Razing the Bar

Faced with almost three years of increasing litigation costs, insurers have been forced to take a good, hard look at their legal budgets and make some tough choices. But in an effort to curb costs, are insurance companies inadvertently creating a potentially damaging situation for the lawyers contracted to defend them in the event of a claim?

Once a backroom discussion between insurers and their vendors, the issue has now been flagged publicly by some senior members of the insurance defence bar. Insurance defence lawyers do not want to appear to be complaining: They have always been paid slightly less on an hourly basis than their commercial litigation counterparts. This was never very significant in the past, they say, because it was balanced off by a predictable volume of work and the security of dealing with a client that paid immediately upon receipt of the invoice.

A few things have changed, however, since those days. Suddenly, insurance lawyers went from earning roughly 20 per cent less than their counterparts — and opponents — in the commercial litigation bar to 40 per cent less, amounting to a difference of more than $100/hr. “At annual billable time of 1,800 hours per year, that is $180,000 per lawyer per year,” observes Brian Elkin, president of the Canadian Defence Lawyers (CDL) and partner responsible for the Ottawa office of Lavery, de Billy LLP.

In a rare moment of candour about money issues, Elkin sounded the alarm publicly in a speech delivered to the Canadian Insurance Claims Managers Association (CICMA)/ Canadian Independent Adjusters’ Association (CIAA) joint conference in Toronto in January. “If there are five lawyers doing this, it translates to $900,000 per year per office.”

To be fair, insurance companies, when reviewing expenses, see the amount spent on legal expenses as a significant sum of money. In an effort to cut back and reduce cost, they look to legal expenses. This has been an especially important exercise in today’s soft market, which is characterized by escalating claims costs.

Claims costs have risen by $800 million from $3.4 billion in 2006 Q1 to $3.7 billion in 2007 Q1 to $4.2 billion in 2008 Q1. Despite slight increases in net premiums earned, claims ratios are still on the rise, as well, from 62.92 per cent in 2006 Q1 to 73.57 per cent in 2008 Q1, according to total Canadian property & casualty financial data from the Office of the Superintendent of Financial Institutions Canada.

Insurance companies have two ways to react to escalating claims costs: charge more for the product, passing the cost along to consumers, or trying to hold the line on payouts, Linda Paccanaro, vice president claims at Kingsway General Insurance, says.

“What you are seeing is the industry struggling to contain its costs and that may be creating perceptions around containment in many different areas.” she says. “The first place you go to is expenses, and I think what lawyers fail to recognize sometimes is that from the perspective of the outsourcing [insurance company]… [lawyers] are the leading source of expense.”

For Carmen Place, past president of CDL and partner with Lindsey Kenney, taking a lower hourly rate is a fair exchange for the opportunity to work with a sophisticated client — one that immediately pays the bills, provides considered instruction and is honest and direct. Such is not always the case when working with other clients, he notes.

Be that as it may, the lawyers defend- ing insurers worry about the impact such cuts make on their ability to defend their clients against an aggressive, well-financed commercial litigation bar.

“Unfortunately, insurers have often approached this without a great deal of thought, and sometimes without a great deal of understanding of what they are doing,” Lee Samis, the principal of Samis and Co., says. “I’ve seen very many different kinds of approaches by companies. Part of it is aimed at getting lower-cost services; part of it is aimed at managing the services more closely. Very little seems to go into the equation in terms of how good the services are. Quite often they don’t seem to pay attention to what results they are getting for the money they are spending.”

When insurance companies make budgeting decisions, they look at legal costs on a line-item basis, looking for ways to reduce costs, Samis says. However, not much consideration is given to what those costs will mean in terms of litigation and claims settlement. For example, plaintiffs’ lawyers might pursue claims because they believe claims will not be fought vigorously and thoroughly.

