Alternative Fee Program Data Shows As Program Matures, Clients Realize Savings On Outside Legal Expense

efficiency

Here is an actual set of alternative fee numbers I’ve just happily provided to update one of the insurance clients I represent, demonstrating that an alternative fee program is saving them money on outside legal expense.  Real money.

Listed below are data for seven insurance related  cases I am handling under a monthly flat fee program (with a cap on the number of months the flat fee can be charged, so as to encourage efficiency).  First a look at the numbers, and then a few quick observations.   Only the case names below are changed to protect identities.  The numbers are 100% actual  and show actual flat fees paid by the client versus what they would have paid under an hourly rate agreement.  Green numbers in the Net Diff. column represent savings to the client.

Case            Hourly Fees      Flat Fees       Net Diff.

Smith        $17,218.50       $25,350.00       $8,131.50

Jones         $30,433.00        $13,650.00     -$16,783.00

Ajax           $2,212.50         $2,775.00         $562.50

King          $4,781.00          $1,950.00       -$2,831.00

Queen       $2,157.50         $895.00            -$1,262.50

Western   $4,074.50         $2,925.00         -$1,149.50

Atlantic   $351.00            $2,775.00        $2,424.00

Total         $61,228.00     $50,320.00     -$10,908.00

Client Savings:            -17.8%

Before the observations, a caveat:  This data, at any given time, is a snapshot in the life of an assignment, and/or group of assignments.  The data changes, but as the assignments mature in terms of their life cycle, a clear picture emerges:

  • Overall the client savings in this alternative fee program approaches 20%.  As the data set increases, the savings  ratio will stay relatively stable, but the real dollars saved in outside legal expense will grow, and grow, and grow.  A company with a million dollars a year  in outside legal expense based on hourly engagements would spend only $821,846.21, a savings of nearly $200,000.00.
  • The insurance clients are “winning” more fee agreements than they are not “winning.”  This is a sign that the alternative fee program is rightly priced so that it is both 1.) an real financial benefit for the client, and 2.) not a financial hardship for the outside law firm.
  • The program retains extreme flexibility, as each assignment is quoted independently (although the quotes generally do cluster closely for similar type cases) and either side retains the right to seek adjustment as the matter proceeds.  Clients also reserve the right to request the traditional billable hour arrangement for any case which they feel does not suit the alternative fee program.
  • There are and there will be outliers in any alternative fee program.  But as you can see from the data, the outliers are rare — in the two cases with  more than a $5,000.00 difference between what the client paid and what the client would have paid, one benefitted the client, and one benefitted the law firm, but the client benefitted twice as much as the law firm when the two outliers are aggregated.  Win-win-win.
  • The program provides simultaneous double benefit to the participating client:  1.) the client gets the benefit of outside counsel with local knowledge and expertise;  and 2.) the client secures this quality at less than hourly rate pricing.

I cannot think of any CEO’s, CFO’s or any other XXO’s who would not like their General Counsel to approach them with an immediate simple way to give their outside legal expense a 20% haircut, while at the same time retaining the right to assign any matter under a flat fee or traditional billable hour arrangement.

I also cannot think of a General Counsel for whom I have ever worked who would not want to take the alternative fee arrangement mechanism I’ve  outlined above for a spin, if it meant retaining the desired law firm at reduced cost.  There is literally nothing to lose except 20% off your outside legal expense budget.

CJH

 

Disability Insurer Prevails: Pre-Existing Condition Justifies Denial, Federal Judge Rules

Witness_stand_in_a_courtroom

HARRISBURG, June 21 — A Pennsylvania federal judge has granted a disability insurer’s summary judgment motion, finding that a refusal of long term disability (LTD) benefits was neither arbitrary nor capricious, because the denial properly relied on a pre-existing condition exclusion in the policy.

