.
¶49 In addressing whether an insurer is vicariously liable for the malpractice of defense
counsel, the Texas Supreme Court was similarly critical of insurer directions to defense
counsel that interfere with their independent judgment and undivided loyalty to insureds.
See State Farm Mut. Auto. Ins. Co. v. Traver (Tex. 1998), 980 S.W.2d 625. In Traver, the
court held that an insurer is not vicariously liable for the malpractice of an independent
attorney whom it chooses to defend an insured. The court in Traver reasoned that in
evaluating whether a principal is vicariously responsible for the actions of its agent, "the
key question is whether the principal has the right to control the agent with respect to the
details of that conduct." Traver, 980 S.W.2d at 627 (citation omitted). The court
determined that "even assuming that the insurer possesses a level of control comparable to
that of a client, this does not meet the requisite for vicarious liability." Traver, 980 S.W.2d
at 627. The Traver court went on to conclude:
A defense attorney, as an independent contractor, has discretion regarding the day-
to-day details of conducting the defense, and is not subject to the client's control
regarding those details. While the attorney may not act contrary to the client's
wishes, the attorney "is in complete charge of the minutiae of court proceedings and
can properly withdraw from the case, subject to the control of the court, if he is not
permitted to act as he thinks best." Moreover, because the lawyer owes unqualified
loyalty to the insured, the lawyer must at all times protect the interests of the
insured if those interests would be compromised by the insurer's instructions.
Traver, 980 S.W.2d at 627-28 (citations omitted) (emphasis added). In a concurring and dissenting
opinion, Justice Gonzalez criticized the court for a "perhaps naive view of the current status of
insurance defense practice." Traver, 980 S.W.2d at 632 (J. Gonzalez, concurring and dissenting).
Justice Gonzalez cautioned that
measures designed to produce a no-frills defense can easily result in only a token
defense. I am concerned that defense lawyers may be reluctant to resist cost-cutting
measures that detrimentally affect the quality of the insured's defense. There is a real
risk that these efforts at cost containment compromise a lawyer's autonomy and
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independent judgment on the best means for defending an insured. . . . The lawyers
are under tremendous pressure trying to serve two masters.
Traver, 980 S.W.2d at 634 (J. Gonzalez, concurring and dissenting).
¶50 Moreover, in American Ins. Ass'n v. Kentucky Bar Ass'n (Ky. 1996), 917 S.W.2d
568, the court affirmed an Advisory ethics opinion that proscribed insurers' use of inhouse
attorneys to represent insureds. The court in Kentucky Bar Ass'n also affirmed an Advisory
ethics opinion concluding that a lawyer may not "enter into a contract with a liability
insurer in which the lawyer or his firm agrees to do all of the insurer's defense work for a
set fee." Kentucky Bar Ass'n, 917 S.W.2d at 569. The court concluded that
the pressures exerted by the insurer through the set fee interferes [sic] with the
exercise of the attorney's independent professional judgment, in contravention of
Rule 1.8(f)(2). The set fee arrangement also clashes with Rule 1.7(b) in that it
creates a situation whereby the attorney has an interest in the outcome of the action
which conflicts with the duties owed to the client: quite simply, in easy cases,
counsel will take a financial windfall; in difficult cases, counsel will take a financial
loss.
Kentucky Bar Ass'n, 917 S.W.2d at 572. The Kentucky Bar Ass'n court stressed that "the mere
appearance of impropriety is just as egregious as any actual or real conflict. Therefore, [the Advisory
opinion] acts as a prophylactic device to eliminate the potential for a conflict of interest or the
compromise of an attorney's ethical and professional duties." Kentucky Bar Ass'n, 917 S.W.2d at 573
(emphasis added). Recognizing that set fee arrangements are "ripe with potential conflicts," the court
concluded that the insurer and insured are "subject to complete divergence at any time. Inherent in all
of these potential conflicts is the fear that the entity paying the attorney, the insurer, and not the one to
whom the attorney is obligated to defend, the insured, is controlling the legal representation." Kentucky
Bar Ass'n, 917 S.W.2d at 573 (emphasis added).
