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No. 98-612 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

2000 MT 110 

299 Mont. 321

2 P. 3d 806

IN THE MATTER OF THE RULES OF 

PROFESSIONAL CONDUCT AND INSURER

IMPOSED BILLING RULES AND PROCEDURES

UGRIN, ALEXANDER, ZADICK & HIGGINS, P.C.,

and JAMES, GRAY, BRONSON & SWANBERG, P.C.,

Petitioners.

ORIGINAL PROCEEDING: Declaratory Relief 

COUNSEL OF RECORD:

For Petitioners:

Neil E. Ugrin (argued) Gary M. Zadick (argued); Ugrin, Alexander, Zadick & Higgins, 

Great Falls, Montana

Robert James (argued) , Bert Fairclough (argued); James, Gray, Bronson & Swanberg, 

Great Falls, Montana

For Respondents:

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Ronald F. Waterman, Thomas E. Hattersley, III; Gough, Shanahan, Johnson

& Waterman, Helena, Montana

Lloyd E. Williams, Jr. (argued), David E. Morgans; Williams & Montgomery,

Chicago, Illinois

Lawrence R. Samuels, Jacquelyn F. Kidder, Robert L. Carter; Ross & Hardies,

Chicago, Illinois (for St. Paul Fire and Marine Insurance Company, USF&G Company, 

TIG Insurance Company)

Thomas M. Welsch; Poore, Roth & Robinson, Butte, Montana

William T. Barker, Jeffrey P. Lennard, Tracy T. Segal; Sonnenschein, Nath

& Rosenthal, Chicago, Illinois (for Allstate Insurance Company, Zurich 

American Insurance Company, Universal Underwriters Insurance Company) 

For Amicus Curiae Supporting Petitioners:

Sam E. Haddon, Esq. (argued), Missoula, Montana; Rockwood Brown, Esq. (argued), 

Billings, Montana (for Montana Defense Trial Lawyers)

Steven H. Gurnee, Esq., San Francisco, California (for Association of Defense

Counsel of Northern California); Robert A. Davidson, Esq., Los Angeles,

California (for Association of Southern California Defense Counsel)

Mark L. Stermitz, Esq., Missoula, Montana (for Montana Appleseed Center

for Law & Justice, Inc.)

Brian M. Morris; Goetz, Gallik, Baldwin & Dolan, Bozeman, Montana;

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Elizabeth Brennan; Rossbach Brennan, Missoula, Montana; Patricia O'Brien

Cotter (argued); Cotter & Cotter, Great Falls, Montana (for Montana Trial

Lawyers Association)

For Amicus Curiae Supporting Respondents:

Jacqueline T. Lenmark; Keller, Reynolds, Drake, Johnson & Gillespie,

Helena, Montana (for American Insurance Association)

Charles Silver, Esq., University of Texas School of Law, Austin, Texas 

(on his own behalf)

Allen B. Chronister; Chronister, Moreen & Larson, Helena, Montana; John

S. Piece, David J. McMahon, Gary A. Bresee; Barger & Wolen, San

Francisco, California (for Legalguard, Inc.)

Mark D. Parker; Parker Law Firm, Billings, Montana (for National

Association of Independent Insurers)

Argued and Submitted: September 28, 1999 

Decided: April 28, 2000

Filed:

__________________________________________

Clerk

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Justice W. William Leaphart delivered the Opinion of the Court.

¶1 In an original application for declaratory judgment, Petitioners assert that insurerimposed billing rules and procedures violate the Rules of Professional Conduct.

¶2 We address the following issues:

¶3 1. May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree 

to abide by an insurer's billing and practice rules which impose conditions limiting or 

directing the scope and extent of the representation of his or her client, the insured?

¶4 2. May an attorney licensed to practice law in Montana, or admitted pro hac vice, be 

required to submit detailed descriptions of professional services to outside persons or 

entities without first obtaining the informed consent of his or her client and do so without 

violating client confidentiality?

Factual and Procedural Background 

¶5 In June, 1985 we adopted the Rules of Professional Conduct "as rules governing the 

conduct of persons admitted to practice law before this Court and all state courts in the 

State of Montana." In November, 1998 Petitioners filed an application for original 

jurisdiction and declaratory relief. Petitioners requested a declaratory ruling on two issues: 

1. May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree to 

abide by an insurer's billing and practice rules which impose conditions limiting or 

directing the scope and extent of the representation of his or her client, the insured? 2. 

May an attorney licensed to practice law in Montana, or admitted pro hac vice, be required 

to submit detailed descriptions of professional services to outside persons or entities 

without first obtaining the informed consent of his or her client and do so without 

violating client confidentiality? 

¶6 We accepted original jurisdiction. We ordered that Petitioners identify insurers doing 

business in Montana whom they sought to have bound by this Court's determination of the 

issues, that the insurers (Respondents) file copies of the billing rules that they enforce in 

Montana, directly or through an auditing agency, and that the parties advise the Court 

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whether they needed an evidentiary hearing.

¶7 Respondents moved this Court for an evidentiary hearing and Petitioners filed a brief in 

opposition. In March, 1999 we issued an order denying the request for an evidentiary 

hearing but allowing Respondents to jointly file an expert opinion. In September, 1999 

this matter was argued before the Court.

Discussion

¶8 As a preliminary matter, we note that Respondents argue that this Court erred in 

accepting original jurisdiction of this case and in denying their request for an evidentiary 

hearing. Respondents argue in part that there is no justiciable case, that the Petitioners lack 

standing, and that there is no issue of statewide importance. 

¶9 Respondents' arguments are wholly without merit. We have a constitutional mandate to 

fashion and interpret the Rules of Professional Conduct. See Article VII, Section 2 of 

Montana's Constitution, providing that "[the supreme court] may make rules governing 

appellate procedure, practice and procedure for all other courts, admission to the bar and 

the conduct of its members." Art. VII, Sec. 2(3), Mont. Const. Compare §§ 37-61-101, 

MCA, et. seq (providing procedures for licensing and regulation of members of Montana's 

bar). Further, whether insurers' billing and practice rules conflict with the Rules of 

Professional Conduct is a question of law that requires no evidentiary hearing. The tension 

between insurers' billing and practice rules and the Rules of Professional Conduct presents 

an appearance of impropriety that is a sufficient basis for this Court to exercise its inherent 

powers and its Constitutional mandate to address the issues presented here. Compare

Bergeron v. Mackler (Conn. 1993), 623 A.2d 489, 494 (recognizing that "considering the 

appearance of impropriety may be part of the inherent power of the court to regulate the 

conduct of attorneys"); First American Carriers v. Kroger Co. (Ark. 1990), 787 S.W.2d 

669, 671 (concluding "fact that Canon 9 [which provided that lawyers should avoid 

appearance of impropriety] is not in the Model Rules does not mean that lawyers no 

longer have to avoid the appearance of impropriety"); Matter of Weinroth (N.J. 1985), 495 

A.2d 417, 421 (citations omitted) (concluding " 'even the appearance of impropriety' that 

casts doubt upon the integrity of the legal process must be avoided"). 