In Yvonne Hilbert v. The Lincoln National Life Insurance Co., 15-471, M.D. Pa., 2017 U.S. Dist. LEXIS 93424), U.S. District Judge Sylvia Rambo ruled that Lincoln National Life Insurance Co., did not violate or abuse its discretion under the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq. (1974) (ERISA), when it found that Ms. Hilbert’s claim was not covered under a LTD policy it issued to Delta Dental, covering her as an employee.
Hilbert worked at Delta Dental and received benefits under the company’s short term disability policy (STD) for back and leg pain, and depression, claiming she was unable to work.   When Lincoln reviewed her claim for LTD status, the LTD policy in question barred coverage for any condition for which the employee was treated within 3 months of her hire.  Lincoln determined that Hilbert received treatment for depression  during her “look back” period of  Aug. 1, 2011 to Nov. 1, 2011, and eventually denied Hilbert’s claim for LTD benefits pursuant to the pre-existing condition exclusion.  Lincoln contended that Hilbert did not prove she was unable to work independent of her depression.
Following the denial of her administrative appeals, Hilbert sued Lincoln in the Eastern District of Kentucky, but the case was moved by Lincoln to the Middle District of Pennsylvania on grounds that  that it was a more convenient forum.
Following transfer, the parties filed cross motions for summary judgment..Judge  Rambo granted Lincoln’s motion and denied Hilbert’s motion , ruling that Lincoln’s denial of LTD benefits was not arbitrary and capricious.  She rejected Hilbert’s argument that the grant of STD benefits undercut the denial — the STD policy did not have a pre-existing condition exclusion.  She also found that Hilbert failed to prove her inability to work was wholly divorced from her depression:
“[the record] demonstrates that Lincoln considered the relevant medical evidence and supports Lincoln’s decision that Plaintiff was not totally disabled due a physical condition as of September 18, 2012…Lincoln did not act in an arbitrary and capricious manner in characterizing the principal duties and responsibilities of Plaintiff’s occupation…Significantly, although Plaintiff treated with several medical providers, not a single physician — not even her primary care physician or her pain physician — supported her claim… Here, Lincoln’s decision to deny Plaintiff LTD benefits is supported by substantial evidence in the record, and without substituting the court’s judgment for that of the defendant in determining eligibility for plan benefits, the court concludes that Plaintiff is not entitled to benefits under the terms of the LTD Policy and that Lincoln’s decision was neither arbitrary nor capricious.”
The judge also found that Hilbert’s receipt of Social Security disability benefits did not entitle her as a matter of course to LTD benefits under the Lincoln policy, observing that SSDI rules do not bar coverage for pre-existing conditions.

Federal Judge Rules Pollution Exclusion Ambiguous; Orders Insurers To Defend School District In Copper/Lead Class Action

copperpipe

Pittsburgh, June 9 – A U.S. District Judge in Pittsburgh has granted a motion for judgment on the pleadings in favor of a school district, ordering a primary and excess insurer to defend the district in a pollution class action case.  In The Netherlands Ins. Co., et. al. v. Butler School District, et. al., U.S District Judge Arthur Schwab interepreted pollution exclusions in the involved insurance policies as ambiguous because they did not specifically exclude pollution claims arising out of copper becoming “bioavailable.”

The school district had a  general liability policy issued by Netherlands and an umbrella policy written by Peerless.  The insurers sought a declaratory judgment in the Western District of Pa. that they had no duty to defend the district because the claims were within exclusions for “pollutants” and lead exposure.

Judge Schwab ruled that both The Netherlands Insurance Co. and Peerless Insurance Co. had to defend Butler Area School District and a prior superintendent, Dale Lumley,  from parents’ claims against the district for concealing hazardous levels of lead and copper in one of the district’s elementary schools.  The Court found the insurance policies’ general pollution exclusions were ambiguous enough to allow coverage and that the specific lead poisoning exclusions did not specifically reference copper.

In ruling on the parties’ cross-motions for summary judgment, Judge Schwab looked to prior decisions in lead paint cases which held that exclusions “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants,’” did not sufficiently address the gradual chemical process by which the paint caused lead poisoning.

