Domino strategy: when Allstate's claims adjusters engage in the unauthorized practice of law, plaintiff attorneys can knock down the company's defenses with a series of arguments.
In the early 1990s, Allstate Insurance Co. adopted a confidential plan, known as Claims Core Process Redesign (CCPR), to enhance profits by engaging in the unauthorized practice of law nationwide. Under CCPR, Allstate offers to represent crash victims in settling their personal injury claims against its insureds. Allstate trains its claims adjusters to establish "empathetic, trust-based relationships" and "act as advocate" for unrepresented claimants so they will not hire lawyers.(1)
After winning the claimant's trust, the adjuster recommends an undervalued settlement. Allstate's internal statistics show that by discouraging legal representation and cultivating trust, the adjuster can persuade unrepresented claimants to settle for one-third to one-half of what the company would pay to claimants who have legal representation.(2)
Allstate's representation of injury claimants creates a conflict of interest because the company undertakes to represent both the insured and the claimant.
CCPR is a radical departure from traditional claims practices. Other insurance companies represent their insureds while maintaining a plainly adversarial posture toward injury claimants. This avoids the conflict of interest inherent in representing a claimant and an insured involved in the same claim. Allstate, however, uses the pretense of loyal, caring representation and advocacy to dupe unrepresented claimants into accepting disadvantageous settlement offers.
Allstate's controversial CCPR policy has generated a wave of litigation. State attorneys general, state bar associations, and private individuals have filed at least 56 lawsuits against Allstate in 22 states, alleging that these practices are fraudulent, deceptive, confusing, and illegal. The suits seek compensatory and punitive damages and injunctive relief on behalf of third-party claimants and Allstate's own insureds.
In January 2000, a Washington state court judge ruled that under CCPR, Allstate engages in the unauthorized practice of law and breaches fiduciary duties by representing third-party claimants in settling personal injury claims against its insureds. Judge Philip Hubbard ruled in Jones v. Allstate Insurance Co. that the insurer has "radically altered its approach to the business of claims [by] mimicking an attorney-client relationship" with unrepresented claimants.(3)
The court invalidated the settlement between the injury claimants and Allstate's insured, ruling that the company's unauthorized practice of law and breach of fiduciary duties made the settlement the fruit of the poisonous tree.
A year later, in Commonwealth v. Allstate Insurance Co.--a case brought by the Pennsylvania attorney general--a state court judge ruled that CCPR practices are "the result of Allstate's organized plan to reduce the settlement of third-party claims by eliminating the need for attorney involvement."(4) Judge Dan Pellegrini found that the confidential CCPR documents reflect" Allstate's intent to create confusion in the minds of its third-party claimants"(5) and that the company's conduct "was willful and in violation of Pennsylvania's Consumer Protection Law" against unfair and deceptive acts and practices.(6)
Despite these rulings, Allstate's illegal practice of law and defiance of state consumer protection acts continues unabated.
Plaintiffs challenging Allstate's CCPR practices can use a simple, inexpensive strategy to establish the company's liability and destroy its legal defenses with a series of summary judgment motions that work like falling dominoes.
The first motion establishes that Allstate's representation of third-party claimants in personal injury settlements involves the unauthorized practice of law. In the second motion, the plaintiff shows that by engaging in the unauthorized practice of law with a conflict of interest, Allstate automatically is liable for breaching its fiduciary duty to provide competent, loyal representation. The third and fourth motions establish that Allstate's breach of fiduciary duty automatically constitutes civil fraud and violation of state consumer-protection statutes.
These motions create a cascading series of legal consequences for Allstate. Because the company has breached fiduciary duties and committed civil fraud, the claimant may void the settlement and sue Allstate's insured for damages. Instead of having the claim settled, the insured is subject to liability for the full claim value, without regard to policy limits. The conflict of interest that arises from CCPR practices triggers a breach of the insurer's fiduciary duty to provide a loyal defense to its insured. It also breaches Allstate's contractual duty to settle within the policy limits so the insured is not exposed to personal liability.
This conflict of interest enables the claimant either to pursue the insured's personal assets or, in exchange for a covenant not to do so, to obtain an assignment of the insured's breach-of-contract and bad-faith claims against the company. The complaint may then be amended to bring the insured's claims against Allstate in conjunction with the claimant's direct liability claims.(7)
With Allstate's liability established and defenses eliminated, the case may proceed to trial on the issues of compensatory and punitive damages, costs, and attorney fees.