¶10 Moreover, Respondents' contentions that the issues presented in this case are not of 

statewide importance and that no urgency attends them are belied by the numerous amici 

briefs and expert opinions that Respondents have submitted. Nor is Respondents' 

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contention that Petitioners lack standing tenable. Petitioners clearly have a personal stake 

in the issue whether their compliance with insurers' billing and practice rules violates the 

Rules of Professional Conduct. Finally, Respondents' claim that they have not had notice 

and an opportunity to respond are flatly contradicted by the more than 1000 pages of 

affidavits, expert opinions, and billing and practice rules that they have filed with this 

Court, not to mention the numerous supporting amicus curiae briefs that also have been 

filed. 

¶11 May an attorney licensed to practice law in Montana, or admitted pro hac vice, agree 

to abide by an insurer's billing and practice rules which impose conditions limiting or 

directing the scope and extent of the representation of his or her client, the insured?

¶12 In addressing this issue, there are several Rules of Professional Conduct that we keep 

in mind. 

¶13 Rule 1.1 provides: "Competence. A lawyer shall provide competent representation to 

a client. Competent representation requires the legal knowledge, skill, thoroughness and 

preparation reasonably necessary for the representation." Rule 1.1, M.R.Prof.Conduct.

¶14 Rule 1.8 provides in pertinent part:

Conflict of Interest, Prohibited Transactions

. . . .

(f) A lawyer shall not accept compensation for representing a client from one other 

than the client unless:

(1) the client consents after consultation;

(2) there is no interference with the lawyer's independence of professional judgment 

or with the client-lawyer relationship; and

(3) information relating to representation of a client is protected as required by Rule 

1.6.

Rule 1.8, M.R.Prof.Conduct (emphasis added).

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¶15 Rule 2.1 provides in part: "Advisor. In representing a client, a lawyer shall exercise 

independent professional judgment and render candid advice." Rule 2.1, M.R.Prof.

Conduct. Rule 5.4 provides in pertinent part: "Professional Independence of a 

Lawyer . . . . (c) A lawyer shall not permit a person who recommends, employs, or pays 

the lawyer to render legal services for another to direct or regulate the lawyer's 

professional judgment in rendering such legal services." Rule 5.4, M.R.Prof.Conduct.

¶16 In the present case, the parties do not dispute that insurers' billing and practice rules 

typically "impose conditions [upon an attorney appointed by an insurer to represent an 

insured] limiting or directing the scope and extent of the representation of his or her 

client." The Petitioners have focussed on the requirement of prior approval in insurers' 

billing and practice rules. We therefore address that condition of representation while 

recognizing that other conditions limiting or directing the scope and extent of 

representation of a client may also implicate the Rules of Professional Conduct.

¶17 As a representative set of litigation guidelines, we briefly consider the guidelines 

submitted by the St. Paul Companies (hereafter, St. Paul). The declared policy of St. Paul's 

Litigation Management Plan (hereafter, the Plan) is to "[p]rovide a systematic and 

appropriate defense for St. Paul and its insureds, and to vigorously defend nonmeritorious 

claims and claims where the demands are excessive."

¶18 St. Paul promotes a "team" approach to litigation in which each member has distinct 

responsibilities. The claim professional is "responsible for disposition of claims, whether 

in suit or not. We expect the St. Paul claim professional to take the lead in initiating 

settlement negotiations . . . . We also expect the claim professional to have significant 

input into development of the litigation strategy (i.e., settle or try)." The Plan also 

"recognizes that defense counsel's primary responsibility and obligation are to protect and 

further the interests of the insured in the conduct of the litigation. Our goal is to cooperate 

with the insured and defense counsel to achieve the best result possible." 

¶19 However, the Plan states that "[m]otion practice, discovery and research are items that 

have historically caused us some concern and which we plan to monitor closely. While we 

foresee very few differences of opinion, we require that defense counsel secure the 

consent of the claim professional prior to scheduling depositions, undertaking research, 

employing experts or preparing motions" (emphasis added). 

¶20 Thus, the Plan expressly requires prior approval before a defense attorney may 

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undertake to schedule depositions, conduct research, employ experts, or prepare motions. 

The Plan concludes that "[w]e understand that any conflicts between the St. Paul 

Litigation Management Plan and the exercise of your independent judgment to protect the 

interests of the insured must be resolved in favor of the insured. We expect, however, to 

be given an opportunity to resolve any such conflicts with you before you take any action 

that is in substantial contravention of the Plan." 

A. Whether Montana has recognized the dual representation doctrine under the Montana 

Rules of Professional Conduct.

¶21 Petitioners assert that the insured is the sole client of a defense attorney appointed by 

an insurer to represent an insured pursuant to an insurance policy (hereafter, defense 

counsel) and that a requirement of prior approval in insurance billing and practice rules 

impermissibly interferes with a defense counsel's exercise of his independent judgment 

and his duty of undivided loyalty to his client. Petitioners argue that because the 

relationship of insurer and insured is permeated with potential conflicts, they cannot be coclients of defense counsel.

¶22 Respondents argue that under Montana law, the rule is that in the absence of a real 

conflict, the insurer and insured are dual clients of defense counsel. From this fundamental 

premise, Respondents argue that as a co-client of defense counsel, the insurer may require 

pre-approval of attorney activities to assure adequate consultation. Respondents argue 

further that defense counsel must abide by a client's decisions about the objectives of 

representation and that defense counsel are obliged to consult with a client about the 

means for the objectives of representation. Respondents also argue that under Montana 

law, an insurer is vicariously liable for the conduct of defense counsel and that an insurer's 

control of litigation justifies holding an insurer vicariously liable for the conduct of 

defense counsel.

¶23 We conclude that Respondents have misconstrued our past decisions. This Court has 

not held that under the Rules of Professional Conduct, an insurer and an insured are coclients of defense counsel. The Montana decisions chiefly relied upon by Respondents are 

inapposite because each one concerns situations where the insurer had "absolute" control 

of the litigation. None of the Montana decisions cited by Respondents addresses whether 

an insurer is a co-client under the Rules of Professional Conduct.

¶24 The central case underlying the Montana decisions cited by Respondents is Jessen v. 

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O'Daniel (D.Mont. 1962), 210 F.Supp. 317. Jessen concerned a bad faith action brought 

by an insured against his insurer following underlying litigation in which the insurer had 

hired an attorney to represent its interests and those of its insured. Further, there was "the 

unique situation of the insured paying a fee to the attorney selected by the insurer, to do 

what in effect the attorney was already required to do under his contract of employment by 

the insurance company." Jessen, 210 F.Supp. at 331. In the course of negotiations between 

the parties in the underlying litigation, the insurer's attorney failed to communicate all of 

the offers that the parties made to each other. The court in Jessen found that "[h]ad [the 

attorney] communicated the respective offers to the other parties, the case would probably 

have been settled." Jessen, 210 F.Supp. at 324.

¶25 The insurer in Jessen argued that the attorney was "acting as a mutual attorney or 

agent for both [the insurer] and [the insured], and accordingly 'neither party can be held 

accountable for knowledge that the mutual attorney had, but did not transfer to the other 

parties or to either of them.' " Jessen, 210 F.Supp. at 330. The court in Jessen

acknowledged a conflict in the authorities regarding whether "the insurance carrier 

becomes an agent of the insured with respect to settlement and trial, or is in the nature of 

an independent contractor." Jessen, 210 F.Supp. at 331 (citations omitted). However, the 

court concluded that 

The precise relationship is unimportant. The authorities agree that these provisions 

of the contract have the effect of placing absolute and exclusive control over the 

litigation in the insurance carrier, with "the correlative duty to exercise diligence, 

intelligence, good faith, honest and conscientious fidelity to the common interests of 

the parties."