“These findings are similar to the facts, as here, where lead and copper are essentially components of the water system at Summit Elementary, which have degraded over time, thereby allegedly rendering the lead and copper bioavailable.”

The judge also held that without a specific copper exclusion, the insurers were bound  to provide a defense in the underlying case, as there has been no factual decisions made as to whether the alleged injuries were caused by the lead, copper or both.  He also ruled that the duty to indemnify would have to await those factual determinations in the underlying case.

Judge Schwab emphasized the bedrock premise that the duty to defend was broader than the duty to indemnify, and then concluded:

“The court will not countenance the insurers’ invitation to turn Pennsylvania law relative to the duty to defend on its head, so as to allow the potential exclusion of a single type of claim to relieve them of their duty to defend, when the law actually requires a defense when a single potentially covered claim is alleged.”

The Netherlands Ins. Co., et. al. v. Butler School District, et. al., (W.D. Pa., June 9, 2017)(Schwab, J.)

 

W.Va. Supreme Court Finds Earth Movement Exclusion Unambiguous

shutterstock_852782921

WEST VIRGINIA,  June 2  – The West Virginia Supreme Court  ruled that Erie Insurance was not liable to provide coverage to an insured business which claimed landslide damage, in part because the earth movement exclusion in the policy made no distinction between natural and artificial earth movement events.

In Erie Property and Casualty Ins. Co. v. Chaber, the Chabers’ motorcycle shop leased property and insured it with a policy issued by Erie Insurance Property and Casualty Co.  A Feb. 19, 2014, landslide caused damages to the property, including broken windows.  Erie engaged an expert who opined the damage was the result of seasonal climate change.  The insureds disputed the claim, and engaged an expert who said the loss was the result of improperly excavated ground.

The W.Va. Circuit Court granted judgment in favor of the Chabers in February 2016, holding that the insuring agreement did not unambiguously exclude manmade landslides.  The state Supreme Court reversed, however, and held that manmade landslides and natural events were both excluded from the Earth Movement Exclusion in the policy.  They also held that that an exception for glass breakage to the exclusion could  not be extended to cover all aspects of the loss.

Judge Margaret Workman wrote:

“A provision in an insurance policy that excludes a loss regardless of whether such loss is ‘caused by an act of nature or is otherwise caused’ is not ambiguous and excludes coverage for the loss whether it is caused by a man-made or a naturally-occurring event.”

The Court also found that while ensuing loss involving breakage of glass was covered via an exception to the Earth Movement Exclusion, the lower court misapplied that exception when it used it to require Erie to pay for the entire claim, calling the circuit court’s interpretation “unjustifiable.”

Erie Insurance Property and Casualty Ins. Co.  v. Chaber, No. 16-0490, W.Va. Supreme Court (Workman, J.)

 

Insured’s Claims Conduct Dooms Bad Faith Claim, Federal Judge Rules

CSCC-Lawsuit-Dismissed

SCRANTON, May 30 – In Turner v. State Farm Fire & Cas. Co., No. 3:15-CV-906, 2017 U.S. Dist. LEXIS 81922 (M.D. Pa. May 30, 2017), U.S. District Judge Richard Conaboy dismissed the plaintiff’s bad faith case, finding that the insured, who was already paid nearly $350,000 for a fire property loss by State Farm, delayed and frustrated a disputed additional payment amount.

The parties disputed that the insured was entitled to more than $17,000 in landscaping charges.  The insurer had already paid $347,000 for other property loss.  And while the contract dispute over the landscaping fees was not resolved at summary judgment, the bad faith claim made by the insured was dismissed, Judge Conaboy finding it unthinkable” on the facts that a jury could find State Farm acted in bad faith.