Allstate's confidential CCPR manual and form letters describe a sophisticated plan for making money by confusing and manipulating the trust of unrepresented claimants. The courts in both Jones and Commonwealth relied on the following excerpts from the manual to support their rulings that Allstate engaged in the unauthorized practice of law and violated consumer protection statutes:
* "Our change goal is to redefine the game ... to question, improve, and radically alter our whole approach to the business of claims."(8)
* "We begin with casualty because that is where we spend the most claim dollars."(9)
* The "goals of claim redesign" are based on recognition that "expense control alone will not allow us to effectively compete ...."(10)
* "THE STRATEGY: Win by exploiting the economics of the practice of law.... To `win' in the new game, we want those who would drive up loss (attorneys, who drive up the cost of settling claims) to lose."(11)
The manual instructs Allstate's adjusters to discourage claimants from seeking legal representation and urge them to rely on the company's advice and service to settle their injury claims. In a section titled "What can I tell claimants about attorneys?" the manual states:
* "Our communications with claimants should reinforce our central theme that claimants do not need attorneys to receive fair treatment or a fair settlement...."(12)
* "Our emphasis should be on reducing the need for an attorney through the service we provide ...."(13)
* "The way we approach claimants and develop relationships will significantly alter representation rates and contribute to lower severities [or claim payouts]...."(14)
* "When an attorney represents a claimant, we pay 2-3 times more to settle the claim."(15)
Reducing the "attorney representation rate" is a "primary performance measure" for adjusters who work in Allstate's "unrepresented segment"--that is, those who deal with claimants who have not enlisted the help of an attorney.(16)
Allstate sends its "unrepresented claimant" letter, "Quality Service Pledge," and "Do I need an attorney?" letter to people involved in collisions with its insureds. The unrepresented-claimant letter says Allstate will provide quality service and be the person's "claim representative." The Quality Service Pledge says the company will conduct" a quick, fair investigation," "fully explain the process," and make "an appropriate offer of compensation." The CCPR manual instructs Allstate adjusters to tell the claimant, "I will help you determine if you are eligible to receive compensation for any injuries you have suffered."(17)
The "Do I need an attorney?" letter tells unrepresented claimants that they do not need a lawyer to obtain a fair settlement and that an attorney will take 25 percent to 40 percent of their settlement money.
Jones v. Allstate illustrates how the company's conflicts of interest, incompetent representation, and unauthorized practice of law are harming people involved in crashes with Allstate's policyholders.
In November 1997, Janet Jones was driving her son home from school when Allstate's insured, 17-year-old Jeremy France, ran a stop sign and broadsided her 1992 Chrysler Plymouth Voyager minivan. In the collision, Janet's seat-belt buckle disengaged, and her head struck the interior of the minivan. She was hospitalized for 24 days for severe head injuries, coma, facial fractures, and the loss of her right eye. Her medical bills exceeded $100,000.
In response to an ongoing investigation by the National Highway Traffic Safety Administration, Chrysler recalled all the seat-belt buckles in its 1991-1993 minivans in December 1997, a month after Janet's crash. The investigation found that the buckles had a "false latching" defect, which caused them to disengage unexpectedly in collisions.(18)
Jeremy France and his parents were insured by Allstate under a $25,000 liability policy. Three days after the collision, the company contacted the Joneses in Janet's hospital room and sent them its unrepresented-claimant letter and Quality Service Pledge. In its investigation, Allstate determined that Jeremy France was 100 percent at fault and that Chrysler's seat belt had malfunctioned. Allstate assisted the Joneses by requesting that their health and auto insurers waive their subrogation interests.
Allstate's adjuster told the Joneses she would represent them. She asked the Joneses to trust her in handling their claim.
Two months later, the adjuster told the Joneses that the Frances' $25,000 policy limit was "all the money that is going to be available." Allstate sent Janet Jones a letter with a $25,000 settlement check and a release form. The company asked the Joneses to sign the check and release their "medical claims" against Allstate.
The language printed on the check, however, required a full release of all bodily injury claims. The release form went further, asking for a full release of all claims against all legally responsible parties. Janet Jones signed and deposited the check but did not sign the release because she was concerned that it might preclude her defective-seat-belt claim against Chrysler.
