INSIGHT: Tips to Maximize Coverage and Limit Insurers’ Deductions to Defense Cost Invoices
It’s a basic tenet of insurance law that a liability insurer has a broad duty to defend its insured against claims that are potentially covered under its insurance policy. When that duty to defend is triggered, an insurer has an obligation to pay the full of amount of the defense costs incurred.
Despite that duty, an insurer will often impose various impediments to the full payment of defense costs. One such tactic is to insist on a review of the defense cost invoices and reduce or deny any costs that are not “reasonable.”
Whether an incurred defense costs is “reasonable” depends on multiple factors, including, the controlling law, whether an insurer has accepted or denied coverage and the specifics of the underlying lawsuit.
However, a insured can limit an insurer’s potential arguments regarding the “reasonableness” of defense costs by instituting simple changes in defense counsel’s billing practices and following certain “best practices.”
Prohibit Block Billing
Many law firms permit attorneys to enter time in a narrative format without breaking out the legal task with corresponding time—this a commonly known as “block billing.” For example, a time entry “block billed” would read “reviewed pleadings, drafted discovery, responded to client emails regarding discovery (3.6).”
On its face, this is a descriptive entry that communicates the specific work done and the total time spent. Yet an insurer may contend that since the amount of time spent on each task is unknown, it cannot evaluate if the time spent was reasonable.
To thwart this argument from the get-go, a simple solution is to avoid block billing and institute “itemized billing.” As a template, an itemized bill would read, “reviewed pleadings (.7); drafted RFA’s (2.3); responded to clients e-mail regarding discovery to be filed (.6).” This is an easy change that eliminates an often used justification by insurers to reduce defense cost invoices.
Use Descriptive Language to Avoid ‘Vague’ Time Entries
Another justification that insurers use to reduce defense costs is that the time entry itself is not detailed enough to know what work was being done—it is too vague. A rule of thumb to follow to avoid vague descriptions is to add “regarding” at the end of the time entry description if it is difficult to tell from the prefatory language what the work entailed.
For example, a time entry that reads “drafted discovery (.3); and spoke to opposing counsel (.4)” may be deemed too vague for payment by an insurer. In contrast, a time entry that reads “drafted interrogatories (.3); participated in a telephone conference with Mr. Smith (opposing counsel) regarding status of discovery plan and call with court(.4)” provides specifically who, what, how and why.
Avoid Inconsistent Time Entries and Multiple Attorneys Performing Same Task
If multiple attorneys are working on the same task or participate in the same meeting/calls, insurers may contend that too many attorneys were involved, the task done by an attorney was not appropriate (i.e., should have been done by a junior attorney, not a partner) or inconsistent billing (same meeting but attorneys spent different amounts of time).
Below are practice tips to mitigate these arguments:
- Before leaving a meeting or immediately following a call, collectively confirm the time spent and billing description;
- Use appropriately descriptive language for the attorney’s seniority. For example, a partner “reviews and edits” and “communicates case objectives and instructions.” In contrast, a junior attorney “drafts first draft of interrogatories” or “conducts initial research and provides initial analyses”;
- Assign tasks to attorneys of appropriate level and skill—a senior partner should probably not bill for “initial research.” However, the required level and skill of an attorney will vary by the complexity of the case and task; and
- If two attorneys are working on the same task, provide greater specificity in task descriptions. Instead of writing “draft pleadings” one attorney should write “draft complaint” and the other should write “revise and edit complaint” or “draft counterclaims.”
Protect Privilege but Provide Detail in Time Entries
There are varied privilege concerns when submitting defense cost invoices to an insurer. Often, to protect privilege, defense bills will be redacted before submission.
The insurer may argue that too much information is redacted to know if the task being done is “reasonable.” This puts the insured in a catch-22—redact for privilege and accept an invoice reduction (or denial of all costs) or don’t redact and risk waiving privilege.
One solution: tailor your invoice descriptions so enough information is conveyed without revealing legal strategy or advice. For example, a description that reads “draft complaint (.2); participate in phone conference with client regarding legal strategy for responding to discovery (.2)” provides specific detail about the tasks without revealing the legal strategy itself so no redactions are needed.
In contrast, “speak to client regarding whether to serve discovery in 10 days or 30 days depending on opposing counsel’s response to last e-mail (.2)” should be redacted because it reveals legal strategy.
Note that this can be especially tricky when conducting legal research and you want to provide a full description of what was researched. In general, a good practice is to draft such time entries similar to: “conduct legal research regarding REDACT for summary judgment motion.”
Provide Back-Up and Support for Expenses
Insurers may assert that either expenses are not covered under the policy (i.e. meals, travel) or insufficient backup was provided to support the costs submitted.
First, insureds should read the policy and note if a policy discusses coverage for expenses.
Second, insureds should provide all receipts and invoices for expenses such as flights, meals, vendors, and experts.
Third, if an insurer refuses to pay for certain expenses one tactic is to submit an accompanying description with the invoice itself. Often, expenses are submitted without any description other than “meal” for example, and an accompanying description provides additional context for reimbursement.
What to Remember When Submitting Defense Cost Invoices
- In the cover letter accompanying the defense costs invoices, state that the insured “reserves all rights” regarding the invoice submission and issues related to coverage;
- If invoices or documents have been redacted, ensure that all hidden data and information redacted has been permanently removed, not simply blacked out;
- Keep track of when the invoice was submitted, the amount of each invoice and the total amount submitted. If managing multiple defense firms, implement a plan early to monitor bill submissions and responses;
- Regularly follow up after invoice submission, especially if payment is not promptly made;
- If coverage is initially denied and the insurer subsequently agrees to pay defense costs, do not accept coverage. Instead, accept the payment of defense costs as a mitigation of the damages resulting from the breach of the insurance contract. Otherwise, the breach may be deemed cured and the insured may waive its rights to pursue damages for the breach; and
- If there is any doubt about what is or is not covered, submit the invoice. If an invoice is not submitted, there is zero chance it will be covered.