The Court ruled that the issue of delay could be analyzed first by a review of the insuring agreement itself.  Judge Conaboy found that the policy placed a duty on the insured to advance his claim by providing information supporting the claim.  The insured in this case, the Court observed, delayed production of supporting documentation for over a year:

“To succeed on a bad faith claim, a Plaintiff must demonstrate “(1) that the insurer lacked a reasonable basis for denying benefits; and (2) that the insurer knew or recklessly disregarded its lack of reasonable basis.” Verdetto v. State Farm Fire and Casualty Company, 837 F.Supp 2d. 480, 484 (M.D.Pa. 2011), affirmed 510 Fed. Appx. 209, 2013 W.L. 175175 (3d. Cir. 2013)(quoting Klinger v. State Farm Mutual Insurance Company, 115 F.3d 230, 233 (3d. Cir. 1997). In addition, a Plaintiff must demonstrate bad faith by clear and convincing evidence. Polselli v. Nationwide Mutual Fire Insurance Company, 23 F.3d 747, 751 (3d. Cir. 1994). For an insurance company to show that it had a reasonable basis to deny or delay paying a claim it need not demonstrate that its investigation yielded the correct conclusion, or that its conclusion more likely than not was accurate. Krisa v. Equitable Life Assurance Company, 113 F.Supp 2d. 694, 704 (M.D.Pa. 2000). The insurance company is not required to show that ‘the process by which it reached its conclusion was flawless or that the investigatory methods it employed eliminated possibilities at odds with its conclusion.’ Id. Instead, an insurance company must show that it conducted a review or investigation sufficiently thorough to yield a reasonable foundation for its action. Id. ‘The ‘clear and convincing’ standard requires that the Plaintiff show ‘that the evidence is so clear, direct, weighty and convincing as to enable a clear conviction without hesitation, about whether or not the defendants acted in bad faith,’  citing J.C. Penney Life Insurance Company v. Pilosi, 393 F.3d 356, 367 (3d. Cir. 2004)…. In short, Plaintiffs’ failure to perform their reporting duty under the contract impeded, wittingly or unwittingly, [the insurer’s] investigation of their claim. Thus, the delay in payment for the value of their personal property was a direct result of Plaintiffs’ failure to perform their contractual duties and, as such, may not serve as an appropriate basis for a finding of bad faith on Defendant’s part. Stated another way, Plaintiffs may not now seek to profit due to their lack of action.”

Turner v. State Farm Fire & Cas. Co., No. 3:15-CV-906, 2017 U.S. Dist. LEXIS 81922 (M.D. Pa. May 30, 2017) (Conaboy, J.)

 

 

Reservation of Rights Letters: Lack of Specificity Proves Fatal To CGL Insurer In South Carolina

DearInsured_Image-279x300

COLUMBIA, S.C. – Law360.com recently featured the South Carolina Supreme Court Ruling in Harleysville Group Insurance vs. Heritage Communities Inc. as one of the five most important but potentially overlooked insurance rulings in the first quarter of this year.  The Harleysville case points up  the peril insurers face for issuing general, non-specific reservations of rights letter.

In Harleysville, the South Carolina Supreme Court held that a reservation of rights letter which did not clearly state why a carrier believed a CGL policy may not provide coverage for a loss could bind the insurer to cover the loss.  The  Court affirmed a special referee’s decision that Harleysville was obligated to insure a prorated share of large verdicts entered against developers of two Myrtle Beach condominium complexes for a series of construction defect cases.

Harleysville agreed to defend the developer,  Heritage Communities Inc. and related companies in the underlying litigation under the CGL policies, but issued several reservation of rights letters during the defense which were used later to question the insurer’s coverage obligations.    A special referee ruled that the insurer had failed to properly reserve its right to dispute coverage for the actual damages verdicts against Heritage because the letters included only “generic denials of coverage” accompanied by verbatim copies of policy provisions.