“I understand it’s a balance,” Samis says. “I understand from a management point of view in a claims department they want to get good value for the services provided, which is fine — it’s terrific. But they need to understand that when they cut costs to a certain degree it has an effect on what services they get, the quality of the people they get, the skills, the seniority, etc. And that has a result on outcomes.”

Strategic advantages

In the past, insurance companies had in-house experts monitoring litigation and working with defence lawyers. But due to threshold systems, these positions are no longer required to the same extent. Instead, in an effort to manage litigation, rules and guidelines have been established. Such regulations include not ordering a transcript without speaking to an insurer first and not charging for photocopying.

“Put a bunch of rules around how a file is handled and those kinds of constraints can be very limiting on people,” Samis says. “And very costly. It’s incredibly costly.”

Jack Fireman, principal partner at Fireman Wolfe, now works on the litigation side, having crossed the floor from his previous work defending insurers. Speaking of his previous experience defending insurers, he observed: “No lawyer spends more or uses more of that stuff than they need to, but you need to do it. And if you’re saying that every time you need to exceed three copies you have to call up the claims manager or the adjuster, as some litigation plans require, then that’s penny-wise and pound foolish.”

Elkin cautioned senior members of the claims adjusting industry in a public meeting that these policies and guidelines could be impeding a lawyer’s ability to provide the best representation possible. In his presentation notes, he cited insurers’ policies around photocopying as a glaring example.

Some time ago, Elkin observed, insurance companies decided law firms should bear the cost of photocopying. When a case goes to trial, there are a large number of documents to prepare, including evidence books. There is some tactical consideration in the preparation of these books. For example, when the defence organizes the books, it has control over the order of the documents. This means the first piece of information a jury or a judge reads is information prepared by the defence; the plaintiffs’ information appears after the defence has laid the foundation of its case. Thus a judge or jury might see the phrase “no apparent distress” in the evidence book prior to the plaintiff’s assertion that he or she was badly injured.

A courtroom is a human arena, and these things matter, Elkin says. First impressions can make a difference to the outcome. He notes his firm can send documents out for duplication at a reasonable cost of about five cents per impression. But if the insurance company refuses to pay for this, the plaintiff’s bar can pick up the tab and thus get first crack at organizing the books. This means they have control over the order of the documents. It also means insurers could ultimately be paying disbursement costs of 25 to 30 cents a page — instead of five cents a page — because that is the fixed rate established by Ontario’s legal governing body, the Law Society of Upper Canada. [Regulations on disbursements will vary from jurisdiction to jurisdiction.]

“If there are 1,500 pages to copy, this means refusing to reimburse us $750 and paying $3,750 to $4,500 to the other side,” Elkin wrote in his notes for a speech he delivered to the CIAA/CICMA. “The end result is that an important strategic advantage is lost and the insurer pays five to six times the cost. Who benefits from this?”

Fireman notes that having to ask for permission to finance incidental costs and justify every expense is negatively affecting the solicitor-client relationship. Lawyers are hired for their expertise and to give advice, he notes. But what is happening is that lawyers are becoming viewed as a necessarily evil; lawyers are handling the case only because claims managers are not allowed in court.

For Place, reporting and cost containment guidelines and reviewing of expenses are just par for the course of doing business with an institutional client. But for insurance companies, unlike other institutional clients, cost containment could potentially become an ethical issue “if certain steps aren’t taken in litigation that ought to have been taken and the insurance company simply didn’t take them because they wanted to contain costs,” he says.

Paccanaro says the amount of oversight insurers require over legal expenses will, of course, depend in part on the size of the bills. For example, most insurance companies will ask lawyers to inform them of the need for a medical assessment or to retain an expert, since these expenditures are large. On the other hand, most insurers will not request to know in advance small charges relating to filing motions or statement of claims. To prepare for the costs, both big and small, many insurance companies will ask their legal vendors for a litigation budget, including how much will it cost to try a case, how will it be done and what experts will be retained. This way, certain expenditures can be pre-approved and funds can be set aside, Paccanaro notes.