Jessen, 210 F.Supp. at 331 (citation omitted) (emphasis added). The Jessen court concluded that "[t]

here can be no question that in the absence of the special fee arrangement(1) with [the insured], [the 

attorney's] conduct and knowledge would be imputed to [the insurer]. Under the circumstances here, 

the special [fee] arrangement cannot relieve [the insurer] from its responsibility for [the attorney's] 

conduct in failing to disclose the various offers to the respective parties." Jessen, 210 F.Supp. at 332.

¶26 The court in Jessen emphasized the complete control over litigation that the insurer 

held under the insurance contract. Jessen did not address whether the attorney's 

compliance with that contract violated the Rules of Professional Conduct. Nor did Jessen

determine whether the insured and the insurer were co-clients under the Rules of 

Professional Conduct.

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¶27 As Respondents point out, subsequent Montana decisions have recognized Jessen's

conclusion that an insurance contract may place absolute control of litigation in the hands 

of the insurer. In Safeco Ins. Co. v. Ellinghouse (1986), 223 Mont. 239, 725 P.2d 217, the 

Court rejected an insurer's claim that because the attorney it hired was an independent 

contractor, the insurer was not responsible for the mistakes of the attorney. Relying on 

Jessen, the Court in Ellinghouse concluded that "[t]he provisions of an insurance contract 

which give the insurance company the right and impose a correlative duty to defend suits 

against the insured have the effect of placing absolute and exclusive control over the 

litigation in the insurance carrier." Ellinghouse, 223 Mont. at 252-53, 725 P.2d at 226 

(citations omitted).

¶28 Similarly, in State v. Second Judicial Dist. Court (1989), 240 Mont. 5, 783 P.2d 911, 

the Court considered whether communication between an insurer and its attorneys, which 

occurred after litigation began, was privileged from disclosure in a bad faith action. Citing 

Jessen and Ellinghouse, the Court determined that "[a]bsent a conflict of interest, the 

attorney hired by the insurance company to defend its insured, represents both." Second 

Judicial Dist. Court, 240 Mont. at 10, 783 P.2d at 914. We note, however, that the Court 

considered client identity only in determining whether insurer-defense counsel 

communications were privileged. 

¶29 In Tigart v. Thompson (1990), 244 Mont. 156, 796 P.2d 582, the district court granted 

plaintiff's motions for a new trial and attorney fees and costs under § 37-61-421, MCA. 

The insurer appealed the award of attorney fees and costs, arguing in part that it was not a 

"party" under § 37-61-421, MCA. The Court in Tigart noted the Jessen court's 

determination that insurance contracts place exclusive control of the litigation in the 

insurer and concluded that "[i]f an insurer may be held liable for the actions of its attorney, 

as was the case in Ellinghouse, under a theory of agency, it is axiomatic that the insurer 

may be responsible for costs, expenses and attorney fees when the insurer 'multiplies the 

proceedings in any case unreasonably and vexatiously.' " Tigart, 244 Mont. at 160, 796 

P.2d at 585. Thus, relying on Jessen, the Tigart Court concluded that the insurer was liable 

for the conduct of its attorney because of the insurer's complete control over the litigation.

¶30 In Palmer By Diacon v. Farmers Ins. (1993), 261 Mont. 91, 861 P.2d 895, the insured 

brought suit against the insurer, arguing that the insurer's denial of his claim for uninsured 

motorist benefits was made in bad faith. The insured claimed that an unidentified truck ran 

his motorcycle off a road. When the insurer denied his claim based on the statement of a 

witness that the truck was in its own lane, the insured filed suit. The district court ordered 

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the insurer to produce all claim file materials dated before the time when the insured 

indicated that he would bring a bad faith action against the insured. Those materials 

"included confidential reports sent to [the insurer] by the attorneys who represented it in 

the uninsured motorist case." Palmer, 261 Mont. at 100, 861 P.2d at 900. Subsequently, 

the district court ruled for the insured. On appeal, the insurer raised the issue whether the 

attorney-client privilege applied in "first-party bad faith cases in which the insurer's 

attorney did not represent the insured's interests in the underlying case." Palmer, 261 

Mont. at 107, 861 P.2d at 905.

¶31 Defining first-party bad faith actions as cases where the plaintiff is the insured, the 

Palmer Court distinguished two kinds of first-party bad faith cases. The Court determined 

that one kind "involves dual representation by the attorney." Palmer, 261 Mont. at 108, 

861 P.2d at 905. Such cases often arise when "a third-party claimant obtains a judgment in 

excess of policy limits and the insured later sues the insurance company for failure to 

settle within policy limits." Palmer, 261 Mont. at 108, 861 P.2d at 905. Quoting Jessen, 

the Palmer Court determined that in such first-party bad faith cases, "[u]nder an insurance 

contract . . . the insurer initially employs the attorney to represent the interests of both the 

insured and the insurer." Palmer, 261 Mont. at 108, 861 P.2d at 905. The Palmer Court 

recognized that other courts have held that under that kind of first-party bad faith action, 

"the insured is entitled to the entire claim file prepared for the underlying lawsuit, because 

the insurer created the file primarily on behal of the insured." Palmer, 261 Mont. at 108, 

861 P.2d at 905 (citation omitted).

¶32 However, under the facts in Palmer, the Court concluded that the action was a distinct 

kind of first-party bad faith action and that when the insurer denied the insured his 

uninsured motorist coverage, the insurer stepped into the shoes of the unidentified thirdparty motorist. Palmer, 261 Mont. at 108, 861 P.2d at 905-06. The Palmer Court further 

concluded that "[t]he attorneys who represented [the insurer] in the uninsured motorist 

case have not represented [the insured], therefore the dual representation reasoning does 

not apply in this case." Palmer, 261 Mont. at 108, 861 P.2d at 906. Like the Court in 

Second Judicial Dist. Court, the Palmer Court recognized the dual representation doctrine 

only in determining whether the communications between an insurer and its attorneys are 

subject to the attorney-client privilege. 

¶33 As the foregoing decisions demonstrate, we have followed Jessen in holding insurers 

responsible for the conduct of defense counsel and we have applied the attorney-client 

privilege to communications between insurers and defense counsel in cases where by 

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contract the insurer was deemed to have assumed absolute control of the litigation. None 

of these decisions addressed whether insurers and insureds are co-clients under the Rules 

of Professional Conduct, and none of them addressed whether defense counsels' 

compliance with insurance contracts that repose "absolute" control of litigation in insurer 

violated the Rules of Professional Conduct. 

¶34 We note that Respondents argue that insurance contracts effectively place absolute 

control of litigation with insurers. However, Respondents' claim of absolute control of 

litigation cannot be reconciled with their insistence that whenever a conflict may arise 

between their litigation guidelines and an attorney's ethical obligations, the attorney is to 

follow the ethical course of action. Respondents' assertion that defense counsel are not 

only free to but must follow their independent judgment is inconsistent with their claim 

that insurers have absolute control of litigation. 