The South Carolina high court agreed  that the reservations of rights letters were insufficient, as they did not adequately place the insureds on notice  of the insurer’s specific concerns and arguments against coverage.  Writing for the Court, Justice John W. Kittredge held:

“It is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage…At the hearing before the Special Referee, Harleysville produced letters it sent to former Heritage principals and counsel between December 2003 and February 2004. These letters explained that Harleysville would provide a defense in the underlying suits and listed the name and contact information for the defense attorney Harleysville had selected to represent Heritage in each matter. These letters identify the particular insured entity and lawsuit at issue, summarize the allegations in the complaint, and identify the policy numbers and policy periods for policies that potentially provided coverage. Additionally, each of these letters (through a cut-and-paste approach) incorporated a nine- or ten-page excerpt of various policy terms, including the provisions relating to the insuring agreement,  Harleysville’s duty to defend, and numerous policy exclusions and definitions. Despite these policy references, the letters included no discussion of Harleysville’s position as to the various provisions or explanation of its reasons for relying thereon. With the exception of the claim for punitive damages, the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage… Here, except as to punitive damages, Harleysville’s reservation letters gave no express reservation or other indication that it disputed coverage for any specific portion or type of damages.”

(emphasis added).  Justice Kittredge went out to point out, for example, that Harleysville did not identify the basis on which it intended to contest that no “occurrence” took place, as defined in the policy.  On that basis, the Court affirmed the referee’s finding that Harleysville could not contest coverage under the CGL policies based on the reservation of rights letters it issued.

Editor’s Note:  The obvious takeaway here is that insurers should not skimp when it comes to the drafting of reservation of rights letters.  The better practice is to have inside or outside counsel prepare specific reservation letters as part of the coverage analysis or coverage opinion, if and when reservation letters are indicated. 

This ruling cautions against any conventional view that reservation of rights letters are merely “cookie cutter” documents that can be generated primarily by word processors.  Reservation of rights form letters may be used as a starting point, but never an ending point — the letters must ultimately contain specific gounds supporting any reserved claim, and wherever possible include citation to facts and information tending to suggest a reasonable dispute as to the terms of the policy on which reservation is being made.  CJH

Harleysville Group Ins. v. Heritage Communities, Inc., No. 2013-001291 (South Carolina, 2017)

Re-Purposing The Free Initial Consultation For The Benefit of Insurers and Corporate Clients

lateclaim

Alternative fee arrangements are out of the bag by now.  They are being tried and used by insurers as part of ongoing efforts to bring cost-certainty to outside legal fees.  Badfaithadvisor.com has a complete survey of alternative fee options here.

But that is not the end of the leverage in favor of  insurers and corporate clients.  And to that end,  I am going to let you all in on a very big secret.  Not only that, I am going to invite — no — I’m going to dare, you to take advantage of it, and here it is:   I would rather my clients and prospects talk to me for free about matters of concern to them ,  than to let them  talk to any of my competitors.  Under any terms.

And so, the free initial consultation, long a staple of the plaintiff’s bar, has been co-opted and re-purposed for my insurance company and other corporate clients.

Insurance and corporate clients, and prospective clients who are interested in testing the waters, are given  free initial consultations of anywhere from 30 minutes to 2 hours (and sometimes more)  to review documents, and to discuss cases they are considering assigning to outside counsel.  But I offer the same thing to the same clients and the same prospects who are actually looking to AVOID sending a matter to outside counsel, too.  This provides value to them in the form of an informal first or second opinion which will give them early clarity on a matter, and peace of mind on potential action plans for handling those claims or matters.

The free initial document review / consultation is a win – win for clients and prospects.  If they do decide to retain me, on either en alternative or conventional fee basis, they have familiarized me with the matter they will be assigning and brought me up to speed at no cost to them, thereby reducing their overall legal expense on the matter.   If they decide to keep the matter in-house, they have received the value of an outside look for free, and I have hopefully created good will my clients will remember when the next matter comes up for consideration.

There are and will always be major coverage matters and bet-the-company litigation which insurers and corporate clients on which clients will seek outside representation.  Free initial consultations on both these matters and matters which clients never assign to outside counsel is another way to provide value to clients in business environments encouraging the limitation and reduction of outside legal expense.

C.J. Haddick