Dollarizing Your Value to Legal Departments: Return on Investment

In an earlier post, I commented on some metrics used by insurance and other in house legal departments used to measure the value of outside law firms engaged to represent them in litigated matters, e.g., insurance coverage or bad faith litigation, the latter of which has at risk real corporate dollars.

I’ve received a thoughtful question or two from lawyers who were interested in how I went about demonstrating to my clients (and prospective clients) what kind of return they could expect in exchange for every dollar of legal fees  they invested in our firm to defending them.  I’ve referred to this metric as Return on Investment (ROI).

It’s somewhat of a subjective exercise up front, which involves making an educated estimate of the insurer’s reasonable exposure at the  start of the case.  You don’t need to actually DO the estimation at the start of the case, because the ROI calculation cannot be done and fed back to the client until the case has ended,  and both the final case outcome and total legal fees are known.  The initial exposure assessment is the only subjectivity in the process; all the rest of the numbers are hard data.

So, here’s a quick and dirty ROI calculation, which can be used for a single case, or aggregated to account for a number of completed cases.

For any case, let

a=the initial, reasonable worst case exposure for client at case outset

b=the final payout, if any; and

c= the amount of legal fees incurred to arrive at the final result

 The ROI calculation is simply:

(a-b)/c.

What Do The Numbers Tell Your Clients About Value?

This calculation is a ratio, which expresses the relationship between the company’s investment in legal fees and the reduction or elimination in the contingent corporate exposure which the fees produced.   In terms of quality or value, a reasonable initial target might be a 3:1 to 4:1 ratio.  5:1 and above are good benchmarks, as a general proposition.  But there is a caveat:  a 5:1 ratio is not satisfactory if your clients average ROI from outside firms is, for example 8:1.

And you may never  get data about your competitors.  The solution?  Shoot for as high a ratio as possible, and work to keep it high.  You will know how well you are doing by the number of repeat engagements you are given.

Originally, I simply used the plaintiff’s initial settlement demand as reasonable worst case exposure, but was quickly educated by clients, and by experience, that a plaintiff’s opening number cannot always, or even usually, be considered reasonable.  I also quicly learned that using such unreasonably high demands to plug into the equation led to ratios which were unreliably flattering, and as a result, not useful to discerning clients.

Return on investment (ROI) can only be used as marketing feedback if the numbers are reasonably reliable, and viewed as such by your clients.

DMC Lawyers Obtain Summary Judgment For Harleysville In Bad Faith Suit

Reading, Pa., Jan. 19Dickie, McCamey & Chilcote attorneys C.J. Haddick and Christine Line have won a dismissal in a bad faith case in favor of client Harleysville Insurance Companies.  The Berks County, Pa.  Court of Common Pleas on January 19 granted the motion for summary judgment filed by Haddick and Line in a bad faith suit arising out of a commercial property coverage dispute over an alleged van theft and fire involving business personal property.  Haddick and Line are members of the firm’s Insurance Law and Litigation Group.

Harleysville did not dispute it owed coverage for the value of the van, substitute van rental expense, and for the value of certain business personal property under an inland marine policy.  It did contest, however, the Plaintiff’s claimed entitlement to a variety of other sums for towing, vehicle storage, loss of business income, and claims for tool losses in excess of the policy limit.  The Court agreed that the additional claims were unsupported by the policy language.

The Court also agreed with Harleysville’s position that regardless of the outcome of the several coverage claims, the claims decisions made were made with reasonable legal and factual bases.  As a result, the Plaintiff’s bad faith claims were dismissed as well.

For additional details on  the ruling, or suggestions  how to have your coverage and bad faith claims decided faster and more favorably with greater cost control, contact us at chaddick@dmclaw.com or 717-731-4800

Rogers Flooring Co. v. Harleysville Ins. Co., Berks County No. 14-674 (Sprecher, J.)