Auditing Legal Bills Without Bloodshed
As a coverage lawyer who has audited legal bills, and had his own legal bills audited, I believe there are very few subjects as fraught with tension and concern for both the carrier and insurance defense counsel (and coverage counsel, may I add) as fee audits. While insurance companies recognize the use of audits as an effective tool to control litigation costs, defense counsel often view the process as little more than an attempt to shave off a portion of their already bare bones bills. Even so, when reasonable rules are followed in the auditing process, most areas of contention can be avoided, even if the process can never be made utterly painless.
Common methods
Much of the tension arises because auditors do not use any single method or procedure to audit legal bills. Indeed, auditing legal bills is not like accounting where there are “generally accepted accounting principles.” Still, legal auditors usually follow one of two recognized standards. One is to audit based on reasonableness of fees. The other is contained in attorney retention agreements or billing guidelines sent by the insurer to the attorney which are usually signed off on at the beginning of a case.
The case law, in Texas and elsewhere, is well settled that the insurance company is liable only for the reasonable and necessary expenses incurred in defending the claim. See Commonwealth Lloyds Ins. Co. v. Thomas, 678 S.W.2d 278, 284 (Tex. App.—Fort Worth 1984, writ ref d n.r.e.). The party seeking recovery of attorneys’ fees has the burden of establishing that both fees and expenses are reasonable and necessary. Courts consider the time spent by each attorney handling the matter and the reasonable hourly rate for each attorney in a firm the key factors when determining the reasonableness of attorneys’ fees.
There are three primary areas of audit: attorneys’ bills for working on the file; the expenses and disbursements; and expert witness invoices and expenses. In reviewing these areas, the auditor normally will review the attorneys’ invoices at a minimum. More detailed audits will include reviews of expenses, including receipts for expenses, on-site examination of law firm procedures and records, examination of work product, pleadings and underlying records to substantiate time and expense entries. Full-scale audits may include review of the published credentials of the lawyers, review of information on local hourly rates, review of work product (quality as well as quantity) and consideration of legal performance, strategy, tactics and results.
Auditing legal bills is not an exact science. Time expended by attorneys on a project as well as the cost of various expenditures, such as experts or court reports, vary from matter to matter and by geographic location. Indeed, certain audit components recognize peculiar market forces (i.e., unusual market costs and local rates) as a tool to evaluate overall effectiveness of the legal services provided by defense counsel. Some cases may not lend themselves to such analysis due to the fact that different attorneys may approach an issue in different ways with no one standard method being “correct.” For instance, attorneys in one jurisdiction may have courts inclined to grant summary judgment motions, thus such motions may figure prominently in their practice. In other places where courts are not so inclined, use of such motions may be rare.
Consequently, auditors need to understand the context of the case. Unfortunately, too often auditors have no direct litigation experience and assume that litigation is a fungible, cookie-cutter process. This misunderstanding, or simple lack of experience, causes more audit problems than any other. One can imagine the number of hours that a shareholder may spend on the phone addressing an auditor’s questions simply because the auditor does not understand that cases are not all the same. To avoid these problems insurance companies should be as careful in picking auditors as they are in choosing defense counsel.
Avoiding audit problems
While reviewing invoices and expense documentation, there are numerous common billing problems for which auditors look. While there is some overlap, these include: block billing, vagueness, excessive minimum time, overhead charges, undocumented expenses, transition time and mistaken math.
There are many ways to minimize these problems or to avoid them altogether. To wit:
1. Attorneys should avoid block billing. Most attorneys should be doing this anyway because of billing guidelines. Instead, defense counsel should fully describe each task performed. If more than one task was done, then they should use parenthetical time entries or “task billing.” For instance, a time entry could provide as follows: “Telephone conference with M. Quinn regarding facts of case (.3); prepare motion for summary judgment based on statute of limitations (2.1); and telephone conference with opposing counsel regarding responses to discovery (.1).”
2. Use agreed upon minimum increments. Bill according to the time actually worked, with a pre-approved hour increment as the smallest unit of measure.
3. Control staffing. The defense attorney should strive to keep the trial team manageable and as small as possible while still able to properly litigate the case. Explain to the carrier why more attorneys are needed on the file before adding them.
4. Admit overcharges. Consider reasonable adjustments of the bill immediately upon inquiry from your client when inadvertent overcharges are brought up or when discovered internally. Be up front and explain to the client why the bill has been adjusted. Such candor is usually respected and appreciated.
5. Show “No charge” entries on the bill. There are many occasions where counsel perform tasks or projects that are not billed. Let the client know that the law firm has done this work and that it is not being charged. This always puts the rest of the bill in a better light.
Limiting tensions
The audit process should include steps to foster mutual cooperation and lessen tensions between the carrier and the defense firm. Steps that can be taken, by both the law firm and the carrier, include:
1. Communicate. The carrier should explain to the defense attorneys that the audit is about cost control and is not about punishing or distrust of the law firm. The carrier and law firm should agree to talk candidly about billing issues and to avoid arbitrary actions. Communication is the single best way to lessen audit tensions;
2. Supplement. If there is missing or inadequate information, then defense counsel should agree to supplement the bill immediately and carriers should give the defense attorney an opportunity to provide the information quickly and without undue delay to avoid payment delays;
3. Explain. If there are extraordinary facts, legal issues or activities that seem unapproved and unjustified, ask the attorney to explain in writing;
4. Reimburse any overpayment. Where overpayments are clear or uncontested, reimburse promptly. Carriers should reciprocate by paying reasonable bills promptly;
5. Supply information in an easy-to-use form, such as on disk in a word-processing format. This will make the auditor’s job easier and underlines its cooperation;
6. Be cooperative. When auditors are on-site, provide a comfortable work space for the auditors. Reasonable explanations or non-confidential information should be provided a timely and complete fashion. However, defense counsel should be allowed to have the auditors sign a confidentiality agreement where concerns about sensitive information exists;
7. Prevent abuse. Auditors should not be allowed to abuse defense counsel; and counsel must be provided the opportunity to respond to a negative report.
The bottom line is that audits, while uncomfortable, should not chill communications or sour good working relationships. Communicate, cooperate and compromise are the ways to prevent the harmful aspects of the audit process.
Brian S. Martin is a partner in the Insurance and Coverage Section of the Houston office of Thompson, Coe, Cousins & Irons, L.L.P.