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Swift justice: insurers can cut legal claims costs by streamlining the decision-making process that determines whether to settle or proceed to trial. (Industry Strategies: Litigation).

One of the most vexing challenges facing claim department managers is how to maintain and possibly improve the effectiveness of their litigation management in the face of ever-increasing legal fees. Typically, legal expenses are the largest component of allocated loss adjustment expenses. Additionally, industry consolidation has intensified those dynamics during the past three to four years.

One effective solution is to simplify the litigation management process and ensure that adjusters and defense counsel are focused on the same objectives. While it is difficult to achieve, it's not impossible. The following approach resulted in a 24% reduction in legal expenses in the first year.

The Setting

The carrier involved had an assortment of claims. Motor vehicle accidents, frequently involving soft tissue injuries, represented a large percentage of its claims. While some claims involved significant bodily injuries, most were simple sprains and strains. Another large source of claims was slips and falls involving stairs or slippery surfaces. There were a few workers' compensation claims, consisting mostly of short-term injuries and back claims. The workers' comp cases rarely involved significant litigation. In short, the claims were representative of a typical book of litigation facing carriers.

Adjusters were responsible for directing the defense, with appropriate supervisory oversight. In reality, the adjusters and supervisors were abdicating that responsibility to defense counsel. In many cases, defense counsel was developing and carrying out the defense, evaluating the claim and/or negotiating settlement. Interviews with adjusters revealed that many felt they had done their job by retaining good defense counsel. Retention letters contained general instructions-such as enter and defend-and counsel was paid an hourly rate.

Follow-up reports by counsel were sporadic and provided little new information that could be used to expedite claim resolution. Litigation could continue for years, with much time and money spent in discovery, only to have an overwhelming number of claims settle close to trial. When an adjuster did attempt to direct the defense, counsel reacted with anger and hostility. This reaction created friction between adjusters and counsel, and discouraged adjusters from trying to proactively manage cases. Finally, billing guidelines had been revised several times, each more complicated and detailed than the former. Bills were rarely reviewed and almost never adjusted.

In the two years prior to the start of the project, the company twice tried to reduce legal costs. First, it increased the number of outside firms it had on its approved counsel list. The underlying strategy was to create competition between firms, resulting in reduced fees. The second attempt centered on reducing hourly billing rates. Despite both attempts, legal costs increased by more than 300% over the two-year period. In short, things were still out of control, with no improvement in litigation management.

The Solution

At the outset, the following project objectives were identified:

* Decrease legal spending;

* Re-engage adjusters in the management of litigation;

* Foster adjuster/counsel teamwork, focused on resolution of litigation;

* Simplify litigation management processes; and

* Ensure consistent litigation management.

In order to achieve these goals, everyone recognized that the old approaches had to be abandoned. New ways would be necessary and adjusters, counsel and supervisors would have to change the way they worked.

Speedy Review

The first change was in what occurred before counsel was retained. Under existing practices, many adjusters simply referred the matter to counsel. Some adjusters consulted with their supervisors. A few adjusters attempted settlement.

Now, all adjusters had to first review the file with their supervisor to determine the potential for settlement. There was no form to fill out or lengthy procedure to follow, except that the review had to be conducted within 24 hours of learning of the litigation. The adjuster had to create a file note about the review. The file note could be no longer than a sentence or two. The objective of the procedure was simple: attempt settlement in appropriate cases and avoid added litigation costs. The review assessed liability and damages and the legal costs (counsel fees, expert witness fees, etc.) that would likely be incurred if the claim were not promptly settled. If settlement was attempted, a straightforward offer would be made within 24 hours of the review. The objective was prompt and reasonable settlement, not to drive a hard bargain.

If the claim was not settled within 48 hours of the offer, defense counsel would be retained. Thus, the entire prereferral process took no more than four days. Checking compliance with the new procedure was simple: read the claim file notes. Compliance was very high--more than 90%--since both the adjuster and supervisor were mutually responsible. Adjusters and supervisors indicated that the high compliance rate resulted because the process was simple and well understood, and all participants understood their responsibilities.

Streamlined Referral Process

To achieve consistent, efficient litigation management, with adjusters and counsel working as a team, it was decided to have the adjusters and counsel design the process themselves. The only direction given was that the process had to be simple, effective and fast. A representative group was assembled and given their charge. Initially, some members had difficulty because they were not accustomed to the idea that they would define how they would work. They were used to having someone tell them what to do. There was also some resistance (primarily from the attorneys) to changing the existing process. They did not see it as cumbersome, repetitive or time consuming. Rather, they saw it as "thorough." There was also some resistance from both adjusters and counsel to working together. Some had experienced disagreements over who would "control" the litigation. To overcome this, they were told straight out that their jobs (adjusters) and future referrals (counsel) depended on their ability to work cooperatively.

What emerged was a simple two-page electronic referral form set up as a Word template. First, the adjuster provided basic information: parties' names, claim number, date of loss, description of loss (no more than two sentences), current status (latest offer and demand), policy information and whether an extension of time had been obtained. Most importantly, adjusters were required to indicate whether they intended to settle or try the matter. Some adjusters had difficulty making that decision. So, a third alternative was developed. "Undetermined."

