Alternative Fee Spotlight: The Simplicity Of Fee Caps

“Nature is pleased with simplicity. And nature is no dummy.”
Isaac Newton

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Above all things, clients do not want headaches.  They certainly don’t want headaches from their outside lawyers.  After all, outside lawyers are supposed to fix headaches, not cause them.  So amid an increasingly roiling sea of alternative fee arrangements, the simplest alternatives may stand out as the most appealing to legal departments who engage outside counsel for litigated and non-litigated matters.

And, believe it or not, some legal departments are reticent to  dispense with the hourly fee altogether, fearing that they may well be trading one gamble with outside counsel  for another:  a flat fee, for example, can under the right circumstances be a worse deal for a client than a high hourly rate, i.e., the bad faith or coverage case that is dismissed early, or settled within 60 days.

Enter the hourly fee with caps concept, an arrangement which not only provides simplicity, but allows legal departments to have their cake and eat it too.  Under the arrangement, outside counsel is engaged under a traditional hourly arrangement, but a cap is agreed to and put into place.  The cap can either be a single cap for the entire engagement, or it can be broken down into separate caps  for each phase of a case.  Caps ensure that the legal department has cost control over the matters it refers out to counsel.  It provides some muscle to legal project management, and not merely lip service.

If a legal department sends out a matter which outside counsel gets dismissed at the pleading stage, or resolves within a couple of months, the client gets the benefit of that speed, efficiency, and reduced expense — it pays only the hourly fee for the minimal amount of work.  At the same time, should a matter take a more protracted course, the client still has the cost control and budget certainty which either an overall fee cap, or phased fee caps,  provide.

One caveat:  as with all alternative fee arrangements, both the legal department and outside counsel must have a level of trust and goodwill which allows for adjustment and renegotiation of the fee mid-course, should their be a sufficiently large and unforeseen change in circumstances to warrant doing so.  The adjustments, however, can only be made if the client is agreeable to doing so, and should be the rare exception to the arrangement, rather than the rule.

For more information on how to put fee caps to work for your legal department to reduce costs and fine tune legal project management budgeting, reach me at chaddick@dmclaw.com or 717-731-4800.

 

 

 

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Winning the Arson/Fraud Case – Part II

In an earlier post, we examined some key points to structuring and winning a civil arson/fraud trial against an insured suspected of misconduct in the making of an insurance claim.  We resume our examination in Part II of Winning the Arson/Fraud Case.

Your Claims Adjuster and Claims Witnesses Must Be Demonstrably More Credible Than The Insured(s)

This is a vital assessment which must made in an objective, detached manor.  Hoping that your claims staff will appear more credible than the insured is not sufficient grounds to proceed to try the arson/fraud case.  A reasoned, detached analysis of the insurer witnesses must be done to determine whether they, individually and as a whole, will stand up to the scrutiny of the jury, and be judged more credible.

Beware of the landmines here. How can claims staff be cross-examined?  Are there any troubling issues in their employment histories?  Do they appear to be partial or biased based on the documentation in the claims file and the claims logs?  Are any of them disgruntled in some way or worse, disgruntled in some way and not forthcoming about it.

Next to the law enforcement witnesses, the claims witnesses are the most important pieces in winning the arson/fraud trial.  They deserve detailed vetting as soon as possible in the process.

Who Let The Dogs Out?

This is going to sound silly.  But this indicator has almost never in 25 years of practicing law led me astray from assessing the proper cases to take to trial.

Did the insured have any pets?  Are they normally kept inside?  Did they perish in the fire, or was there some unusual event or explanation which led them to being out of the house at the time of the fire?

Arsonists love their dogs like anybody else.  The average one-off arsonist is simply neither aware enough nor disciplined enough to sacrifice a family pet  to create the impression of a fire of actual unknown origin.   Electrical malfunctions and other accidental fires do not take time to lead otherwise confined pets to safety before they begin.  Almost all arsonists do, however.  The notable exception to this guideline is the rage or anger fire in which the arsonist attempts to harm a pet of the object of his anger — which is a very, very small percentage of intentionally set fires, in my experience.

Look For Mistakes

Some arsonists are more skilled than others. Few are hired professionals, and the amateurs make plenty of mistakes.  Combining the stress of the circumstances which would lead an insured to commit arson for insurance benefits,  and a basic lack of experience in such activity generally leads to a break or two in the fire investigation —  telltale signs of intentionally set fire versus fire of accidental cause and origin.