¶51 We hold that defense counsel in Montana who submit to the requirement of prior
approval violate their duties under the Rules of Professional Conduct to exercise their
independent judgment and to give their undivided loyalty to insureds. Compare Rule 1.7
(b) (providing "[a] lawyer shall not represent a client if the representation of that client
may be materially limited by the lawyer's responsibility to another client or to a third
person"); Annotated Model Rules of Professional Conduct, Comment [4] to Rule 1.7
(concluding "[t]he critical questions are the likelihood that a conflict will eventuate and, if
it does, whether it will materially interfere with the lawyer's independent professional
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judgment in considering alternatives or foreclose courses of action that reasonably should
be pursued on behalf of the client"); State v. Jones (1996), 278 Mont. 121, 125, 923 P.2d
560, 563 (concluding "[t]he duty of loyalty is 'perhaps the most basic of counsel's duties'
") (citation omitted).
¶52 2. May an attorney licensed to practice law in Montana, or admitted pro hac vice, be
required to submit detailed descriptions of professional services to outside persons or
entities without first obtaining the informed consent of his or her client and do so without
violating client confidentiality?
¶53 Rule 1.6 provides in pertinent part:
Confidentiality of Information
(a) A lawyer shall not reveal information relating to representation of a client unless
the client consents after consultation, except for disclosures that are impliedly
authorized in order to carry out the representation.
Rule 1.6(a), M.R.Prof.Conduct.
¶54 As a representative set of guidelines concerning the disclosure of detailed descriptions
of professional services to third-party auditors, we consider the guidelines submitted by
the Zurich-American Insurance Group (hereafter, Zurich). Zurich's litigation guidelines
regarding audits provide in pertinent part:
Audits
Zurich-American reserves the right to examine and audit books, records, other
documents, and supporting material for the purpose of evaluating compliance with
its litigation management guidelines, the billing requirements set forth therein, and
the reasonableness of the firm's charges. The books, records, and documents we
may examine include, without limitation: original time sheets from attorneys and
staff; explanations of billing methods and practices; attorney work product and other
contents of open and closed files involving the defense of Zurich-American
customers; phone message records; and diaries, etc.
All requested books and records must be made available to us during business hours
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for examination, audit, or reproduction. We shall employ, at our discretion, internal
auditors or independent outside auditors for purposes of accomplishing audits.
¶55 Petitioners argue that Respondents' billing and practice rules require the disclosure of
confidential detailed descriptions of professional services. These disclosures are not
impliedly authorized and do not further representation. Nor does an insured's contractual
consent to disclosure of confidential information cure such disclosures, as an insured
cannot know in advance of litigation what will be disclosed. Petitioners argue further that
third-party auditors are different from insurers and that they do not fall within a protective
"magic circle." Petitioners argue that under the Rules of Professional Conduct, disclosures
of detailed billing statements to third-party auditors are only permissible if the client gives
his informed consent after consultation.
¶56 Respondents respond that third-party auditors are agents of insurers. Because they
share "common interests" with insureds in reducing costs of litigation, third-party auditors
are part of a privileged community. Further, insureds' consent is implied for disclosures
that are reasonably necessary for representation. Thus, disclosures to third-party auditors
are like disclosures to secretaries and computer technicians. Moreover, insureds have
consented to disclosure by contract. Respondents also argue that whether a disclosure to a
third-party auditor breaches the attorney-client privilege is a question of fact. Further,
Respondents argue that much of the information in billing statements is neither
confidential nor privileged. Finally, Respondents contend that the obligation of defense
attorneys to charge reasonable fees is meaningless if insurers cannot monitor their services.
¶57 Underlying the parties' positions is a fundamental disagreement regarding whether
third-party auditors are part of a privileged community or magic circle within which
confidential information may be shared without waiver of attorney-client or work product
privilege. Respondents argue that in United States v. Mass. Inst. of Technology (1st Cir.