Jeremy France, a high school student, lived at home with his parents and had no assets beyond Allstate's $25,000 policy. His parents were subject to vicarious liability under the family car doctrine, and Chrysler was subject to joint and several liability for all the Joneses' damages. Under Washington state's liability apportionment statute, however, vicarious and joint and several liability would be unavailable if the Joneses settled separately with Jeremy.(19)
A settlement with Jeremy would thus prevent the Joneses from obtaining full compensation from Jeremy's parents or Chrysler. Although Allstate's Quality Service Pledge promised to "fully explain the process," Allstate did not inform the Joneses of the legal or economic consequences of settling separately with its insured.
Later, when the Joneses became aware of those consequences, they returned the $25,000 to Allstate. The company refused the repayment and insisted that the Joneses had released their claims by signing the settlement check.
The trial court later ruled on summary judgment that Allstate's representation of the Joneses constituted the unauthorized practice of law and that Allstate committed legal malpractice in failing to disclose the adverse consequences of the settlement. The court invalidated the settlement and allowed the Joneses to proceed with their claims against Jeremy France and his parents. The Joneses also filed a product liability case against DaimlerChrysler.
The Washington Supreme Court has accepted direct review of the case on grounds that Allstate's CCPR claims practices present "a fundamental and urgent issue of broad public import which requires prompt and ultimate determination."(20) The court's decision, expected this summer or fall, is likely to have national implications because other states have similar practice-of-law rules and consumer protection statutes.
The domino strategy
Attorneys representing claimants like the Joneses can use a simple strategy to dismantle Allstate's defenses. Once the company's unauthorized practice of law is established, the falling dominoes of liability for breach of fiduciary duties, civil fraud, and violation of consumer protection laws are set in motion.
Domino 1: unauthorized practice of law. This claim is the Achilles' heel of the CCPR policy. Since it can be proven on summary judgment, there is no need for the claimant to waste time and money securing expert opinions about whether Allstate improperly practiced law or violated the legal standard of care. Courts have the expertise and responsibility to make this determination without regard to expert testimony.(21)
Although the courts find it difficult to provide a comprehensive definition of the practice of law, they are in general agreement that
the practice of law includes, but is not limited to, representing another before the courts; giving of legal advice and counsel to others relating to their rights and obligations under the law; and preparation or approval of the use of legal instruments by which legal rights of others are either obtained, secured, or transferred even if such matters never become the subject of a court proceeding. Functionally, the practice of law relates to the rendition of services for others that call for the professional judgment of a lawyer.(22)
In determining whether an activity or service constitutes the unauthorized practice of law, the courts have focused on whether it involves the "lay exercise of legal discretion" and creates "the potential for public harm" through "injurious consequences from the acts of the unskilled."(23) Unauthorized practice occurs when a layperson's activities or services result in "uncertain legal rights"(24) or create a risk of "incompetence, divided loyalties, and other evils."(25)
The courts uniformly have concluded that "the negotiation of a settlement on behalf of the injured party requires the exercise of professional judgment and is, therefore, the practice of law."(26) Allstate's strategy of "exploiting the economics of the practice of law" by negotiating settlements for personal injury claimants plainly involves unauthorized practice.
In Dauphin County Bar Association v. Mazzacaro, the Pennsylvania Supreme Court held that a lay adjuster's evaluation and negotiation of a personal injury settlement for a third-party claimant necessarily involves the exercise of legal discretion and is the unauthorized practice of law:
Such an assessment ... involves an understanding of the applicable tort principles (including the elements of negligence and contributory negligence), a grasp of the rules of evidence, and an ability to evaluate the strengths and weaknesses of the client's case vis-a-vis that of the adversary. The acquisition of such knowledge is not within the ability of laypersons, but rather involves the application of abstract legal principles to the concrete facts of the given claim. As a consequence, it is inescapable that lay adjusters who undertake to negotiate settlements of the claims of third-party claimants must exercise legal judgments in so doing.... In sum, we conclude that such third-party claimant representation by lay adjusters constitutes the unauthorized practice of law.(27)
In State v. Hunt, the Washington Court of Appeals held that the unauthorized practice of law occurs when laypeople represent claimants in evaluating and negotiating settlements and preparing releases of tort-feasors and insurance companies: "[W]hen one determines for the parties the kinds of legal documents they should execute to effect their purpose [of settling personal injury claims], such is the practice of law."(28)
In Brown v. Unauthorized Practice of Law Committee, the Texas Court of Appeals held that when a claims adjuster "negotiated the amount of damages to be paid on behalf of parties other than himself," this activity "required the use of legal skill and knowledge and, thus, constituted the practice of law."(29)
Allstate contends that it is not practicing law under its CCPR program because its adjusters do not believe they are practicing law or tell claimants that they are lawyers. The company says it merely represents itself and its insured in negotiating settlements and preparing releases. The courts, however, have uniformly held that such "subjective belief' and "pro se" explanations are not legal defenses.