B. Whether insurers and insureds are co-clients under Montana's Rules of Professional 

Conduct.

¶35 We turn to the question whether an insurer is a client of defense counsel under the 

Rules of Professional Conduct. We note that some other courts have concluded that the 

insurer is not a client of defense counsel. In Atlanta Int. Ins. Co. v. Bell (Mich. 1991), 475 

N.W.2d 294, the court addressed whether defense counsel retained by an insurer to defend 

its insured may be sued by the insurer for professional malpractice. Recognizing the 

general rule that an attorney will only be held liable for negligence to his client, the court 

determined that "the relationship between the insurer and the retained defense counsel [is] 

less than a client-attorney relationship." Bell, 475 N.W.2d at 297. The court further 

determined, however, that although the insurer is not a client of defense counsel, the 

defense counsel nevertheless "occupies a fiduciary relationship to the insured, as well as to 

the insurance company." Bell, 475 N.W.2d at 297. Recognizing further that "the tripartite 

relationship between insured, insurer, and defense counsel contains rife possibility [sic] of 

conflict," Bell, 475 N.W.2d at 297, the court reasoned that "[t]o hold that an attorneyclient relationship exists between insurer and defense counsel could indeed work mischief, 

yet to hold that a mere commercial relationship exists would work obfuscation and 

injustice." Bell, 475 N.W.2d at 297.

¶36 Nor is Michigan unique in concluding that the insured is the sole client of defense 

counsel. See Jackson v. Trapier (Sup. Ct. 1964), 247 N.Y.S.2d 315, 316 (concluding that 

once defense undertaken, "defendant is the client and not the insurance carrier even 

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though the latter may have chosen the counsel and may be paying his fee"); Continental 

Cas. v. Pullman, Comley, et al. (2nd Cir. 1991), 929 F.2d 103, 108 (citation omitted) 

(concluding "[i]t is clear beyond cavil that in the insurance context the attorney owes his 

allegiance, not to the insurance company that retained him but to the insured defendant"); 

Point Pleasant Canoe Rental v. Tinicum Tp. (E.D. Pa. 1986), 110 F.R.D. 166, 170 

(concluding "[w]hen a liability insurer retains a lawyer to defend an insured, the insured is 

considered the lawyer's client"); First American Carriers v. Kroger Co. (Ark. 1990), 787 S.

W.2d 669, 671 (citation omitted) (concluding that " 'when a liability insurer retains a 

lawyer to defend an insured, the insured is the lawyer's client'").

¶37 Respondents argue vigorously that the interests of an insurer and an insured usually 

coincide and that most litigation is settled within an insured's coverage limits. These 

arguments gloss over the stark reality that the relationship between an insurer and insured 

is permeated with potential conflicts. Compare Thomas D. Morgan, What Insurance 

Scholars Should Know About Professional Responsibility, 4 Conn.Ins.L.J. 1, 7-8, 1997 

(concluding that designating insurer "a second client . . . would routinely create the 

potential for conflicts of interest"); Kent D. Syverud, What Professional Responsibility 

Scholars Should Know About Insurance, 4 Conn.Ins.L.J. 17, 23-24, 1997 (recognizing "[b]

oth insurance companies and insureds have important and meaningful stakes in the 

outcome [of] a lawsuit against the insureds, stakes that include not just the money that the 

insurance company must pay in defense and settlement, but also the uninsured liabilities of 

the insured, which include not just any judgment in excess of liability limits, but also the 

insured's reputation and other non-economic stakes. The history of liability insurance 

suggests that unbridled control of the defense of litigation by either the insurance company 

or the insured creates incentives for the party exercising that control to take advantage of 

the other"). Compare also Restatement (Third) of the Law Governing Lawyers § 215, 

Comment f(5) (Proposed Final Draft No. 2, 1998) (emphasis added) (recognizing "[m]

aterial divergence[s] of interest might exist between a liability insurer and an insured . . . . 

Such occasions for conflict may exist at the outset of the representation or may be created 

by events that occur thereafter"). In cases where an insured's exposure exceeds his 

insurance coverage, where the insurer provides a defense subject to a reservation of rights, 

and where an insurer's obligation to indemnify its insured may be excused because of a 

policy defense, there are potential conflicts of interest.

¶38 We reject Respondents' implicit premise that the Rules of Professional Conduct need 

not apply when the interests of insurers and insureds coincide. The Rules of Professional 

Conduct have application in all cases involving attorneys and clients. Moreover, whether 

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the interests of insurers and insureds coincide can best be determined with the perfect 

clarity of hindsight. Before the final resolution of any claim against an insured, there 

clearly exists the potential for conflicts of interest to arise. Further, we reject the 

suggestion that the contractual relationship between insurer and insured supersedes or 

waives defense counsels' obligations under the Rules of Professional Conduct. We decline 

to recognize a vast exception to the Rules of Professional Conduct that would sanction 

relationships colored with the appearance of impropriety in order to accommodate the 

asserted economic exigencies of the insurance market. Compare Kroger, 787 S.W.2d at 

671 (concluding "[w]e have consistently taken strong positions in situations where the 

public's confidence in attorneys might be eroded by the appearance of a conflict of 

interest"). We hold that under the Rules of Professional Conduct, the insured is the sole

client of defense counsel.

¶39 We caution, however, that this holding should not be construed to mean that defense 

counsel have a "blank check" to escalate litigation costs nor that defense counsel need not 

ever consult with insurers. Under Rule 1.5, M.R.Prof.Conduct, for example, an attorney 

must charge reasonable fees. See Rule 1.5, M.R.Prof.Conduct (providing in part that "[a] 

lawyer's fees shall be reasonable"). Nor, finally, should our holding be taken to signal that 

defense counsel cannot be held accountable for their work.

¶40 Respondents argue further, however, that even if an insurer is not a co-client of 

defense counsel, an insurer's control of litigation is necessary and appropriate. 

Respondents argue that the insurer must control the litigation in order to meet its duties to 

the insured to indemnify and to provide a defense. Further, Respondents argue that the 

insured has a good faith duty to cooperate with the insurer in defense of a claim that 

warrants an insurer's control of litigation, and that in any event insureds agree to insurers' 

control of litigation. Respondents also argue that insureds typically contract for a limited 

defense that does not protect their reputational interests and that they are not entitled to 

unlimited expenditures on their behalf. Further, Respondents assert that insurers and 

insureds have "aligned" interests in minimizing litigation costs and settlements.

¶41 None of these arguments is persuasive. Animating them is the deeply flawed premise 

that by contract insurers and insureds may dispense with the Rules of Professional 

Conduct.

¶42 Respondents also argue that insurers' control of litigation is justified under the 

Restatement and that, for example, under the proposed draft for § 215 of the Restatement 

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(Third) of the Law Governing Lawyers, an insurer's direction of a defense is justified 

regardless whether the insurer is a co-client "when the insurer 'will pay any judgment 

rendered against the [insured] client and [the insurer] makes a decision that defense costs 

beyond those designated by [the insurer] would not significantly change the likely 

outcome.' " We decline to join the parties' arguments over the Restatement. We note that 

in the draft cited by Respondents, the Restatement states that it "has not been considered 

by the members of the American Law Institute and does not represent the position of the 

Institute on any of the issues with which it deals. Restatement (Third) of the Law 

Governing Lawyers (Proposed Final Draft No. 2, 1998). More importantly, we are in no 

way bound by the Restatement in interpreting Montana's Rules of Professional Conduct.

