1-1 By: Bernsen S.B. No. 1654 1-2 (In the Senate - Filed March 9, 2001; March 14, 2001, read 1-3 first time and referred to Committee on Business and Commerce; 1-4 April 24, 2001, reported favorably by the following vote: Yeas 4, 1-5 Nays 1; April 24, 2001, sent to printer.) 1-6 A BILL TO BE ENTITLED 1-7 AN ACT 1-8 relating to the provision of defense counsel to insureds by 1-9 liability insurers; providing a civil penalty. 1-10 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-11 SECTION 1. Subtitle B, Title 2, Insurance Code, is amended 1-12 by adding Chapter 104 to read as follows: 1-13 CHAPTER 104. PROVISION OF DEFENSE COUNSEL BY LIABILITY INSURERS 1-14 Sec. 104.001. DEFINITION. In this chapter: 1-15 (1) "Insurer" means any partnership, corporation, 1-16 association, or other group, however organized, that issues any 1-17 form of liability insurance, whether primary insurance coverage, 1-18 excess insurance coverage, or umbrella insurance coverage. The 1-19 term includes a Lloyd's plan insurer, reciprocal or interinsurance 1-20 exchange, county mutual insurance company, or farm mutual insurance 1-21 company. 1-22 (2) "Litigation-management guideline" means a rule or 1-23 guideline issued by an insurer to a defense counsel provided by the 1-24 insurer to an insured for the purpose of directing how the counsel: 1-25 (A) conducts the defense of the insured; or 1-26 (B) records and bills time for conducting the 1-27 defense of the insured. 1-28 Sec. 104.002. APPLICABILITY OF CHAPTER. This chapter 1-29 applies only to an insurer that issues a liability insurance 1-30 policy: 1-31 (1) to or covering any resident of this state; 1-32 (2) covering liability incurred by an insured in this 1-33 state; or 1-34 (3) under which the insurer provides a defense to an 1-35 insured in a claim or action pending in this state. 1-36 Sec. 104.003. CERTAIN GUIDELINES PROHIBITED. (a) An 1-37 insurer may not require a defense counsel provided to an insured to 1-38 follow a litigation-management guideline that: 1-39 (1) interferes with: 1-40 (A) the counsel's duty of loyalty to the 1-41 insured; 1-42 (B) the counsel's duty to exercise independent 1-43 professional judgment; or 1-44 (C) the attorney-client relationship between the 1-45 counsel and the insured; or 1-46 (2) would result in a waiver of the attorney-client 1-47 privilege between the defense counsel and the insured. 1-48 (b) The types of litigation-management guidelines prohibited 1-49 by this section include guidelines that require a defense counsel 1-50 to obtain the insurer's approval before performing a routine task 1-51 related to conducting the defense of the insured, such as: 1-52 (1) determining what legal research the counsel will 1-53 conduct; or 1-54 (2) deciding whether to: 1-55 (A) hire an expert; 1-56 (B) take a deposition; 1-57 (C) investigate a claim made against an insured; 1-58 (D) videotape a deposition; 1-59 (E) file a motion, including a motion to dismiss 1-60 or a motion for summary judgment; or 1-61 (F) prepare a document or have a paralegal 1-62 prepare a document. 1-63 Sec. 104.004. FLAT FEE PROHIBITED. An insurer may not 1-64 require a defense counsel accept a flat fee for: 2-1 (1) defending an insured; or 2-2 (2) performing a task in connection with the defense 2-3 of an insured. 2-4 Sec. 104.005. CERTAIN CONTRACT PROVISIONS VOID. (a) A 2-5 provision in a contract between an insurer and a defense counsel or 2-6 between an insurer and an insured that violates Section 104.003 or 2-7 104.004 is void. 2-8 (b) A waiver by an insured of a provision of Section 104.003 2-9 or 104.004 is void. 2-10 Sec. 104.006. DAMAGES; INJUNCTIVE RELIEF. (a) A person may 2-11 bring an action against an insurer to: 2-12 (1) recover any actual damages proximately suffered by 2-13 an insured because of a violation of Section 104.003 or 104.004; 2-14 and 2-15 (2) obtain injunctive relief to prevent the threatened 2-16 or continued violation of Section 104.003 or 104.004. 2-17 (b) An insurer that, based on a litigation-management 2-18 guideline or flat fee agreement that violates this chapter, refuses 2-19 to pay all or part of a defense counsel's fee for the defense of an 2-20 insured is liable to the counsel for the reasonable value of any 2-21 unpaid legal services or expenses provided by the counsel in the 2-22 defense of the insured. 2-23 (c) A court shall award reasonable and necessary attorney's 2-24 fees to a person who recovers damages or obtains injunctive relief 2-25 under this section. 2-26 Sec. 104.007. CIVIL PENALTY. An insurer who violates 2-27 Section 104.003 or 104.004 is liable for a civil penalty not to 2-28 exceed $10,000 for each act of violation. At the commissioner's 2-29 request, the attorney general shall institute an action in a 2-30 district court in Travis County to recover a civil penalty under 2-31 this section. 2-32 SECTION 2. This Act applies only to conduct that occurs on 2-33 or after the effective date of this Act. Conduct that occurred 2-34 before that date is governed by the law as it existed immediately 2-35 before the effective date of this Act, and that law is continued in 2-36 effect for that purpose. 2-37 SECTION 3. This Act takes effect September 1, 2001. 2-38 * * * * *