The beauty of alternative fee arrangements are that they are alternative — the flexibility they provide make them useful in a number of contexts, and in a number of different sizes (from the single assignment to a large block of work). That flexibility can be applied to subrogation matters insurers often assign to outside counsel.
Traditionally, such assignments are handled on a simple contingency arrangement, or a flat fee basis. Certain larger subrogation assignments can be assigned out by insurance company legal departments on an hourly basis as well. Insurers are interested in other arrangements, however, which can increase their net recovery, which is a nice way of saying cut the costs of acquisition. Outside subrogation lawyers are a large cost of acquisition.
Enter again the alternative fee option. We recently quoted a monthly flat fee arrangement on a mid-size property subrogation claim. There is an overall cap on the number of chargeable months (and therefore the maximum legal fee), and that cap number represents a sufficiently small percentage of the potential subrogation recovery so as to be attractive to the insurer who was looking for a fee quote.
At first blush, the arrangement would seem to be less efficient than a contingency fee arrangement- it looks as if the outside law firm has an incentive to stretch out the duration of the subrogation case to maximize their fee. But this suspicion ignores two patent realities: 1.) it is far better business to turn a subrogation case around in three months than three years, because it will lead to additional assignments; and 2.) insurance companies have so much subrogation work that they know the reasonable life span of any given subrogation matter, and therefore how their outside law firms compare to those norms.
Insurance company legal departments face cost pressures today like no other time. Fee arrangements on subrogation cases which give insurers a means of increasing their net recovery, when compared to contingency, flat, and billable hour arrangements, will become increasingly attractive. Lawyers and firms looking to keep the subrogation business they have, or to increase their market share, will have to offer something more than the traditional subrogation fee arrangements.
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