¶43 Respondents also suggest that the billing and practice rules' requirement of prior 

approval is not as strict as it appears, that insurers employ it to ensure that they are 

consulted, and that they "rarely" withhold approval. They contend that preapproval is 

permissible because the insurer "is entitled not to pay for services that are overpriced or 

unnecessary to the case."

¶44 We conclude that whether the requirement of prior approval seldom results in denials 

of authorization for defense counsel to perform legal services begs the question whether 

the requirement of prior approval violates the Rules of Professional Conduct. Without 

reaching the issue here, moreover, we caution further that a mere requirement of 

consultation may be indistinguishable, in its interference with a defense counsel's exercise 

of independent judgment and ability to provide competent representation, from a 

requirement of prior approval. Further, the entitlement of insurers not to pay for 

overpriced or unnecessary services, which Petitioners do not dispute, also begs the 

question whether the requirement of prior approval violates the Rules of Professional 

Conduct. 

¶45 Finally, Respondents argue that their billing and practice rules do not interfere with 

defense counsels' freedom of action. As previously discussed, they suggest that when an 

insurer denies approval for particular actions that defense counsel propose, nothing 

prevents defense counsel from exercising their independent judgment and doing the very 

thing for which the insurer has denied approval. We reject Respondents' underlying 

dubious premise that the threat of withholding payment does not interfere with the 

independent judgment of defense counsel. The very action taken by Petitioners in seeking 

declaratory relief in the present case is a blunt repudiation of that speculative premise. 

Further, if the threat of withholding payment were quite as toothless as Respondents 

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suggest, we doubt that they would make such a threat, let alone that they would expressly 

incorporate it in their billing and practice rules.

C. Whether the requirement of prior approval violates the Rules of Professional Conduct.

¶46 Having concluded that the insured is the sole client of defense counsel, we turn to the 

fundamental issue whether the requirement of prior approval in billing and practice rules 

conflicts with defense counsels' duties under the Rules of Professional Conduct. The 

parties appear to agree that defense counsel may not abide by agreements limiting the 

scope of representation that interfere with their duties under the Rules of Professional 

Conduct. Compare Annotated Model Rules of Professional Conduct (Fourth ed. Center for 

Professional Responsibility American Bar Association) Rule 1.2, p. 12, Comment [4] 

(concluding "[t]he objectives or scope of services provided by a lawyer may be limited by 

agreement with the client or by the terms under which the lawyer's services are made 

available to the client. . . . [5] An agreement concerning the scope of representation must 

accord with the Rules of Professional Conduct and other law. Thus, the client may not be 

asked to agree to representation so limited in scope as to violate Rule 1.1").

¶47 We conclude that the requirement of prior approval fundamentally interferes with 

defense counsels' exercise of their independent judgment, as required by Rule 1.8(f), M.R.

Prof.Conduct. Further, prior approval creates a substantial appearance of impropriety in its 

suggestion that it is insurers rather than defense counsel who control the day to day details 

of a defense. 

¶48 Montana is not alone in rejecting arrangements that fetter lawyers' undivided duty of 

loyalty to their clients and their independence of professional judgment in representing 

their clients. In Petition of Youngblood (Tenn. 1995), 895 S.W.2d 322, the court 

determined that for inhouse attorney employees of an insurance company to represent 

insureds was not a per se ethical violation. However, the Youngblood court emphasized 

the loyalty that an attorney owes an insured and concluded that 

Some of the usual characteristics incident to [the employer-employee] relationship 

cannot exist between the insurer and the attorney representing an insured. The 

employer cannot control the details of the attorney's performance, dictate the 

strategy or tactics employed, or limit the attorney's professional discretion with 

regard to the representation. Any policy, arrangement or device which effectively 

limits, by design or operation, the attorney's professional judgment on behalf of or 

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loyalty to the client is prohibited by the Code, and, undoubtedly, would not be 

consistent with public policy.

Youngblood, 895 S.W.2d at 328. The court went to conclude that "[t]he same loyalty is owed the client 

whether the attorney is employed and paid by the client, is a salaried employee of the insurer, or is an 

independent contractor engaged by the insurer." Youngblood, 895 S.W.2d at 328. 

¶49 In addressing whether an insurer is vicariously liable for the malpractice of defense 

counsel, the Texas Supreme Court was similarly critical of insurer directions to defense 

counsel that interfere with their independent judgment and undivided loyalty to insureds. 

See State Farm Mut. Auto. Ins. Co. v. Traver (Tex. 1998), 980 S.W.2d 625. In Traver, the 

court held that an insurer is not vicariously liable for the malpractice of an independent 

attorney whom it chooses to defend an insured. The court in Traver reasoned that in 

evaluating whether a principal is vicariously responsible for the actions of its agent, "the 

key question is whether the principal has the right to control the agent with respect to the 

details of that conduct." Traver, 980 S.W.2d at 627 (citation omitted). The court 

determined that "even assuming that the insurer possesses a level of control comparable to 

that of a client, this does not meet the requisite for vicarious liability." Traver, 980 S.W.2d 

at 627. The Traver court went on to conclude:

A defense attorney, as an independent contractor, has discretion regarding the dayto-day details of conducting the defense, and is not subject to the client's control 

regarding those details. While the attorney may not act contrary to the client's 

wishes, the attorney "is in complete charge of the minutiae of court proceedings and 

can properly withdraw from the case, subject to the control of the court, if he is not 

permitted to act as he thinks best." Moreover, because the lawyer owes unqualified 

loyalty to the insured, the lawyer must at all times protect the interests of the 

insured if those interests would be compromised by the insurer's instructions. 

Traver, 980 S.W.2d at 627-28 (citations omitted) (emphasis added). In a concurring and dissenting 

opinion, Justice Gonzalez criticized the court for a "perhaps naive view of the current status of 

insurance defense practice." Traver, 980 S.W.2d at 632 (J. Gonzalez, concurring and dissenting). 

Justice Gonzalez cautioned that 

measures designed to produce a no-frills defense can easily result in only a token 

defense. I am concerned that defense lawyers may be reluctant to resist cost-cutting 

measures that detrimentally affect the quality of the insured's defense. There is a real 

risk that these efforts at cost containment compromise a lawyer's autonomy and 

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independent judgment on the best means for defending an insured. . . . The lawyers 

are under tremendous pressure trying to serve two masters. 

Traver, 980 S.W.2d at 634 (J. Gonzalez, concurring and dissenting).

¶50 Moreover, in American Ins. Ass'n v. Kentucky Bar Ass'n (Ky. 1996), 917 S.W.2d 

568, the court affirmed an Advisory ethics opinion that proscribed insurers' use of inhouse 

attorneys to represent insureds. The court in Kentucky Bar Ass'n also affirmed an Advisory 

ethics opinion concluding that a lawyer may not "enter into a contract with a liability 

insurer in which the lawyer or his firm agrees to do all of the insurer's defense work for a 

set fee." Kentucky Bar Ass'n, 917 S.W.2d at 569. The court concluded that 

the pressures exerted by the insurer through the set fee interferes [sic] with the 

exercise of the attorney's independent professional judgment, in contravention of 

Rule 1.8(f)(2). The set fee arrangement also clashes with Rule 1.7(b) in that it 

creates a situation whereby the attorney has an interest in the outcome of the action 

which conflicts with the duties owed to the client: quite simply, in easy cases, 

counsel will take a financial windfall; in difficult cases, counsel will take a financial 

loss.

