Issue No. 1 – Selection of Defense Counsel
An insurance carrier owes a duty to defend its insured.  Insurance carriers often assert that they want to retain counsel to defend the policyholder from their approved panel counsel list.  These panel counsel typically have agreed to a negotiated discounted hourly rate for the volume of work that they undertake on the insurance carrier’s behalf.   An attorney on the panel counsel list may not be the best attorney to defend a claim, particularly if the claim is a complex claim requiring a particular legal expertise.  The policyholder does not have to agree to the insurance carrier’s selection of panel counsel if the insurance carrier has reserved rights to deny coverage.  Policyholder’s should negotiate with their insurance carriers and work with them to obtain a mutually agreeable defense counsel.

Issue No. 2 – Rates of Defense Counsel
Often with the selection of defense counsel, the hourly rate of that defense counsel becomes an issue.  An insurance carrier is responsible for paying defense costs that are reasonable and necessary.  The reasonableness of the attorney’s fees may depend on: (1) the novelty and complexity of the issues involved in the case and the legal skill level needed to properly defend the case; (2) the legal fee customarily charged in the locality for similar legal services; and (3) the experience, reputation and ability of the attorney or attorneys who will be providing the legal services.  See Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974); Vicor Corp. v. Vigilant Ins. Co., 2012 U.S. Dist. LEXIS 139589, at *6-7 (D. Mass. Sept. 28, 2012); Lamensdorf v. Welin, 2011 U.S. Dist. LEXIS 142326, 14-16 (M.D. Ga. Dec. 12, 2011).   

There are times when the policyholder does not believe that the insurance carrier selected panel counsel has the requisite skills needed to defend the claim and wants to use a more qualified lawyer who charges a higher hourly rate, or the policyholder has used a particular lawyer or law firm to defend the policyholder in similar cases historically and that lawyer’s hourly rate is higher than the rate that the insurance carrier’s panel counsel.  In those circumstances, the policyholder may have to negotiate with the insurance carrier to get the insurance carrier to agree to pay the higher hourly rate, or at least a rate higher than the panel counsel’s rate, with the policyholder potentially paying the delta. In Northern Sec. Ins. Co. v. R.H. Realty Trust, 78 Mass. App. Ct. 691, 695 (2011), the court said: “[T]he insured was entitled to have a reasonable fee paid, based on market rather than panel rates. Panel rates . . . often reflect, first what [the insurer] was able to bargain for as a large insurance company handling various cases involving many attorneys, who presumably wish to continue receiving referrals; and second, the justifiable interest of a company such as [the insurer] to keep its legal costs down, especially in routine cases, which may be at odds with an insured’s desire to pay more for legal representation in the hope of minimizing legal exposure.”

Issue No. 3 – Billing Guidelines 
Many insurance carriers send billing guidelines to defense counsel.  These billing guidelines dictate defense counsel’s time on certain tasks, seniority of legal staff performing various tasks, the type and amount of discovery to be undertaken, motion practice, the amount of legal research, and the amount of detail required in defense counsel invoices.  Billing guidelines do not change the insurance carrier’s obligations under the insurance policy and cannot interfere with the defense counsel’s ethical obligations.  The majority of courts have found that insurance carrier imposed billing guidelines are not enforceable.  See e.g., Supreme Court of Ohio Bd. of Comm’rs on Grievances & Discipline, Op. 2000-3 (2003); In re Rules of Prof. Conduct, 2 P.3ed 806 (Mont. 2000); and Indiana State Bar Ass’n, Opinion 3 of 1998.  As the California Court of Appeals stated in Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App.4th 999 (1998):

Under no circumstances can such guidelines be permitted to impede the attorney’s own professional judgment about how best to competently represent the insured.  If the attorney’s representation is to be limited in any way that unreasonably interferes with the defense, it is the insured,not the insurer, who should make that decision.
 
Policyholders should review and discuss any insurance carrier billing guidelines with its insurance carrier and defense counsel at the time of defense counsel’s retention to address any disputed issue in the guidelines at the outset.

Conclusion
An open line of communication between the insurance carrier, the policyholder, and defense counsel can help minimize disputes related to the defense of a tendered claim.  By addressing these issues at the outset of a new case, defense costs can be managed and potentially reduced to the satisfaction of both the policyholder and the insurance carrier.