For example, in Hunt, the Washington Court of Appeals held that whether a party's activities and services involve the practice of law is determined by an objective legal standard.(30)
Similarly, in Bergantzel v. Mlynarik and Meunier v. Bernich, the Iowa Supreme Court and the Louisiana Court of Appeals, respectively, ruled that adjusters who negotiate personal injury settlements for claimants engage in the unauthorized practice of law, even if the adjusters state that they are not attorneys and tell the claimants they are free to engage the services of a lawyer.(31)
The "pro se" defense is not available to Allstate because, as courts have held in other contexts, a layperson who selects and completes a legal instrument for another party to sign is engaging in the practice of law. The defense applies only if "the layperson is acting solely on his own behalf.(32)
Allstate necessarily exercises legal discretion when it represents third-party claimants in settling their personal injury claims. Its undisclosed conflict of interest automatically violates the legal standard of care.(33)
Domino 2: breach of fiduciary duties. Once the unauthorized practice of law is established, liability for breach of the fiduciary duties of undivided loyalty and competent representation automatically follows. In Liebergessell v. Evans, the Washington Supreme Court held that a "fiduciary relationship arises as a matter of law between an attorney and his client...."(34)
Allstate's fiduciary relationship with unrepresented claimants arises when it purports to represent them in settling claims and advises them to sign releases that affect their legal rights and obligations. In Jones, the court ruled on summary judgment that Allstate's unauthorized practice of law automatically resulted in a breach of fiduciary duties to the third-party claimants.(35)
Domino 3- civil fraud. Liability for civil fraud, as distinct from common law fraud, flows automatically from Allstate's unauthorized practice of law and breach of fiduciary duties to injury claimants.
In Valley Land Office, Inc. v. O'Grady, the Washington Supreme Court held that civil fraud occurs as a matter of law when a fiduciary breaches its duties of undivided loyalty and full disclosure. The court said it is not necessary to prove the nine elements of common law fraud to establish that a fiduciary is liable for civil fraud. As the court explained, "Any departure from these rules [of full disclosure and undivided loyalty] is a fraud in law."(36)
Under this authority, a claimant should be able to prove on summary judgment that Allstate committed civil fraud by engaging in the unauthorized practice of law and breaching its fiduciary duties of undivided loyalty and full disclosure.
Domino 4: consumer protection act violations. In Commonwealth, the Pennsylvania court ruled on summary judgment that the three CCPR forms Allstate sends to claimants--the unrepresented-claimant letter, the Quality Service Pledge, and the "Do I need an attorney?" letter--violate Pennsylvania's Consumer Protection Law, which prohibits "fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding."(37)
The court rejected Allstate's argument that a plaintiff has to establish the nine elements of common law fraud to prove statutory consumer fraud. Instead, it held that consumer fraud occurs when a party makes a material representation that may mislead or deceive a reasonable consumer. Under this standard, the court held that Allstate's three CCPR forms are "misleading and deceptive" because they
create a likelihood of confusion or misunderstanding to a reasonable claimant ... that Allstate will act in the interest of the third-party claimant, leaving the impression that it will take care of the claimants and look out for all of their interests.... The pledge, which in different versions has also indicated that Allstate's claim representative will be the third-party claimant's advocate, is deceptive because it serves to reinforce the [unrepresented-claimant] letter's attempt to instill confidence and the belief that Allstate has the interest of the third-party claimant at heart, when, in fact, it probably does not, because it would be in conflict with its representation of its policyholders and its duty to its shareholders.(38)
The domino strategy can help lawyers suing Allstate to stop the company from harming the public through deception, conflict of interest, and the unauthorized practice of law. Allstate is vulnerable to legal attack because the illegality of its CCPR claims practices can be established on summary judgment, leaving the issues of damages, costs, and fees for trial.