Since exposures are much larger now than they were even five years ago, the skills and abilities of a lawyer or legal team are magnified; they can make the difference between retaining or losing large amounts of money. For a smaller $10,000 case, an insurance company probably won’t require the cream of the insurance defence bar to take over the file, but when it comes to a $10 million case, a lot of lawyers and claims personnel will be looking at the file. In turn, this will raise more detailed questions about how the defence is being handled.

“I think lawyers can expect to see more of that,” Paccanaro says. “Whenever there’s escalation in the exposure and the amount that you are paying out, the people who handle that are going to feel tension. It probably isn’t just the lawyers. It’s probably the adjusters as well, because there’s an increased demand for better performance because of the increased exposure.”

Losing the defence

There is an old saying that “you get what you pay for,” as a panelist noted in a public forum on claims litigation organized by reinsurer Swiss Re. For the best legal advice, an insurer can naturally expect to pay top dollar. By not doing so, the unintended effect may be to cause the defence bar to whither on the vine. Some lawyers note that without financial resources, the new generation of lawyers might have less of an opportunity to gain courtroom experience. Junior associates used to be able to cut their teeth on small and moderate-sized cases, including property damage cases. But now that such cases are resolved by means of direct compensation and a threshold on small injury, a large number of small cases are no longer in the system. These were the cases where a number of lawyers were trained, where they learned to think on their feet and question witnesses and so forth. These opportunities have been cut back, Samis says.

Further to that, because insurance companies are legitimately wary of the expense involved in litigation, they tend to avoid it, which often results in settlement either at mediation or without mediation. This further shrinks the number of opportunities for new lawyers to gain experience in how to defend insurers in a courtroom.

For senior lawyers, the sheer economics of receiving less money to defend insurance claims has them pursuing opportunities outside of defence work.

There is a debate as to whether insurance companies are paying lawyers enough money to keep them in the defence bar.

It is not, however, a matter of simply losing a few senior lawyers: Experienced insurance defence lawyers, those who know the ins and outs of working with and for an insurance company, will make for formidable opponents if they make the switch over to the plaintiff’s bar.

“[Insurance companies are] going to lose people like me and a lot of other people who have left the defence bar and gone over to the plaintiff’s side,” Fireman says. “[They] make it their business to make a marvelous profit off their experience and off their training as defense lawyers.”

Still other insurance defence lawyers have found it difficult to prove to their firm’s partners that insurance law represents a lucrative direction for the firm. Some have broken away from their firms entirely, opting instead to start their own smaller insurance law boutique firms.

Paccanaro doesn’t buy the doom and gloom story that insurance defence lawyers are disappearing. She notes, rather, that there doesn’t appear to be any shortage of lawyers. She acknowledges there are cases in which lawyers switch from one side to the other, and it’s often because they consider it more lucrative. This is potentially due to a possible “bonus” for the plaintiff lawyer upon winning a case, whereas on the defense side a lawyer is paid for the work that is done.

“It may not have anything to do with insurance companies,” Paccanaro notes. “It may just have to do with compensation.”

Preferred vendors

Some insurance companies have set up partnerships with law firms in order to remove any sense that insurance companies and their counsel are working at cross-purposes. Irene Bianchi, vice president of claims and corporate services at Royal & SunAlliance, says rigorous selection processes can be used to satisfy the concerns of both the insurance companies and law firms in advance of pending litigation. “What we want to be able to do by making these different types of arrangements with our law firms is make sure that it’s a win-win situation with both the firm and our company and ultimately our insureds,” Bianchi says. “Whenever we look to external vendors who are going to be acting as our arms, as you will, to deal with our insureds, we look for quality, service and price in that order.”

The Economical has gone through a similar process, reassessing their defence needs in an effort to gain greater efficiency. “As a result of that, we’ve worked a lot more closely with our counsel than ever before,” Rocco Neglia, vice president of claims at The Economical, points out.