1997), 129 F.3d 681, the court recognized insurer and insured as a relationship within
which parties share a common interest that protects privileged communications.
Respondents argue further that in Indian Law Resource Ctr. v. Dept. of Interior (D. D.C.
1979), 477 F.Supp. 144, the court concluded that an auditor was a confidential agent of a
privileged party and that disclosure of attorney fee information did not waive any privilege.
¶58 Mass. Inst. of Technology does not support Respondents' claims. In Mass. Inst. of
Technology, the IRS requested the billing statements of law firms that had represented
MIT. MIT had apparently disclosed the very same billing statements to the Defense
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Contract Audit Agency (the audit agency), which "help[ed] entities in the Department of
Defense review contract performance to be sure that the government [was] not
overcharged for services." Mass. Inst. of Technology, 129 F.3d at 683. MIT gave IRS the
documents it requested but redacted information that it claimed was covered by the
attorney-client privilege, the work product doctrine, or both. In turn, the audit agency
refused to give the IRS those documents without the consent of MIT. The IRS also
requested minutes of the MIT corporation and its executive and auditing committees. The
district court ruled that MIT's disclosure of legal bills to the audit agency forfeited its
attorney-client privilege. However, concluding that three of the minutes contained
privileged material that MIT had not been shown to have disclosed to the audit agency the
district court declined to order their production.
¶59 On appeal, MIT argued that its disclosure of the billing statements to the audit agency
did not forfeit its attorney-client privilege. Further, while conceding that it could not prove
that it had withheld the three minutes from the audit agency, MIT argued that the minutes
were protected by the attorney-client privilege and the work product doctrine. On cross-
appeal, the IRS argued that the district court erred in concluding that the three minutes
contained privileged material.
¶60 The court in Mass. Inst. of Technology concluded that "decisions do tend to mark out,
although not with perfect consistency, a small circle of 'others' with whom information
may be shared without loss of the privilege (e.g., secretaries, interpreters, counsel for a
cooperating co-defendant, a parent present when a child consults a lawyer)." Mass. Inst. of
Technology, 129 F.3d at 684. The court emphasized that "the underlying concern is
functional: that the lawyer be able to consult with others needed in the representation and
that the client be allowed to bring closely related persons who are appropriate, even if not
vital, to a consultation." Mass. Inst. of Technology, 129 F.3d at 684 (citation omitted). The
court acknowledged that "[i]n a rather abstract sense, MIT and the audit agency do have a
'common interest' in the proper performance of MIT's defense contracts and the proper
auditing and payment of MIT's bills." Mass. Inst. of Technology, 129 F.3d at 686.
However, the court determined that
this is not the kind of common interest to which the cases refer in recognizing that
allied lawyers and clients-who are working together in prosecuting or defending a
lawsuit or in certain other legal transactions-can exchange information among
themselves without loss of the privilege. To extend the notion to MIT's relationship
with the audit agency, which on another level is easily characterized as adversarial,
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would be to dissolve the boundary almost entirely.
Mass. Inst. of Technology, 129 F.3d at 686.
¶61 Turning to MIT's disclosure of its minutes to the audit agency, the court concluded
that its treatment of the billing statements disposed of MIT's claim that its attorney-client
privilege survived disclosure of the minutes to the audit agency, and the court focused on
MIT's work product claim. The court concluded that the prevailing rule is that "disclosure
to an adversary, real or potential, forfeits work product protection." Mass. Inst. of
Technology, 129 F.3d at 687. The court went on to conclude that
MIT's disclosure to the audit agency was a disclosure to a potential adversary. The
disclosures did not take place in the context of a joint litigation where the parties
shared a common legal interest. The audit agency was reviewing MIT's expense
submissions. MIT doubtless hoped that there would be no actual controversy
between it and the Department of Defense, but the potential for dispute and even
litigation was certainly there.
Mass. Inst. of Technology, 129 F.3d at 687 (emphasis added).
¶62 In the present case we note Respondents' claim that the court in Mass Inst. of
Technology recognized insurers and insureds as a relationship within which parties share a
common interest that protects their privileged communications. Their claim is misguided.
