LEGAL COUNSEL COSTS: VALUE OR NOT?

As a young lawyer, I remember the Honorable Justice Edson Haines talking about costs and legal fees, and on many instances he would state that, “there are times when the lawyer must share the risk of his client”.

In the 1970s, sending an account to an insurance company was a straight forward process. At the end of the case, the lawyer would telephone the claims person. They would discuss what had transpired, the effort that was put into the lawsuit and the result. This discussion included the amount of the claim, the amount of costs and disbursements that was paid to plaintiff’s counsel, whether the result was good or bad as compared to reserves and the expectations of the client. Sometimes there were adjustments upward if the result was good or downward if the case went badly. The fee was agreed upon between the lawyer and the claims person, the bill submitted and paid, and that was the end of it. Over time and a number of cases, things worked out equitably.

During this time period, counsel mostly dealt with the same claims people on a regular basis. There was not the same kind of turnover in the companies that we see today. In addition, the relationship with a client was founded on confidence and trust. It was truly a professional relationship.

This all changed in the early 1980s. In 1982, my partner, Jeffery Lyons, received a letter from the president of an important client. During a meeting, we were shown a letter that he had received from his head office in Chicago which basically said “all our counsel must now submit time-docketed accounts”. Jeff’s reaction was instantaneous. He told the executive that this was the worst possible mistake any insurer could make. It would mean paying the appropriate amount of fees for larger cases, but paying exorbitant costs on the smaller cases. Nothing would slip through the cracks, the ability to adjust was lost. It would also encourage delay in the resolution of litigation, add overhead to the law firm, and require the purchase of more computers, software and people to run them. Lawyers would spend time filling out dockets instead of practicing law. He predicted quite accurately that legal costs would “go through the roof” as would the so-called hourly rate. He was emphatic that one day the industry would regret they ever made this decision. His prediction was deadly accurate.

Back to the future

The problems that exist today are aptly described by two recent experiences from my law practice. The first situation involved an automobile accident on private property, resulting in personal injuries. A crucial issue in the dispute was ownership of the roadway where the accident had occurred. This required retaining an expert in property law to provide an opinion that could be used in assessing liability. Such an opinion could only come from one of Toronto’s major law firms. After many months of chasing documents, correspondence and meetings, we received an opinion which was reasonably satisfactory but not as definitive as we would have liked. The real difficulty, however, was that when the account was received and ultimately submitted to the client, the bill of the expert exceeded our own account and we were defending the lawsuit. Quite frankly, I was embarrassed to submit this account to the client. I knew that the client would not perceive that he had received value from this opinion.

My second story involves a case, where an associate, after winning a case at trial under the “summary rules”, came to me at a time when the account was to be delivered. Under the summary rules, the recoverable amount cannot exceed $25,000. In this particular case, as the successful party, we were awarded costs which were fixed by the presiding judge at $15,000 plus disbursements and GST. The actual trial of the matter had lasted approximately four days and the young associate’s docketed time was well in excess of the costs recovered. The other issue of importance is the fact that the likelihood of recovery of any of the costs awarded was unlikely. After discussing the various issues, my colleague and I agreed that we would send the client an account that equaled the costs payable as ordered by the trial judge so that in the event these costs were ever recovered, the client would be fully indemnified.

The hourly quandary

Insurers made the decision to insist on time-docketed accounts because they were desperate to evaluate whether or not they were getting value for their money and they wanted a measuring stick. Once the insurance industry went to a time-docketed billing system, they saw their costs escalate. As we moved into the 1990s, the industry began the search for some kind of alternative billing method. Insurers recognized that the instrument they used to measure and control costs had magnified the problem. This type of billing turned lawyers into “taxi drivers”, or hourly paid employees. It took the professionalism out of the practice of law, and turned law firms into businesses.

Why can we not fix it? The answer is simple. The hourly rate is risk averse. Secondly, very few lawyers can budget and give accurate estimates of what the conduct of litigation will cost. This is a profession to which change does not come easily. In addition, however, there are many insurers who feel too comfortable with the time-docketed account. This situation leads to complacency. In today’s climate the desire for change is client-driven – the desire to maintain the status quo is driven by the profession.

Insurers want consistency in how they are treated by their suppliers and, generally speaking, have too much turnover to allow claims examiners to negotiate fees with counsel as they once did.

On the other hand, law firms love the time-docketed account. It makes budgeting and financial forecasting a breeze. Associates can be given targets based on billable hours and paid accordingly. It has become a golden egg for the profession and a significant cost factor for the insurance industry. They have become clients who question whether they are obtaining value for their money. Many times when our associates come to me to discuss an account, and my reaction is that the amount is too high, I pose the question, how would you like to be on the receiving end of this bill? Would you feel you got value for your money?

