Bench & Bar May/June 2026

FEATURE: ARTIFICIAL INTELLIGENCE

• The factors concerning “the nov elty and difficulty of the questions involved” and “the experience, reputation, and ability of the law yer” take on new dimensions in the AI context. The difficulty now includes properly configuring AI systems to address complex legal questions, understanding the lim itations of current tools, and main taining sufficient domain exper tise to identify AI hallucinations or errors. A lawyer’s unique value proposition might involve their ability to frame legal problems in ways technology can address while knowing when human judgment must predominate, which provides a sound basis for maintaining val ue-based fees even as raw produc tion time decreases. • Regardless of the method em ployed in billing clients, lawyers are still required to communicate billing methods and its rationale to their client to ensure that the client understands not only what they are paying for, but why some legal matters may now be less cost ly or, in certain complex situations, comparably priced despite techno logical efficiency. Open commu nication about billing structures and technology helps manage cli ent expectations and builds trust. None of this has changed. The suggested new arrangement reflects the wisdom of the KBA’s Ethics Opinion E-416, which clarifies the Supreme Court’s deci sion in American Insurance Association v. Kentucky Bar Association 8 (AIA). In AIA , the Court considered a challenge to KBA E-368 when the Board of Governors con cluded that a lawyer’s flat fee contract with an insurer to provide representation to all of the insurer’s insureds under a “set fee” 9 arrangement created an inherent conflict between the lawyer and the insured. Specif ically, the conflict arises when lawyers profit by minimizing their work, and their duty to provide full representation to the insured. The Court agreed with the KBA when it described the situation as one in which the

insurer promises to provide a defense to their insureds, but then attempts to limit that defense through a separate fee contract with the lawyer. However, and most impor tantly, the KBA’s position is clarified by KBA E-416 and this Opinion is relevant to this article. E-416 explains how lawyers repre senting insured defendants may structure their fee arrangements without violating the AIA decision if such arrangements assure that the lawyer’s professional judgment remains independent and the insured’s interests are protected and this will occur when a lawyer charges the insurer a fixed fee for a particular case or matter, rather than a single fee covering all defense work. In this type of arrangement the lawyer’s work corresponds to a defined representation, and the lawyer’s compensation is not tied to minimizing work across multiple mat ters, hence, avoiding the systemic incentive problem addressed by the Court in its AIA decision. The KBA did acknowledge that insurers may, ethically, impose billing caps, reporting requirements, litigation bud gets, and staffing restrictions. These type of requirements are not per se unethical as long as the lawyer retains professional judgment, and does not impair the law yer’s duties to their client, the insured. The Court’s AIA opinion and the KBA E-416 are unified by emphasizing three key principles: (1) the insured is the client, even when the insurer pays the lawyer; (2) the lawyer’s pro fessional judgment remains independent; and (3) the economic or structural arrange ments does not materially interfere with the lawyer’s obligations to provide an effective representation of the client. 10 All of this may be accommodated by the suggested “value assurance model” approach. SUGGESTED CLIENT AGREEMENTS REFLECTING AI COST AND VALUE ALLOCATION Rule 1.5(b) requires that a lawyer’s client agreement disclose “the basis or rate of the fee and expenses for which the client will be responsible,” however, the routine use of AI does not require specific communica tion to the client, unless other factors are present. 11 Notwithstanding the necessary required disclosures when a lawyer uses AI

the lawyer should advise the client of the following key elements: • AI Disclosure Clause: State that the firm may use reputable AI technologies for tasks such as re search, drafting, and administra tive functions, always under pro fessional supervision. • Value and Efficiency Clause: Ex plain how the use of AI may re duce billable time or costs, with value-based or fixed-fee structures reflecting the enhanced efficiency and clients benefit from techno logical advancements, not just pay for software. • Confidentiality and Ethics As surance: Include assurances that all use of AI complies with pro fessional ethical obligations, con fidentiality requirements, and data protection. Confirm no cli ent-identifiable information will be entered into any third-party AI tools without specific client con sent, except in secure or private environments. • Client Consent: Where applicable, secure informed client consent, es pecially if confidential data may be processed by external AI platforms or if the client is being charged for specific AI-related expenses. This may be referenced as a signature block or an initial disclosure in the engagement letter. • Example:

Our firm uses reputable AI technologies to assist with legal research, drafting, and adminis trative tasks to improve efficiency and service quality. Direct costs associated with AI tools used specifically for your representa tion (such as contract review or document analysis) may be billed as separate line items or disburse ments. AI use will comply with confidentiality, ethical standards, and all applicable data protection laws. We will not submit identi fiable client data to external AI platforms without your prior informed consent.

22 may/june 2026