First, in Mass Inst. of Technology, MIT argued that its disclosure to the audit agency was
like other cases where "disclosure has been allowed, without forfeiting the privilege,
among separate parties similarly aligned in a case or consultation (e.g., codefendants,
insurer and insured, patentee and licensee)." Mass. Inst. of Technology, 129 F.3d at 685. In
other words it was MIT, not the court, who made the analogy to the insurer-insured
relationship. Second, in a footnote, the court in Mass. Inst. of Technology cited several
decisions that have considered insurer-insured relationships.
¶63 In the first of these decisions, Roberts v. Carrier Corp. (N.D. Ind. 1985), 107 F.R.D.
678, the court addressed whether the company, Carrier, in passing on arguably privileged
communications between itself and its attorney and between its attorney and its insurer to
another company, Hamilton, waived any privilege that might otherwise have attached to
those communications. The court recognized that under Indiana law, a statement by a
"client to his attorney for communication to a third person is not considered confidential."
Carrier, 107 F.R.D. at 686 (citations omitted). However, the court found that Carrier and
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Hamilton were sister subsidiaries of United Technologies and concluded that when "a
corporation with a legal interest in an attorney-client communication relays it to another
related corporation, the attorney-client privilege is not thereby waived." Carrier, 107 F.R.
D. at 687 (citation omitted). Further, the court found that "Carrier and Hamilton do share
an identical legal interest: defense of a claim based upon a malfunction of valve #242."
Carrier, 107 F.R.D. at 688. Under those particular facts, the court concluded that Indiana's
rule concerning communications to third parties was not violated. Carrier, 107 F.R.D. at
688.
¶64 In the second of these decisions, Linde Thomson Langworthy Kohn & Van Dyke v.
RTC (D.C. Cir. 1993), 5 F.3d 1508, the court noted that "[f]ederal courts have never
recognized an insured-insurer privilege as such." Linde Thomson, 5 F.3d at 1514 (citations
omitted). The court went on to
firmly reject any sweeping notion that there is an attorney-client privilege in insured-
insurer communications. . . . Certainly, where the insured communicates with the
insurer for the express purpose of seeking legal advice with respect to a concrete
claim, or for the purpose of aiding an insurer-provided attorney in preparing a
specific legal case, the law would exalt form over substance if it were to deny
application of the attorney-client privilege. However, a statement betraying neither
interest in, nor pursuit of, legal counsel bears only the most attenuated nexus to the
attorney-client relationship. . . . [I]f what is sought is not legal advice, but
insurance, no privilege can or should exist.
Linde Thomson, 5 F.3d at 1515 (citations omitted) (emphasis added).
¶65 Carrier and Linde Thomson clearly do not support Respondents in the present case.
Respondents have not suggested that third-party legal auditors "share an identical legal
interest" with insureds. Carrier, 107 F.R.D. at 688 (emphasis added). Nor have
Respondents suggested that "what is sought [from third-party auditors] is . . . legal
advice." Linde Thomson, 5 F.3d at 1515. Moreover, Carrier and Linde Thomson do not
address the disclosure of confidential information to third-party auditors under Montana's
Rules of Professional Conduct.
¶66 Respondents rely on the court's decision in Indian Law Resource Center to argue that
third-party auditors are confidential agents of insureds and that disclosure of billing
statements to them therefore does not waive any privilege. We conclude that their reliance
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on Indian Law Resource Center is also misplaced. In Indian Law Resource Center, the
plaintiff, a nonprofit corporation, brought an action under the Freedom of Information Act
(FOIA), seeking disclosure of documentation regarding payments from funds under
federal control to attorneys who served the Hopi tribe. The plaintiff requested documents
that included "(1) Tribal resolutions reflecting the names of the lawyers chosen and the fee
amounts endorsed; (2) periodic law firm statements to the Tribal Council, with attached
vouchers describing in detail legal services provided and travel expenses incurred." Indian
Law Resource Center, 477 F.Supp. at 146. Plaintiff's request was first sent to the Bureau
of Indian Affairs (BIA); the Department of Interior (Interior) denied that request. The
court in Indian Law Resource Center noted that "[a]s part of its general trust responsibility
to the Indians, Interior reviews and approves the choice of counsel and fixing of fees by
Indian tribes." Indian Law Resource Center, 477 F.Supp. at 145.