Kentucky Bar Ass'n, 917 S.W.2d at 572. The Kentucky Bar Ass'n court stressed that "the mere 

appearance of impropriety is just as egregious as any actual or real conflict. Therefore, [the Advisory 

opinion] acts as a prophylactic device to eliminate the potential for a conflict of interest or the 

compromise of an attorney's ethical and professional duties." Kentucky Bar Ass'n, 917 S.W.2d at 573 

(emphasis added). Recognizing that set fee arrangements are "ripe with potential conflicts," the court 

concluded that the insurer and insured are "subject to complete divergence at any time. Inherent in all 

of these potential conflicts is the fear that the entity paying the attorney, the insurer, and not the one to 

whom the attorney is obligated to defend, the insured, is controlling the legal representation." Kentucky 

Bar Ass'n, 917 S.W.2d at 573 (emphasis added). 

¶51 We hold that defense counsel in Montana who submit to the requirement of prior 

approval violate their duties under the Rules of Professional Conduct to exercise their 

independent judgment and to give their undivided loyalty to insureds. Compare Rule 1.7

(b) (providing "[a] lawyer shall not represent a client if the representation of that client 

may be materially limited by the lawyer's responsibility to another client or to a third 

person"); Annotated Model Rules of Professional Conduct, Comment [4] to Rule 1.7

(concluding "[t]he critical questions are the likelihood that a conflict will eventuate and, if 

it does, whether it will materially interfere with the lawyer's independent professional 

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judgment in considering alternatives or foreclose courses of action that reasonably should 

be pursued on behalf of the client"); State v. Jones (1996), 278 Mont. 121, 125, 923 P.2d 

560, 563 (concluding "[t]he duty of loyalty is 'perhaps the most basic of counsel's duties' 

") (citation omitted). 

¶52 2. May an attorney licensed to practice law in Montana, or admitted pro hac vice, be 

required to submit detailed descriptions of professional services to outside persons or 

entities without first obtaining the informed consent of his or her client and do so without 

violating client confidentiality?

¶53 Rule 1.6 provides in pertinent part:

Confidentiality of Information

(a) A lawyer shall not reveal information relating to representation of a client unless 

the client consents after consultation, except for disclosures that are impliedly 

authorized in order to carry out the representation.

Rule 1.6(a), M.R.Prof.Conduct.

¶54 As a representative set of guidelines concerning the disclosure of detailed descriptions 

of professional services to third-party auditors, we consider the guidelines submitted by 

the Zurich-American Insurance Group (hereafter, Zurich). Zurich's litigation guidelines 

regarding audits provide in pertinent part:

Audits

Zurich-American reserves the right to examine and audit books, records, other 

documents, and supporting material for the purpose of evaluating compliance with 

its litigation management guidelines, the billing requirements set forth therein, and 

the reasonableness of the firm's charges. The books, records, and documents we 

may examine include, without limitation: original time sheets from attorneys and 

staff; explanations of billing methods and practices; attorney work product and other 

contents of open and closed files involving the defense of Zurich-American 

customers; phone message records; and diaries, etc.

All requested books and records must be made available to us during business hours 

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for examination, audit, or reproduction. We shall employ, at our discretion, internal 

auditors or independent outside auditors for purposes of accomplishing audits.

¶55 Petitioners argue that Respondents' billing and practice rules require the disclosure of 

confidential detailed descriptions of professional services. These disclosures are not 

impliedly authorized and do not further representation. Nor does an insured's contractual 

consent to disclosure of confidential information cure such disclosures, as an insured 

cannot know in advance of litigation what will be disclosed. Petitioners argue further that 

third-party auditors are different from insurers and that they do not fall within a protective 

"magic circle." Petitioners argue that under the Rules of Professional Conduct, disclosures 

of detailed billing statements to third-party auditors are only permissible if the client gives 

his informed consent after consultation.

¶56 Respondents respond that third-party auditors are agents of insurers. Because they 

share "common interests" with insureds in reducing costs of litigation, third-party auditors 

are part of a privileged community. Further, insureds' consent is implied for disclosures 

that are reasonably necessary for representation. Thus, disclosures to third-party auditors 

are like disclosures to secretaries and computer technicians. Moreover, insureds have 

consented to disclosure by contract. Respondents also argue that whether a disclosure to a 

third-party auditor breaches the attorney-client privilege is a question of fact. Further, 

Respondents argue that much of the information in billing statements is neither 

confidential nor privileged. Finally, Respondents contend that the obligation of defense 

attorneys to charge reasonable fees is meaningless if insurers cannot monitor their services.

¶57 Underlying the parties' positions is a fundamental disagreement regarding whether 

third-party auditors are part of a privileged community or magic circle within which 

confidential information may be shared without waiver of attorney-client or work product 

privilege. Respondents argue that in United States v. Mass. Inst. of Technology (1st Cir. 

1997), 129 F.3d 681, the court recognized insurer and insured as a relationship within 

which parties share a common interest that protects privileged communications. 

Respondents argue further that in Indian Law Resource Ctr. v. Dept. of Interior (D. D.C. 

1979), 477 F.Supp. 144, the court concluded that an auditor was a confidential agent of a 

privileged party and that disclosure of attorney fee information did not waive any privilege.

¶58 Mass. Inst. of Technology does not support Respondents' claims. In Mass. Inst. of 

Technology, the IRS requested the billing statements of law firms that had represented 

MIT. MIT had apparently disclosed the very same billing statements to the Defense 

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Contract Audit Agency (the audit agency), which "help[ed] entities in the Department of 

Defense review contract performance to be sure that the government [was] not 

overcharged for services." Mass. Inst. of Technology, 129 F.3d at 683. MIT gave IRS the 

documents it requested but redacted information that it claimed was covered by the 

attorney-client privilege, the work product doctrine, or both. In turn, the audit agency 

refused to give the IRS those documents without the consent of MIT. The IRS also 

requested minutes of the MIT corporation and its executive and auditing committees. The 

district court ruled that MIT's disclosure of legal bills to the audit agency forfeited its 

attorney-client privilege. However, concluding that three of the minutes contained 

privileged material that MIT had not been shown to have disclosed to the audit agency the 

district court declined to order their production.

¶59 On appeal, MIT argued that its disclosure of the billing statements to the audit agency 

did not forfeit its attorney-client privilege. Further, while conceding that it could not prove 

that it had withheld the three minutes from the audit agency, MIT argued that the minutes 

were protected by the attorney-client privilege and the work product doctrine. On crossappeal, the IRS argued that the district court erred in concluding that the three minutes 

contained privileged material.

