HBA-MSH, NRS S.B. 1654 77(R)BILL ANALYSIS Office of House Bill AnalysisS.B. 1654 By: Bernsen Civil Practices 5/18/2001 Committee Report (Amended) BACKGROUND AND PURPOSE Currently, certain insurance companies are placing restrictions on how retained defense counsel can conduct the defense of the insured. The State Bar of Texas Professional Ethics Committee recently published Ethics Opinion 533 stressing that the lawyer's only client is the insured and that it is impermissible under the Texas Rules of Professional Conduct for a lawyer to agree with an insurance company to restrictions that interfere with the lawyer's exercise of independent professional judgment. Senate Bill 1654 prohibits certain litigation-management guidelines from being imposed by an insurer on lawyers defending the insured. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. ANALYSIS Senate Bill 1654 amends the Insurance Code to prohibit an insurer from submitting to a defense counsel a litigation-management guideline that requires or suggests that a defense counsel perform an activity that interferes with the counsel's duty of loyalty to the insured, the counsel's duty to exercise independent professional judgment, or the attorney-client relationship between the counsel and the insured, or would result in a waiver of any privilege of the insured. The bill provides that the types of litigation-management guidelines prohibited include guidelines that require or suggest that a defense counsel should or must obtain the insurer's approval before performing a task or incurring an expense to represent and protect the insured. The bill provides that a provision in a contract between an insurer and a defense counsel or between an insurer and an insured that violates the prohibition of certain litigation-management guidelines is void. The bill provides that a waiver by an insured of a provision of certain litigation-management guidelines is void. The bill authorizes an insured to bring an action against an insurer to recover any actual damages proximately suffered by an insured and to obtain injunctive relief to prevent the threatened or continued violation of the prohibition of certain litigation-management guidelines. The bill provides that an insurer that, based on a litigation-management guideline that violates the defense of an insured, refuses to pay all or part of a defense counsel's fee or expenses for the representation of an insured is liable to the counsel and the insured for the reasonable value of any unpaid legal services or expenses provided by the counsel in the representation of the insured. The bill provides that an insurer who violates the prohibition of certain litigation-management guidelines is liable for a civil penalty that may not exceed $5,000 for the first or second act of violation, or $10,000 for the third and each subsequent act of violation. The bill requires the attorney general to file and prosecute a civil suit in a district court in Travis County to recover a civil penalty, at the commissioner of insurance's request. EFFECTIVE DATE September 1, 2001. EXPLANATION OF AMENDMENTS Committee Amendment No. 1 provides that the types of litigation-management guidelines prohibited in the provision of defense council by liability insurers include guidelines that require, but not those that suggest a defense counsel to obtain the insurer's approval before performing a task or incurring an expense to represent and protect the insured.