¶67 The "only issue" in Indian Law Resource Center was whether, under an exemption in
FOIA, the "withheld information is either confidential or privileged." Indian Law
Resource Center, 477 F.Supp. at 146. Interior argued that the information withheld should
be deemed confidential under FOIA because the information was received pursuant to "the
agency's fulfillment of its trust responsibilities." Indian Law Resource Center, 477 F.Supp.
at 146. Interior argued further that as a trustee it should "not be required to divulge
whatever material The Hopi Tribe as beneficiary declares to be confidential, so long as the
material otherwise qualifies under [FOIA] exemption four." Indian Law Resource Center,
477 F.Supp. at 147.
¶68 The court concluded that there was substantial evidence of future harm from
disclosure of the detailed law firm statements and that the law firm statements were
entitled to protection as attorney work product. Finding no evidence that the vouchers had
been disclosed to any party other than Interior, "which is acting as a confidential agent of
the Tribe," Indian Law Resource Center, 477 F.Supp. at 148, the court concluded that the
law firm statements are "exempt from disclosure under [FOIA] exemption four, on
grounds of both privilege and confidentiality." Indian Law Resource Center, 477 F.Supp.
at 149.
¶69 In the present case, Respondents compare Interior to third-party auditors and argue
that because third-party auditors act as confidential agents, disclosure of billing
information to them does not waive "the privilege." Respondents' reading of Indian Law
Resource Center is incorrect. Third-party auditors are not confidential agents of insureds
but function rather as agents of insurers. Moreover, to compare third-party auditors to
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Interior, the confidential agent in Indian Law Resource Center, is to ignore the specific
trust responsibilities that Interior has for the Hopi tribe, trust responsibilities that
Respondents do not claim that third-party auditors similarly bear for insureds. Further,
Indian Law Resource Center is readily distinguishable from the present case as the court
there addressed a specific exemption under FOIA but did not address Rule 1.6 of the Rules
of Professional Conduct.
¶70 We conclude that a third-party auditor is not within the "magic circle" or community
of interest that the court in Mass. Inst. of Technology recognized. Respondents, again,
claim that the purpose of third-party auditors complements the interests of insureds and
that third-party auditors merely seek to control the costs of defense in order to keep
insurance premiums down for insureds. This asserted common interest in keeping
litigation costs and premiums down is not sufficient to bring third-party auditors within
the magic circle. The Rules of Professional Conduct do not vary according to commercial
exigencies. Nor are third-party auditors "confidential agent[s]" of insureds. Indian Law
Resource Center, 477 F.Supp. at 148. We further conclude that disclosure of detailed
billing statements to a third-party auditor is "disclosure to a potential adversary." Mass.
Inst. of Technology, 129 F.3d at 687. In third-party auditors' review of confidential
information, there is always the possibility of disputes between auditors, defense counsel
and their clients that could result in litigation.
¶71 Nor are third-party auditors "needed in the representation" or "appropriate, even if not
vital, to a consultation," as secretaries and computer technicians may well be. Mass. Inst.
of Technology, 129 F.3d at 684. Disclosure to persons needed in the representation or
appropriate to a consultation does not also justify disclosure "to a potential adversary."
Mass. Inst. of Technology, 129 F.3d at 687.