The assumption underlying these selection processes and preferred partnerships is that the lawyers are the courtroom extension of the claim handlers. “We have service standards that [the lawyers have] agreed to, and that we audit,” Bianchi says. “And we have agreed rates. There’s no cap on the rates, but we agree on how much we’re going to be charged for files and how much they are going to be billed for files. We agree to a price and it’s a contractual agreement and it’s basically based on the type of file that we have.”

The lawyers themselves decide who will be responsible for a file. Thus it is more likely a junior lawyer at the firm will be responsible for a relatively straightforward case such as a slip-and-fall. On the other hand, Bianchi notes, the company will pay appropriately when more senior and experienced counsel are required.

The Economical has a similar situation in place. A certain kind of case will be costed according to a certain fee schedule, but if the file gains complexity, it might be reassigned within the firm; only then would this kind of situation trigger additional costs for the insurer.

With this arrangement comes an ease of business and a newfound closeness with counsel that was not there before, Bianchi points out. The law firm understands the needs of the insurance company and vice versa.

“[It] reduces the number of calls back and forth to the claim handler saying ‘How do you want me to handle this?’ or ‘What’s your procedure for that?'” Bianchi says. “They know how we like things to be reported, for example, and so they do it. Conversely, we understand how they like to get things in their office.”

Shawn Kirkpatrick, claims technical advisor, casualty litigation at The Economical, points out that by working with a smaller number of law firms, senior staff from The Economical are able to go straight to the firm to read material, saving photocopying and report costs. “We got to the lawyer’s file to look at the information or to get briefings from counsel, it’s just some logical common sense that’s being applied to extract mutual cost.”

As claims costs continue to rise, insurance companies will inevitably have to continue to look for ways to balance the bottom line and keep claims ratios in check. Law firms too need to keep the bottom line in check and if compensation continues to decrease, the pressures to seek monies elsewhere will increase.

Only time will tell how the pressures of rising claims costs will impact the insurance companies and the defence bar.

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“Put a bunch of rules around how a file is handled and those kinds of constraints can be very limiting on people. And very costly. It’s incredibly costly.”

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“Whenever there’s escalation in the exposure and the amount that you are paying out, the people who handle that are going to feel tension.”

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Suggested Solutions

There are steps that can be taken to try and lower litigation costs and deal with other concerns, according to lawyer Brian Elkin.

1. Consider different claims handlers once litigation is under way — If a case goes to litigation, it means that the claims handler could not resolve the case, for whatever reason. By this time, the claims handler has a personal stake in the case and by bringing in a new claims handler it “can make all the difference in the world,” Elkin notes.

2. Have the file prepared before it goes to counsel — If the file is incomplete, let counsel know immediately. If reports are missing from the plaintiff, counsel can work to resolve that, including serving a notice of examination.

3. Assess what the case is worth on the merits (range) with counsel — Objectively evaluate the plaintiff’s case and determine range of exposure.

4. Assess what will be spent to bring the file to the point that the chances of arriving at or near that number are good — Determine what it will cost to bring the file as close to the value of the case on its merits. Follow this up with a cost benefit analysis to determine the best return.

5. Decide at what point you are prepared to take the case to trial — Counsel can provide an assessment as to what might happen at a trial to help determine whether the cost of trial outweighs the cost of settling. Take a look at best and worst case scenarios — but don’t be afraid to go to trial.

6. Get an offer to settle out as early as possible — This can help protect the insurance company from having to pay costs. The earlier an offer is made, the faster it can be determined whether the case can be efficiently settled.

7. Understand that when the matter goes to litigation it is in our bailiwick — A lawyer is familiar with the judges and the opponents in the jurisdiction within which they work. They are also in a position to predict reaction to a case. “When we give advice as to settlement values we are not telling you the state of the law,” Elkin writes. “We are telling you how we think the judges, lawyers and experts we deal with daily are going to react to your case. This applies with respect to strategies as well as to predicting outcomes.”