The following mistakes have all occurred in cases I have handled, including one case in which all of the mistakes occurred in the same fire.  Some of these are sure to strike you as fantastical but they all are true:

  • multiple points of origin which did not communicate with each other;
  • failure to ventilate the fire by opening doors and/or windows;
  • leaving incriminating documents such as  a mortgage foreclosure notice dated within 10 days of the fire  in the area of origin;
  • failing to dispose of lighters/ignition sources in the areas or origin;
  • failing  to plug in electrical appliances which were later offered by the insured as probable sources of an accidental fire
  • writing an apology to a spouse in soot on a window following the fire (this one is not so much as a mistake as it is a confession of the subconscious, I imagine)
  • using a cell phone to call a business associate about the fire twenty minutes before calling 911 Emergency Services to report the fire.

The case in which all of these mistakes occurred in the same fire  was readily identified as an arson/fraud case which should be tried.   And while that particular case is an outlier to put it mildly, most arson fires do not go perfectly for the arsonist, and mistakes can be identified.  They should be pointed out and shown to the jury.

Do Not Forget Damages

In the bustle and effort spent establishing the insured’s liability for arson/fraud, the fact that many statutes provide a right of reimbursement and recovery to the insure is lost, and insurers as a result do not take sufficient advantage of recouping expenses and costs related to investigating the fire, and recouping claims dollars which may have been paid out during the pendency of the claim.

In many ways, an insurer used to being a defendant must become a plaintiff fur purposes of not only putting on an arson/fraud case, but also for putting on a damages case as well.  Costs and claims dollars must be tracked, organized, and presented in the form of cogent damages exhibits and/or summary exhibits, preferably using the same trial presentation software as discussed in the first half of this post.  SIU and other special investigators employed by the insurers, and claims staff can authenticate these items for admission into evidence.

Some states provide for recovery of multiples of such costs, and attorneys fees in the form of penalties.  For that reason, they should not be overlooked if the decision to try the arson fraud case has been made.

Arson/Fraud Cases Can Be Won

While it does require thought and effort, the right arson/fraud cases can be won by insurers who take the time to identify good candidates, and work those candidates up properly for trial.  The prosecution of civil arson/fraud claims can also be a source for the insurer to recoup costs and claims dollars thought to have been lost in the investigation and payment of fraudulent claims.

C.J. Haddick

 

 

Winning The Arson/Fraud Case: Part I

Many jurisdictions provide insurers with civil claims for damages and/or civil penalties in the event they sustain losses caused by insured misconduct including arson/insurance fraud.  Yet insurers are for the most part reluctant to take advantage of these provisions, fearing the arson/fraud case as either too costly or not good for company image.

These cases are both winnable and, not unpopular where there is a basis to proceed. Here is a quick survey of some key points to winning the arson/fraud case:

Pick The Right Case Before Buying In

To say that there are winnable fraud and arson cases is not to say that all cases of suspected fraud and arson are winnable.  Perhaps a full 50% or more of determining whether a civil arson or fraud prosecution will be successful rides on selecting the correct cases for prosecution.   In this regard, experience on both the claims team side and the outside counsel side is important when making this assessment, as is the collaborative process between the two.  Case selection must be a  joint exercise.

The topic of selecting the proper cases for trial could fill volumes, but some general guidelines will be helpful here:   The fire science in the case must clearly point to incendiary origin.  Motive, usually financial, is technically not required, but I have never successfully prosecuted a civil fraud or arson case without explaining to the jury why someone would want or need to try to burn their own home to the ground.  It is a hard concept for most people to wrap their heads around without explaining why to them.  Other possible non-financial motives include revenge, or “rage” fires, but my educated guess is that financial motive is the motive in play for more than every 8 of 10 arson fires.

The candidates for trial are likely to strike  you in the face; they have a way of standing out.  Regardless, however, analysis and due diligence of the merits of  such candidates should always be done before a final decision is made.

Be Mindful of the Burden of Proof

This is sometimes overlooked until the case is well underway.  However, it should be one of the first things considered before a decision is made to try an arson/fraud case.

In many jurisdictions the burden of proof for establishing arson/fraud is higher than the standard civil preponderance of the evidence standard, e.g., the clear and convincing evidence standard.  The burden of proof should be considered at the outset, when analyzing a case for possible use of arson/fraud defenses, or for the affirmative seeking of compensation on behalf of the insurer victimized by the alleged arson/fraud.  If the evidence is not so good that the burden of proof will be met, the case is not a good candidate for an arson/fraud trial.

Develop a timeline

Just as motive is crucial to success (addressed in Part II of this post), so is explaining to a jury precisely what happened and when and, most importantly, answering the question of whether the insured had the opportunity to start a fire at home within the appropriate window of time.  The time line must be used to eliminate any potential alibis which can undermine successfully putting on an arson/fraud case.