¶72 We note Respondents argue that because the attorney-client privilege extends to the
insurer and because an insurer can only act through its employees and agents, the attorney-
client privilege applies to an insurer's agents as well, citing United States v. Schwimmer
(2nd Cir. 1989), 892 F.2d 237. In Schwimmer, the court recognized that the attorney-client
privilege "is held to cover communications made to certain agents of an attorney,"
Schwimmer, 892 F.2d at 243, and the court also recognized the "common interest" rule as
protecting "the confidentiality of communications passing from one party to the attorney
for another party where a joint defense effort or strategy has been decided upon and
undertaken by the parties and their respective counsel." Schwimmer, 892 F.2d at 243
(citation omitted). Schwimmer does not support Respondents' argument. Third-party
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auditors are not agents of defense counsel, nor are disclosures to them "communications
passing from one party to the attorney for another party." Schwimmer, 892 F.2d at 243.
¶73 In determining that third-party auditors fall outside the "magic circle," however, we
do not hold that the disclosure of detailed descriptions of professional services to a third-
party auditor necessarily violates any privilege that may attach to them. Resolution of that
issue would clearly entail findings of fact that we have not made in the present case.
¶74 Having determined that insurers are not clients of defense counsel and that third-party
auditors are potential adversaries of defense counsel, we turn to the issue whether the
disclosure of billing statements to third-party auditors is "impliedly authorized in order to
carry out the representation." Rule 1.6., M.R.Prof.Conduct.
¶75 Petitioners do not dispute that disclosures of billing information to insurers are
impliedly authorized to carry out representation. It does not follow, however, that
disclosing billing information to third-party auditors is also impliedly authorized. As
previously discussed, third-party auditors lie outside the "magic circle" and do not share a
community of interest with insureds. Their mission, as characterized in part by
Respondents, is to find fault with legal charges, not to further the representation of
insureds. Further, unlike secretaries and computer technicians who are engaged to assist
defense counsel, third-party auditors are not employed by defense counsel and as noted
they are potential adversaries of defense counsel. As such, third-party auditors stand in
potential conflict with the interests of insureds in competent representation by defense
counsel who exercise their independent professional judgment.
¶76 Further, we reject Respondents' argument that insureds' consent by contract to
disclosure of detailed professional billing statements comports with Rule 1.6, M.R.Prof.
Conduct. An insured executing a liability policy with an insurer cannot know at the time
he enters the contract what kind of claim will be brought against him, what the issues will
be, or what kinds of services will be undertaken by his defense attorney. Nor can an
insured know, at the time he contracts for insurance, the legal consequences that may
result from the disclosure of billing information to a third-party auditor. Depending on the
facts and circumstances, such disclosure may waive a specific privilege. Thus, under Rule
1.6, M.R.Prof.Conduct, for an insured to make a fully informed consent to disclosure of
detailed professional billing statements, the consent must be contemporaneous with the
facts and circumstances of which the insured should be aware.
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¶77 We emphasize that by its plain language, Rule 1.6, M.R.Prof.Conduct, extends to all
communications between insureds and defense counsel and that this rule is therefore
broader in both scope and protection than the attorney-client privilege and the work
product doctrine. Compare In re Advisory Opinion No. 544 of N.J. (N.J. 1986), 511 A.2d
609, 612 (citation omitted) (emphasis added) (concluding "this Rule [of Confidentiality]
expands the scope of protected information to include all information relating to the
representation, regardless of the source or whether the client has requested it be kept
confidential or whether the disclosure of the information would be embarrassing or
detrimental to the client"); Damron v. Herzog (9th Cir. 1995), 67 F.3d 211, 215 (citation
omitted) (concluding "[a]n integral purpose of the rule of confidentiality is to encourage
clients to fully and freely disclose to their attorneys all facts pertinent to their cause with
absolute assurance that such information will not be used to their disadvantage").
¶78 We hold that disclosure by defense counsel of detailed descriptions of professional
services to third-party auditors without first obtaining the contemporaneous fully informed
consent of insureds violates client confidentiality under the Rules of Professional Conduct.
/S/ W. WILLIAM LEAPHART
We concur:
/S/ J. A. TURNAGE
/S/ KARLA M. GRAY
/S/ JIM REGNIER
/S/ TERRY N. TRIEWEILER
/S/ WILLIAM E. HUNT, SR.
/S/ JAMES C. NELSON
1. As previously noted, the insured also paid a fee to the attorney whom the insurer hired.
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