Allstate facing new lawsuit over attorney Internet bids.

Allstate is facing a multimillion-dollar class action lawsuit in Chicago over its practice of seeking low bids on the Internet for legal representation of its insureds. (Maya v. Allstate Insurance Co., No. 01-006084 (Ill., Cook County Cir. Ct. May 23, 2001).)

The lawsuit requests punitive damages, as well as other relief. Plaintiff attorney David Novoselsky of Chicago has asked for an injunction to make Allstate stop soliciting lawyers over the Internet.

"Allstate has chosen to pool or aggregate claims against its insureds and 'retain' counsel based upon a 'bidding' system where a group of potential lawsuits are advertised for review by various attorneys, with an invitation to place a bid over the Internet for the lowest possible cost of representation," the plaintiffs allege in the complaint. "Allstate then accepts this bid for anonymous retention" and later assigns such cases to the bidder.

The plaintiffs have filed a claim under Illinois's Consumer Fraud and Deceptive Business Practices Act, as well as common law claims of fraud and breach of contract.

Allstate defends its practice, saying it continues to provide quality legal services to its insureds. In an interview, Pat Gallery, Allstate's vice president of litigation services, said flat fees for legal representation have existed for decades. Gallery, who noted that the company also seeks out lawyers recommended by claims representatives and other sources, said price is not the only factor it considers when deciding which attorneys to hire.

He said the practice could benefit policyholders. Their cases would probably close sooner "because there's less incentive to do a lot of legal work," he said.

He added that it is in Allstate's best interest to provide quality representation because increased litigation losses would be reflected in the company's expenses through higher payouts.

John Budlong, a Seattle attorney suing Allstate for bad-faith claims practices, said an insurance company's failure to adequately defend its policyholders could leave them facing judgments that exceed their insurance coverage. "This appears to be another example of Allstate trying to turn its claims operations into a profit center by providing less defense for the customers' premium dollars," Budlong said.

The lawsuit is the latest in a series of actions against Allstate related to its legal practices. In June, Florida Circuit Judge Paul Siegel ruled that staff attorneys had violated Florida Bar rules by using private firm letterhead that failed to note their affiliation with Allstate.

In April, a Pennsylvania state court judge ordered Allstate to pay $250,000 in civil penalties for violating the Unfair Trade Practices and Consumer Protection Law. (Commonwealth of Pennsylvania v. Allstate Insurance Co., No. 1009 M.D. 1998 (Pa. Commw. Ct. 2001.)

Allstate reported in July that its second-quarter profits dropped 63 percent, leading to a sharp drop in its stock price. When asked whether the second-quarter losses could lead to further measures to control litigation expenses, Gallery refused to comment.