When I suggest here that a timeline must be developed, I suggest also that it must be developed in a way that a jury can 1.) visually see the timeline of events (preferably via software like PowerPoint or TrialDirector); and 2.) understand the time line so that it makes sense, and does not look in any way at variance with the evidence.

Pictures Pictures Pictures

This is a close relative of the timeline tip, and arguably even more important.  Jurors today more than ever view jury trials as television in the courtroom, albeit on a larger scale.  They would much prefer to be educated by the insurer, law enforcement investigators, and counsel about the cause and origin of the fire, than to merely be told what caused a fire.  The will be comfortable only after coming to a conclusion on their own, rather than taking the insurer’s word for it, even if that word is coming from an expert.

Demonstrative evidence, preferably photo, animation, video and other visual media presented on trial software is the best way to convey cause and origin information.  With photographs and demonstrative evidence, experts can discuss and demonstrate origin points at the fire scene, point out burn patterns, and other critical visual evidence to give the jury the comfort it needs to make a finding that the insured essentially committed a crime.

Scale model fire scene diagrams, photos of documentary evidence (such as financial papers, tax return summaries, etc.) and fire scene photos and video evidence all aid the jury in assessing the arson/fraud case.

We will review additional keys to winning the arson/fraud case in Part II of this post.

 

 

 

 

 

NJ: National Union Avoids Claim Due To Late Notice; Need Not Show Prejudice

NEW JERSEY,  Feb. 11 – The New Jersey Supreme Court has ruled that National Union Fire Ins. Co. of Pittsburgh need not demonstrate prejudice  to avoid liability to provide defense and indemnity to an insured who reported the underlying claim six months late,  in violation of the policy’s notice requirements.  In Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pittsburgh, the Court ruled that the insurer did not have to defend or indemnify its insured, First Independent Financial Group, in a lender liability suit brought by putative borrowers.

The policy provided that First Independent provide notice of any claim made against it  during the policy period, or within 30 days following the end of the policy period, provided the notice was no later than 30 days following the insured’s initial notice of the claim.    First Independent did not report the claim at issue  until six months after it was sued, had hired its own counsel, and answered the complaint.  National Union denied coverage  on grounds of late notice, and First Independent settled the underlying claims in part, assigning to the plaintiffs its coverage claims against National Union.

The assignee plaintiffs filed a declaratory judgment action, and National Union was granted summary judgment based on the late notice defense.  An intermediate appeals court affirmed the ruling in favor of National Union.

In affirming the ruling in favor of National Union, the Court undertook an analysis of the differences between claims made policies and occurrence policies, and wrote:

Claims made policies commonly require that the claim be made and reported within the policy period, thereby providing a fixed date after which the insurance company will not be subject to liability under the policy. … Claims made policies also tend to have an additional notice of claim provision phrased in terms of the insured notifying the insurer of a claim or potential claim promptly or the like[.] 13 Couch on Insurance 3d 186:13 (2009).

The prompt notice requirement and the requirement that the claim be made within the policy period in claims made policies maximiz[e] the insurer s opportunity to investigate, set reserves, and control or participate in negotiations with the third party asserting the claim against the insured and mark the point at which liability for the claim passes to an ensuing policy,

The Court also held that in the claims made context, prejudice was not an element of establishing the late notice defense:

[W]hen First Independent began defending against plaintiffs claims without first notifying National Union, an action explicitly barred by the terms of the policy, it violated a condition precedent of timely notice to National Union, and thus breached the policy’s express condition of notice of a claim in order for coverage to attach. We decline plaintiffs invitation to read the insurance policy at issue as a contract of adhesion, or engage in a strained construction to support the imposition of liability or write a better policy for the insured than the one purchased…

 Accordingly, we hold that First Independent s failure to comply with the notice provisions of the bargained for Directors and Officers policy constituted a breach of the policy, and National Union may decline coverage without demonstrating appreciable prejudice. We recognize that a different conclusion may have been reached in other jurisdictions, but our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a claims made policy.

The Court unanimously upheld judgment as a matter of law in favor of National Union.

Templo Fuente De Vida Corp. v. National Union Fire Ins. Co. of Pgh., (N.J. 2016)

Alternative Fee Spotlight: Allowing Clients To Adjust The Fee For Value Perceived

It is a dangerous thing for a lawyer to put his fate, even partially, in the hands of his client – the lawyer is used to having it the other way around.  For centuries, lawyers have always set their value, and disclaimed the risk of a bad result, placing it squarely on the shoulders of their customers.  (I do not chose and use the word “customers” lightly.  Clients, especially legal departments,  are in this day and age customers in the truest sense of the word:  discerning buyers with pricing power.  Those lawyers who fail to approach clients as customers risk being left behind.)