Alternative solutions

Small Cases with Fixed Values. These kind of cases are conducted in the Small Claims Court or pursuant to summary rules. It is easy to develop fees in these kinds of cases based on the amount of the claim. For example, a $25,000 summary rules case can be taken to trial for a fee of $6,000 plus disbursements and GST. Formulas like these can be applied to any case that has a fixed value. Another alternative is a fee based on a fixed amount for every $1,000 of claim.

Declining Billing System. Property and casualty insurers have learned that the longer a file is open, the more likely it is that the cost will escalate both in terms of indemnity and legal costs. It is therefore to the insurer’s advantage to close a file early. By providing the lawyer with incentives to close the file, an insurer can achieve some positive results. For example, the insurer can make an arrangement with the counsel that the lawyer will receive a fee of $7,500 for taking this case from its inception to the conclusion of the pre-trial. If at any step along the way the case is resolved, the fee is still the same. There are pros and cons to this method. This same principal can be used depending on the size of the case by adjustments to the flat fee. For instance, a fee of $7,500 to take a case to a pre-trial conference is appropriate for run-of-the-mill personal injury cases having a value of less than $100,000. It is not appropriate for million dollar cases.

Bulk billing. This method describes the situation where an insurer enters a relationship with a law firm based on a fixed fee to handle a certain number of files, or a certain type of file. As is usually done, disbursements and GST are additional items. This method provides the insurer with the predictability it desires in terms of costs but turns lawyers into processors of paper. It is hard to measure and deteriorates the professional incentive to produce quality work.

The menu approach. The menu approach is something that once again started in the U.S. and is currently gaining favor with insurers and creates areas of specialty within the law firm. For instance when a file is sent to a law firm, the client checks off what activities they require. They may or may not ask for a “discovery”, or an opinion on damages or coverage, or whatever else is on the menu. The fee for these services is determined by the estimated value of the claim. The fee is fixed and known in advance. The cost of doing a pre-trial and the cost of doing an ADR is also fixed. The cost of a trial depending on which lawyer actually attends court is treated as an entirely separate matter. All of these items are pre-selected by the insurer when the file arrives.

This system presupposes that the law firm in question has capable trial counsel at the end of the line as well as someone who can handle an appeal if necessary. The individuals who possess these latter skills are becoming rarer. They are also the same individuals who demand higher hourly rates. In order to have these individuals work at conventional hourly rates, it may be that some kind of annual retainer arrangement has to be worked out between the law firm and the insurer to ensure that these people will be available when needed and will fit into the hourly rate system imposed by the insurer.

The law firm is structured in a way that fulfills these goals by having lawyers who do only one thing, but do it extremely well. From the law firm’s point of view in terms of recruitment, associates would start doing basic pleadings and then move to examinations for discovery and motions and so on up the line until they become well-trained trial counsel.

Alternative implications

Insurance companies recognize that transaction costs are very modest when compared to indemnity payments. Statistics have demonstrated that a case that has resolved early will result in significant savings in the ultimate dollar that is spent both on indemnity and legal costs. Since 97% of all cases which are referred to counsel settle anyway, the insurer recognizes that the major component of legal transaction costs are directly related to the length of time a file is open in the lawyer’s hands and not the hourly rate. Therefore, all of these billing methods that insurers are now devising are designed to encourage lawyers to settle cases as quickly as possible. Every lawyer working in the insurance field today should begin strategizing the minute they open a file as to how that file can be closed. If lawyers are good professionals, that is the way they will conduct themselves regardless of whatever billing system they use.

The ultimate solution

Having created this problem with the inception of the hourly rate, we are now in a period of transition. We have not been into the process long enough to determine whether it will accomplish mutual goals. The difficulty is that all of these various methods of billing instituted in the name of economy detract from the concept of “professionalism”. I concede immediately that insurers today do not retain trial counsel. They retain counsel to prepare the case for settlement. They use law firms where trial counsel is ultimately available if needed. Once you start eroding the “professionalism” of counsel, that is the day that you endanger the “indemnity dollar”. Once you turn lawyers into file processors and make them adjusters with law degrees, that person’s goal becomes closure at whatever cost. This is not an improvement.

The best solution is to restore a solicitor client relationship that is built on confidence and trust. Perhaps a combination of what the law firm and the insurer see as the best of both worlds. The law firm will use agreed upon hourly rates, but at the end of the case the insurer will have an opportunity to review with a lawyer the real value of the effort and adjust accordingly. The law firm and the insurer can each designate one experienced individual, someone who through his or her knowledge and reputation understands the litigation process and knows, generally speaking, the individuals and the issues. These designated representatives can meet on a monthly basis to deal with file accounts, so that legal costs can be discussed and a fair fee assessed to the file based on the value that the client has received. This will increase the level of professionalism both on the part of the client and on the part of the law firm and will enhance and restore the relationship between client and counsel.