The answer to the question is “yes.” Many insurers use attorney budgets to help set accurate legal reserves. Legal budgets can figure into an insurer’s decision on whether to settle (“cost of defense settlement”) or take a case to trial. So attorney budgets do matter. This is why most insurers require attorneys to submit case budgets at the onset of the representation and also require that the case budgets be revised as the cases progress.
But what happens when the attorneys blow past their submitted budgets? Can attorneys be held to their budgets? The answer to this question can be “yes,” especially if there has been no change in circumstances. See California State Bar Arbitration Advisory 03-01 “Detecting Attorney Bill Padding” (Jan. 29, 2003) at p. 6 (“A budget is supposed to be accurate and binding but subject to revision if circumstances change and the client is promptly informed.”). Also see In re Chas. A. Stevens & Co., 105 B.R. 866 (Bankr. N.D. Ill. 1989)( “The court holds that when professionals, especially financial experts, project estimated fees or budgets to a client, they should expect to be held to the same or some reasonable variation thereof. For (the applicant) . . . to apply to this court after such enormous overruns and expect payment in full is unrealistic and unreasonable.”).
Even if “circumstances change,” attorneys may still be held liable for their budget estimates. This would be the case where it can be shown that the changed circumstances should not have been “unexpected” by an experienced attorney. See In re Crown Orthodonic Dental Group, 159 B.R. 307 (Bankr. C.D. Cal. 1993)( “If an attorney estimates the cost of his or her services and that estimate is a critical part of the negotiations upon in employing the attorney, unless there are some real, unexpected changes of circumstances, the attorney should be bound by that estimate.”).
At the very least, insurers should track how well attorneys do in meeting their budget projections as part of their overall evaluation of the attorneys. (A good e-billing program can help track budgets.) To emphasize the point, attorneys need to be told up front that the insurer does track how well attorneys do in meeting budget projections as part of their evaluation of the attorney’s performance.