¶60 The court in Mass. Inst. of Technology concluded that "decisions do tend to mark out, 

although not with perfect consistency, a small circle of 'others' with whom information 

may be shared without loss of the privilege (e.g., secretaries, interpreters, counsel for a 

cooperating co-defendant, a parent present when a child consults a lawyer)." Mass. Inst. of 

Technology, 129 F.3d at 684. The court emphasized that "the underlying concern is 

functional: that the lawyer be able to consult with others needed in the representation and 

that the client be allowed to bring closely related persons who are appropriate, even if not 

vital, to a consultation." Mass. Inst. of Technology, 129 F.3d at 684 (citation omitted). The 

court acknowledged that "[i]n a rather abstract sense, MIT and the audit agency do have a 

'common interest' in the proper performance of MIT's defense contracts and the proper 

auditing and payment of MIT's bills." Mass. Inst. of Technology, 129 F.3d at 686. 

However, the court determined that

this is not the kind of common interest to which the cases refer in recognizing that 

allied lawyers and clients-who are working together in prosecuting or defending a 

lawsuit or in certain other legal transactions-can exchange information among 

themselves without loss of the privilege. To extend the notion to MIT's relationship 

with the audit agency, which on another level is easily characterized as adversarial, 

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would be to dissolve the boundary almost entirely. 

Mass. Inst. of Technology, 129 F.3d at 686. 

¶61 Turning to MIT's disclosure of its minutes to the audit agency, the court concluded 

that its treatment of the billing statements disposed of MIT's claim that its attorney-client 

privilege survived disclosure of the minutes to the audit agency, and the court focused on 

MIT's work product claim. The court concluded that the prevailing rule is that "disclosure 

to an adversary, real or potential, forfeits work product protection." Mass. Inst. of 

Technology, 129 F.3d at 687. The court went on to conclude that

MIT's disclosure to the audit agency was a disclosure to a potential adversary. The 

disclosures did not take place in the context of a joint litigation where the parties 

shared a common legal interest. The audit agency was reviewing MIT's expense 

submissions. MIT doubtless hoped that there would be no actual controversy 

between it and the Department of Defense, but the potential for dispute and even 

litigation was certainly there. 

Mass. Inst. of Technology, 129 F.3d at 687 (emphasis added). 

¶62 In the present case we note Respondents' claim that the court in Mass Inst. of 

Technology recognized insurers and insureds as a relationship within which parties share a 

common interest that protects their privileged communications. Their claim is misguided. 

First, in Mass Inst. of Technology, MIT argued that its disclosure to the audit agency was 

like other cases where "disclosure has been allowed, without forfeiting the privilege, 

among separate parties similarly aligned in a case or consultation (e.g., codefendants, 

insurer and insured, patentee and licensee)." Mass. Inst. of Technology, 129 F.3d at 685. In 

other words it was MIT, not the court, who made the analogy to the insurer-insured 

relationship. Second, in a footnote, the court in Mass. Inst. of Technology cited several 

decisions that have considered insurer-insured relationships. 

¶63 In the first of these decisions, Roberts v. Carrier Corp. (N.D. Ind. 1985), 107 F.R.D. 

678, the court addressed whether the company, Carrier, in passing on arguably privileged 

communications between itself and its attorney and between its attorney and its insurer to 

another company, Hamilton, waived any privilege that might otherwise have attached to 

those communications. The court recognized that under Indiana law, a statement by a 

"client to his attorney for communication to a third person is not considered confidential." 

Carrier, 107 F.R.D. at 686 (citations omitted). However, the court found that Carrier and 

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Hamilton were sister subsidiaries of United Technologies and concluded that when "a 

corporation with a legal interest in an attorney-client communication relays it to another 

related corporation, the attorney-client privilege is not thereby waived." Carrier, 107 F.R.

D. at 687 (citation omitted). Further, the court found that "Carrier and Hamilton do share 

an identical legal interest: defense of a claim based upon a malfunction of valve #242." 

Carrier, 107 F.R.D. at 688. Under those particular facts, the court concluded that Indiana's 

rule concerning communications to third parties was not violated. Carrier, 107 F.R.D. at 

688.

¶64 In the second of these decisions, Linde Thomson Langworthy Kohn & Van Dyke v. 

RTC (D.C. Cir. 1993), 5 F.3d 1508, the court noted that "[f]ederal courts have never 

recognized an insured-insurer privilege as such." Linde Thomson, 5 F.3d at 1514 (citations 

omitted). The court went on to 

firmly reject any sweeping notion that there is an attorney-client privilege in insuredinsurer communications. . . . Certainly, where the insured communicates with the 

insurer for the express purpose of seeking legal advice with respect to a concrete 

claim, or for the purpose of aiding an insurer-provided attorney in preparing a 

specific legal case, the law would exalt form over substance if it were to deny 

application of the attorney-client privilege. However, a statement betraying neither 

interest in, nor pursuit of, legal counsel bears only the most attenuated nexus to the 

attorney-client relationship. . . . [I]f what is sought is not legal advice, but 

insurance, no privilege can or should exist.

Linde Thomson, 5 F.3d at 1515 (citations omitted) (emphasis added). 

¶65 Carrier and Linde Thomson clearly do not support Respondents in the present case. 

Respondents have not suggested that third-party legal auditors "share an identical legal

interest" with insureds. Carrier, 107 F.R.D. at 688 (emphasis added). Nor have 

Respondents suggested that "what is sought [from third-party auditors] is . . . legal 

advice." Linde Thomson, 5 F.3d at 1515. Moreover, Carrier and Linde Thomson do not 

address the disclosure of confidential information to third-party auditors under Montana's 

Rules of Professional Conduct.

¶66 Respondents rely on the court's decision in Indian Law Resource Center to argue that 

third-party auditors are confidential agents of insureds and that disclosure of billing 

statements to them therefore does not waive any privilege. We conclude that their reliance 

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on Indian Law Resource Center is also misplaced. In Indian Law Resource Center, the 

plaintiff, a nonprofit corporation, brought an action under the Freedom of Information Act 

(FOIA), seeking disclosure of documentation regarding payments from funds under 

federal control to attorneys who served the Hopi tribe. The plaintiff requested documents 

that included "(1) Tribal resolutions reflecting the names of the lawyers chosen and the fee 

amounts endorsed; (2) periodic law firm statements to the Tribal Council, with attached 

vouchers describing in detail legal services provided and travel expenses incurred." Indian 

Law Resource Center, 477 F.Supp. at 146. Plaintiff's request was first sent to the Bureau 

of Indian Affairs (BIA); the Department of Interior (Interior) denied that request. The 

court in Indian Law Resource Center noted that "[a]s part of its general trust responsibility 

to the Indians, Interior reviews and approves the choice of counsel and fixing of fees by 

Indian tribes." Indian Law Resource Center, 477 F.Supp. at 145.