If "Undetermined" was selected, however, the subsequent action plan was designed to obtain the information necessary within a specified time to enable the adjuster to make that decision. Finally, the adjuster developed an action plan unique to that claim, including specific tasks for counsel. General instructions such as "enter and defend" were unacceptable. Upon completion, the adjuster emailed the form to counsel. Within five days, they were jointly responsible to have a face-to-face meeting or a telephone conference to mutually agree upon an action plan. The plan detailed each item, the person responsible for completing it and the time in which it was to be accomplished.

When the group finished its work, most participants felt the form would work. Some had reservations. When it was "rolled out," there were a substantial number of doubters. Within two months, however, most adjusters and counsel found that the new process worked. They liked it because it provided them with the essential information easily and quickly, and it enabled them to work within the short time limitations.

In addition to streamlining the referral process, there were related changes. Adjusters and counsel discovered they could work together without the old turf wars. When they did work together, they were able to develop more effective defenses. Both groups found comfort because each knew what their responsibilities were and when the tasks had to be completed. The adjusters and counsel also realized they did not really need to exchange massive amounts of information. Because they were experienced professionals, a shorthand developed. The old way of communicating--detailed recitations of information already known by both parties--was a thing of the past.

The referral process was quick (a simplified electronic form, sent by email), easy (contained only essential information) and fostered teamwork (everyone understood that the group would "sink or swim" together).

Ongoing Litigation Management

The benefits from the revised referral process were quickly adopted into the ongoing processes. Adjusters and attorneys found that long, detailed deposition summaries were inefficient and wasteful. They agreed that short emails, containing only new information that impacted the handling of the case would be used.

Other processes were streamlined. The initial analysis by counsel--typically, an exhaustive factual recitation and discussion of the applicable law--would no longer be used because these analyses were repetitive, did not add value and did not promote case resolution. If counsel saw something unique, that could prompt a phone call or brief e-mail. Subsequent counsel reports (generally, by e-mail) would be sent only when new, important information was developed. Short response deadlines--generally one or two working days--were agreed to. At first, some found the deadlines difficult to deal with, but as time passed, they found the new way of communicating did not take long and therefore they could respond quickly.

Pre-Existing Litigation

In addition to revising the management of new litigation, each pending case was reviewed. The adjuster and attorney met, discussed the case, and agreed to an action plan to resolve it. These action plans specified who was to do what, with completion deadlines. Again, the focus was on resolution, consistent with the decision on whether to settle or take the case to trial. These reviews also resulted in 10% to 15% of the cases being settled before the adjuster and counsel met.

Understanding Litigation Costs

At the same time the litigation management processes were revised, data was gathered and analyzed to understand the total costs of litigation: indemnity payments and legal costs. Information on indemnity payments was developed by geographic region, line of business, and amount paid (either as a result of settlement or verdict). Legal costs were analyzed by categories: law firm (both in-house and outside counsel), claim office and line of business. This provided adjusters with information on how these factors contributed to the cost of concluding a claim. On average, they knew what the likely legal expenses would be if the claim was litigated.

Adjusters were encouraged to use this information in developing the settlement offers made before referring the matter to counsel. In essence, they performed a cost/benefit analysis based on the total costs of concluding a particular claim. Did it make more economic sense to settle the claim now, or after incurring legal expenses?

Use of House Counsel

The legal cost analysis also demonstrated that, on average, house counsel fees were approximately 60 cents for every dollar charged by outside counsel. While this cost differential was compelling, there was concern about whether there was a difference in indemnity results. Similar cases were divided by size of settlement and then by what type of counsel handled them. This study revealed that the amount of indemnity paid in cases handled by outside counsel did not materially differ from those handled by house counsel. The same result was obtained when similar analyses were conducted by line of business and injury type.

Because house counsel had a clear advantage on fees, and there was no significant difference in indemnity payments, all new cases were referred to house counsel, except when there was a conflict. While some adjusters and claim managers at first resisted this change, the numbers were compelling.

The Results

Twelve months into the project, total legal costs had been reduced by 24%. Other benefits were also realized. Adjusters were again actively engaged in directing litigation. They were working with counsel, rather than against them. The number of settlements increased and the length of time cases pended began to shorten.

Were there difficulties? Yes. Most of the challenges stemmed from peoples' resistance to change and new ways of thinking. Some adjusters had difficulty making the decision on whether to settle or proceed to trial. Some had difficulty being assertive with counsel. Some counsel had difficulty viewing adjusters as equal teammates. Both groups had problems adjusting to the new ways of doing things--shorter, quicker, and more focused communications. Some had technology issues such as using e-mail. Most were able to adjust, however. Those who could not, moved on.

Was it worth it? Absolutely. And not only because of the savings. More valuable were the lessons about teamwork and managing change. A renewed sense of "can do" was the ultimate benefit for years to come.

Donald Applestein is vice president of Am-Re Consultants Inc., a division of American Re-Insurance Co.
COPYRIGHT 2002 A.M. Best Company, Inc.
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Copyright 2002, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Applestein, Donald
Publication:Best's Review
Geographic Code:1USA
Date:Nov 1, 2002
Words:2071
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