By: Bernsen S.B. No. 1654 A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to the provision of defense counsel to insureds by 1-3 liability insurers; providing a civil penalty. 1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-5 SECTION 1. Subtitle B, Title 2, Insurance Code, is amended 1-6 by adding Chapter 104 to read as follows: 1-7 CHAPTER 104. PROVISION OF DEFENSE COUNSEL BY LIABILITY INSURERS 1-8 Sec. 104.001. DEFINITIONS. In this chapter: 1-9 (1) "Defense counsel" means an attorney or law firm 1-10 retained or engaged by an insurer for the purpose of representing 1-11 an insured under an insurance policy. 1-12 (2) "Insurer" means any partnership, corporation, 1-13 association, or other group, however organized, that issues any 1-14 form of liability insurance, whether primary insurance coverage, 1-15 excess insurance coverage, or umbrella insurance coverage. The 1-16 term includes a Lloyd's plan, reciprocal or interinsurance 1-17 exchange, county mutual insurance company, or farm mutual insurance 1-18 company. 1-19 (3) "Litigation-management guideline" means a rule or 1-20 guideline issued by an insurer to a defense counsel provided by the 1-21 insurer to an insured for the purpose of directing how the counsel 1-22 conducts the representation of the insured or records and bills 1-23 time for conducting the representation of the insured. The term 1-24 does not include a request by the insurer for the defense counsel 1-25 to provide information regarding the date of an activity, the 2-1 individual responsible for an activity, the amount of time expended 2-2 on an activity, or a reasonable and brief description of an 2-3 activity. 2-4 Sec. 104.002. APPLICABILITY OF CHAPTER. This chapter 2-5 applies only to an insurer that issues a liability insurance 2-6 policy: 2-7 (1) to or covering any resident of this state; 2-8 (2) covering liability incurred by an insured in this 2-9 state; or 2-10 (3) under which the insurer provides legal 2-11 representation to an insured in a claim or action pending in this 2-12 state. 2-13 Sec. 104.003. CERTAIN GUIDELINES PROHIBITED. (a) An 2-14 insurer may not submit to a defense counsel a litigation-management 2-15 guideline that requires or suggests that a defense counsel perform 2-16 an activity that: 2-17 (1) interferes with: 2-18 (A) the counsel's duty of loyalty to the 2-19 insured; 2-20 (B) the counsel's duty to exercise independent 2-21 professional judgment; or 2-22 (C) the attorney-client relationship between the 2-23 counsel and the insured; or 2-24 (2) would result in a waiver of any privilege of the 2-25 insured. 2-26 (b) The types of litigation-management guidelines prohibited 3-1 by this section include guidelines that require or suggest that a 3-2 defense counsel should or must obtain the insurer's approval before 3-3 performing a task or incurring an expense to represent and protect 3-4 the insured. 3-5 (c) This section does not prohibit an insurer from disputing 3-6 the reasonableness or necessity of attorney's fees or expenses 3-7 after receiving a fee invoice submitted by a defense counsel. 3-8 Sec. 104.004. CERTAIN CONTRACT PROVISIONS VOID. (a) A 3-9 provision in a contract between an insurer and a defense counsel or 3-10 between an insurer and an insured that violates Section 104.003 is 3-11 void. 3-12 (b) A waiver by an insured of a provision of Section 104.003 3-13 is void. 3-14 (c) If a contract provision is void because the provision 3-15 violates Section 104.003, the remaining provisions of the contract 3-16 are valid and enforceable to the extent permitted by other law. 3-17 Sec. 104.005. DAMAGES; INJUNCTIVE RELIEF. (a) An insured 3-18 may bring an action against an insurer to: 3-19 (1) recover any actual damages proximately suffered by 3-20 the insured because of a violation of Section 104.003; and 3-21 (2) obtain injunctive relief to prevent the threatened 3-22 or continued violation of Section 104.003. 3-23 (b) An insurer that, based on a litigation-management 3-24 guideline that violates this chapter, refuses to pay all or part of 3-25 a defense counsel's fee or expenses for the representation of an 3-26 insured is liable to the counsel and the insured for the reasonable 4-1 value of any unpaid legal services or expenses provided by the 4-2 counsel in the representation of the insured. 4-3 (c) A court shall award reasonable and necessary attorney's 4-4 fees to a person who recovers damages or obtains injunctive relief 4-5 under this section. 4-6 Sec. 104.006. CIVIL PENALTY. (a) An insurer who violates 4-7 Section 104.003 is liable for a civil penalty. A civil penalty 4-8 assessed under this section may not exceed: 4-9 (1) $5,000 for the first or second act of violation; 4-10 or 4-11 (2) $10,000 for the third and each subsequent act of 4-12 violation. 4-13 (b) At the commissioner's request, the attorney general 4-14 shall file and prosecute a civil suit in a district court in Travis 4-15 County to recover a civil penalty under this section. 4-16 SECTION 2. This Act applies only to conduct that occurs on 4-17 or after the effective date of this Act. Conduct that occurred 4-18 before that date is governed by the law as it existed immediately 4-19 before the effective date of this Act, and that law is continued in 4-20 effect for that purpose. 4-21 SECTION 3. This Act takes effect September 1, 2001.