¶67 The "only issue" in Indian Law Resource Center was whether, under an exemption in 

FOIA, the "withheld information is either confidential or privileged." Indian Law 

Resource Center, 477 F.Supp. at 146. Interior argued that the information withheld should 

be deemed confidential under FOIA because the information was received pursuant to "the 

agency's fulfillment of its trust responsibilities." Indian Law Resource Center, 477 F.Supp. 

at 146. Interior argued further that as a trustee it should "not be required to divulge 

whatever material The Hopi Tribe as beneficiary declares to be confidential, so long as the 

material otherwise qualifies under [FOIA] exemption four." Indian Law Resource Center, 

477 F.Supp. at 147.

¶68 The court concluded that there was substantial evidence of future harm from 

disclosure of the detailed law firm statements and that the law firm statements were 

entitled to protection as attorney work product. Finding no evidence that the vouchers had 

been disclosed to any party other than Interior, "which is acting as a confidential agent of 

the Tribe," Indian Law Resource Center, 477 F.Supp. at 148, the court concluded that the 

law firm statements are "exempt from disclosure under [FOIA] exemption four, on 

grounds of both privilege and confidentiality." Indian Law Resource Center, 477 F.Supp. 

at 149.

¶69 In the present case, Respondents compare Interior to third-party auditors and argue 

that because third-party auditors act as confidential agents, disclosure of billing 

information to them does not waive "the privilege." Respondents' reading of Indian Law 

Resource Center is incorrect. Third-party auditors are not confidential agents of insureds 

but function rather as agents of insurers. Moreover, to compare third-party auditors to 

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Interior, the confidential agent in Indian Law Resource Center, is to ignore the specific 

trust responsibilities that Interior has for the Hopi tribe, trust responsibilities that 

Respondents do not claim that third-party auditors similarly bear for insureds. Further, 

Indian Law Resource Center is readily distinguishable from the present case as the court 

there addressed a specific exemption under FOIA but did not address Rule 1.6 of the Rules 

of Professional Conduct.

¶70 We conclude that a third-party auditor is not within the "magic circle" or community 

of interest that the court in Mass. Inst. of Technology recognized. Respondents, again, 

claim that the purpose of third-party auditors complements the interests of insureds and 

that third-party auditors merely seek to control the costs of defense in order to keep 

insurance premiums down for insureds. This asserted common interest in keeping 

litigation costs and premiums down is not sufficient to bring third-party auditors within 

the magic circle. The Rules of Professional Conduct do not vary according to commercial 

exigencies. Nor are third-party auditors "confidential agent[s]" of insureds. Indian Law 

Resource Center, 477 F.Supp. at 148. We further conclude that disclosure of detailed 

billing statements to a third-party auditor is "disclosure to a potential adversary." Mass. 

Inst. of Technology, 129 F.3d at 687. In third-party auditors' review of confidential 

information, there is always the possibility of disputes between auditors, defense counsel 

and their clients that could result in litigation. 

¶71 Nor are third-party auditors "needed in the representation" or "appropriate, even if not 

vital, to a consultation," as secretaries and computer technicians may well be. Mass. Inst. 

of Technology, 129 F.3d at 684. Disclosure to persons needed in the representation or 

appropriate to a consultation does not also justify disclosure "to a potential adversary." 

Mass. Inst. of Technology, 129 F.3d at 687.

¶72 We note Respondents argue that because the attorney-client privilege extends to the 

insurer and because an insurer can only act through its employees and agents, the attorneyclient privilege applies to an insurer's agents as well, citing United States v. Schwimmer 

(2nd Cir. 1989), 892 F.2d 237. In Schwimmer, the court recognized that the attorney-client 

privilege "is held to cover communications made to certain agents of an attorney," 

Schwimmer, 892 F.2d at 243, and the court also recognized the "common interest" rule as 

protecting "the confidentiality of communications passing from one party to the attorney 

for another party where a joint defense effort or strategy has been decided upon and 

undertaken by the parties and their respective counsel." Schwimmer, 892 F.2d at 243 

(citation omitted). Schwimmer does not support Respondents' argument. Third-party 

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auditors are not agents of defense counsel, nor are disclosures to them "communications 

passing from one party to the attorney for another party." Schwimmer, 892 F.2d at 243.

¶73 In determining that third-party auditors fall outside the "magic circle," however, we 

do not hold that the disclosure of detailed descriptions of professional services to a thirdparty auditor necessarily violates any privilege that may attach to them. Resolution of that 

issue would clearly entail findings of fact that we have not made in the present case.

¶74 Having determined that insurers are not clients of defense counsel and that third-party 

auditors are potential adversaries of defense counsel, we turn to the issue whether the 

disclosure of billing statements to third-party auditors is "impliedly authorized in order to 

carry out the representation." Rule 1.6., M.R.Prof.Conduct.

¶75 Petitioners do not dispute that disclosures of billing information to insurers are 

impliedly authorized to carry out representation. It does not follow, however, that 

disclosing billing information to third-party auditors is also impliedly authorized. As 

previously discussed, third-party auditors lie outside the "magic circle" and do not share a 

community of interest with insureds. Their mission, as characterized in part by 

Respondents, is to find fault with legal charges, not to further the representation of 

insureds. Further, unlike secretaries and computer technicians who are engaged to assist 

defense counsel, third-party auditors are not employed by defense counsel and as noted 

they are potential adversaries of defense counsel. As such, third-party auditors stand in 

potential conflict with the interests of insureds in competent representation by defense 

counsel who exercise their independent professional judgment.

¶76 Further, we reject Respondents' argument that insureds' consent by contract to 

disclosure of detailed professional billing statements comports with Rule 1.6, M.R.Prof.

Conduct. An insured executing a liability policy with an insurer cannot know at the time 

he enters the contract what kind of claim will be brought against him, what the issues will 

be, or what kinds of services will be undertaken by his defense attorney. Nor can an 

insured know, at the time he contracts for insurance, the legal consequences that may 

result from the disclosure of billing information to a third-party auditor. Depending on the 

facts and circumstances, such disclosure may waive a specific privilege. Thus, under Rule 

1.6, M.R.Prof.Conduct, for an insured to make a fully informed consent to disclosure of 

detailed professional billing statements, the consent must be contemporaneous with the 

facts and circumstances of which the insured should be aware.

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¶77 We emphasize that by its plain language, Rule 1.6, M.R.Prof.Conduct, extends to all

communications between insureds and defense counsel and that this rule is therefore 

broader in both scope and protection than the attorney-client privilege and the work 

product doctrine. Compare In re Advisory Opinion No. 544 of N.J. (N.J. 1986), 511 A.2d 

609, 612 (citation omitted) (emphasis added) (concluding "this Rule [of Confidentiality] 

expands the scope of protected information to include all information relating to the 

representation, regardless of the source or whether the client has requested it be kept 

confidential or whether the disclosure of the information would be embarrassing or 

detrimental to the client"); Damron v. Herzog (9th Cir. 1995), 67 F.3d 211, 215 (citation 

omitted) (concluding "[a]n integral purpose of the rule of confidentiality is to encourage 

clients to fully and freely disclose to their attorneys all facts pertinent to their cause with 

absolute assurance that such information will not be used to their disadvantage").

¶78 We hold that disclosure by defense counsel of detailed descriptions of professional 

services to third-party auditors without first obtaining the contemporaneous fully informed 

consent of insureds violates client confidentiality under the Rules of Professional Conduct. 

/S/ W. WILLIAM LEAPHART

We concur:

/S/ J. A. TURNAGE

/S/ KARLA M. GRAY

/S/ JIM REGNIER 

/S/ TERRY N. TRIEWEILER 

/S/ WILLIAM E. HUNT, SR.

/S/ JAMES C. NELSON

1. As previously noted, the insured also paid a fee to the attorney whom the insurer hired. 

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