(1.) ALLSTATE INSURANCE CO., CLAIMS CORE PROCESS REDESIGN MANUAL 8, 10, exhibit 6 (1995) [hereafter CCPR MANUAL]. Copies of the manual are available online to ATLA members from the ATLA Exchange. Visit http://exchange.atla.org and select "Hot Topics."
(2.) Id. at 3, exhibit 4.
(3.) No. 99-2-02212-2 SEA, slip op. at 9 (Wash., King County Super. Ct. Jan. 14, 2000).
(4.) No. 1009 M.D. 1998, slip op. at 13 (Pa. Commw. Ct. Jan. 18, 2001).
(5.) Id. at 13.
(7.) See John Budlong, Assigned Policy Rights Can Increase Compensation, TRIAL, Oct. 1995, at 64.
(8.) CCPR MANUAL, supra note 1, at 2.
(9.) Id. at 1.
(10.) Id. at 2.
(11.) Commonwealth, No. 1009 M.D. 1998, slip op. at 4 (quoting 1993 version of CCPR manual).
(12.) CCPR MANUAL, supra note 1, at 24.
(13.) Id. at 27.
(14.) Id. at 2.
(15.) Commonwealth, No. 1009 M.D. 1998, slip op. at 4 (quoting 1993 version of CCPR manual).
(16.) CCPR MANUAL, supra note 1, at 12.
(17.) Id. at 16 n.11.
(18.) OFFICE OF DEFECTS INVESTIGATION, NAT'L HIGHWAY TRAFFIC SAFETY ADMIN., SAFETY RECALL INVESTIGATION REPORT, RECALL NO. EA96-016 (Dec. 17, 1997).
(19.) WASH. REV. CODE [sections] 4.22.070(1)(b) (2000).
(20.) WASH. R. APP. P. 4.2(a)(4).
(21.) See, e.g., Burien Motors, Inc. v. Balch, 513 P.2d 582, 587 (Wash. Ct. App. 1973); Eriks v. Denver, 824 P.2d 1207, 1211 (Wash. 1992).
(22.) See Bergantzel v. Mlynarik, 619 N.W.2d 309, 312 (Iowa 2000) and cases from other jurisdictions cited therein.
(23.) See, e.g., Perkins v. CTX Mortgage Co., 969 P.2d 93, 98, 103 (Wash. 1999). 24. See id. at 100.
(25.) Cultum v. Heritage House Realtors, Inc., 694 P.2d 630, 633 (Wash. 1985).
(26.) Bergantzel, 619 N.W.2d 309, 313, and cases cited therein; 16 JOHN ALAN APPLEMAN & JEAN APPLEMAN, INSURANCE LAW & PRACTICE, WITH FORMS [sections] 8649, at 137 (1981).
(27.) 351 A.2d 229, 234 (Pa. 1976).
(28.) 880 P.2d 96, 100 (Wash. Ct. App. 1994).
(29.) 742 S.W.2d 34, 42 (Tex. Ct. App. 1987).
(30.) 880 P.2d 96, 100.
(31.) 619 N.W.2d 309, 315-16; 170 So. 567, 568-69, 5722-73 (La. Ct. App. 1936).
(32.) Washington State Bar Ass'n v. Great W. Union Fed. Sav. & Loan Ass'n, 586 P.2d 870, 876 (Wash. 1978).
(33.) The rules of legal ethics, as well as those of legal competence, apply to laypeople who practice law. See Batten v. Abrams, 626 P. 2d 984, 985 n.1 (Wash. Ct. App. 1981).
(34.) The Washington Supreme Court defined a fiduciary relationship as "one in which one party `occupies such a relation to the other party as to justify the latter in expecting that his interests will be cared for.'" Liebergesell v. Evans, 613 P.2d 1170, 1175 (Wash. 1980) (quoting RESTATEMENT OF CONTRACTS [sections] 472(1)(c) (1932)).
(35.) No. 99-2-02212-2 SEA.
(36.) 432 P.2d 850, 854 (Wash. 1967); see also RESTATEMENT (SECOND) OF AGENCY [sections] 390 (1958); RESTATEMENT (SECOND) OF TRUSTS [sections] 2, at 6 (1959).
(37.) PA. STAT. ANN. tit. 73 [sections] 201-2 (ii), (iii), (v), (xxi) (West 2001).
(38.) Commonwealth, No. 1009 M.D. 1998, slip. op. at 10-11.
John Budlong is an attorney in Seattle.