The billable hour arrangement swims hard against this tide of modern reality, and is faltering against the strength of the current.  Hourly rate engagements seek to dictate value to the customer in a top-down manner, and in  an age when customers have the capability and desire to assess and decide value for themselves, and use that data to hire outside law firms.

As lawyers read this, especially older ones, they are likely to feel a tightness in their throats and to see their own knuckles whitening.  The thought of sending a bill out to a client and giving the client the power of even partial veto over that bill is to them rather like paying the cable TV  company based on whether the viewer liked what she watched, and how much she liked it.  Preposterous, right?

Wrong.  They day has arrived when lawyers, including old ones and very good ones, must face the reality that clients want and expect to have far greater influence on how they compensate their outside law firms, and how that compensation should be linked to something other than merely the time expended.

There are at least two reasons to do so.  First, legal departments are already  exercising such control, with auditing departments and third party auditing vendors poring over and oftentimes unilaterally adjusting invoices.  And second, those lawyers not willing to cede this power to their customers are going to be either passed over on the legal departments panel lists, are removed from the lists altogether.  Lawyers have no choice; and to believe they do have a choice is to risk extinction.

The Nuts And Bolts of Client Value Adjustments

There are a number a ways to place greater value control in the hands of the legal departments who engage outside counsel.  The two most prominent ones at this stage of the game, however, are holdbacks, and value adjustments.

Under the holdback system, a percentage (usually in the range of 10%-25% or 30%) of the total fee paid to the outside firm , whether via hourly arrangement or an alternative, is held back until either a specific case goal is reached, or the conclusion of the matter.  The client then has the authority to pay some, all, or none of the holdback to the outside law firm, based on the value the client believes it received.

The value adjustment method is similar, but not identical, to the holdback method.  Under the value adjustment approach, clients are given authority over any invoice to adjust an invoice downward or upward by an agreed upon percentage (again usually 10%-25% or 30%) based on the value it feels it received  during the period covered by the invoice.

Why Give A Client So Much Pricing Power?

Outside law firms who have been compensated for decades by the billable hour simply don’t have their interests sufficiently aligned with those of their clients.  Where the client wants fast, efficient and inexpensive, the outside law firm compensated hourly has interests which, while not diametrically opposed to speed, efficiency, and cost-consciousness, are sufficiently opposed to those goals to  have led legal departments to question the arrangement, and to move toward something better.

Holdbacks and client value adjustments allow lawyers and clients to realign their interests in the same general direction, to jointly shoulder the risks of poor performance and bad results, and to restore the feeling that the legal department and the outside lawyer are in the same boat, and rowing in the same direction.

 

 

Judge Rules DWI Victims Adequately State Bad Faith Claim Against Progressive

PHILADELPHIA, Feb. 4 – U.S. District Judge Timothy J. Savage has denied a motion to dismiss filed by Progressive Insurance Company in response to a bad faith complaint filed by Progressive insureds Jeffrey and Aimee Kelly arising out of a UM/UIM claim.    The Court did dismiss, however, claims the Kellys made against progressive under the Pa. Unfair Trade Practices and Consumer Protection Law.

The Kellys were injured in 2010 when their vehicle was struck from behind by a drunk driver.  They settled with the drunk driver for the driver’s policy limits, and then filed a UM/UIM claim with their own carrier, Progressive.  Progressive denied the claim, and the Kelly’s filed suit.

The Judge stated succinctly:

The Kellys allege that Progressive failed to pay their claims, make a reasonable settlement offer, investigate their claims properly, and consider medical and other documentation. These allegations suffice to state a claim under § 8371… The insurance bad faith statute applies to post-contract formation conduct. The UTPCPL, on the other hand, applies to conduct surrounding  the insurer’s pre-formation conduct.  The UTPCPL applies to the sale of an insurance policy.  It does not apply to the handling of insurance claims.

Kelly v. Progressive Advanced Ins. Co., (E.D. Pa. Feb. 4, 2016)(Savage, J.)

GC’s: Are You Demanding Fee Options From Outside Counsel?

For many years the arrangement was understood — a negotiated hourly rate would cover the assignments from General Counsels at Insurance Companies and other Corporations to their outside lawyers.  The seismic shift in legal departments to emphasis on speed, efficiency, and cost-effectiveness has obliterated that status quo, for the most part.

Some outside firms have slowly, glacially, begun to shift to alternative fee arrangements.  But as I have written in the past, this shift is not likely enough to keep pace with what  in-house legal departments are searching for:  the nimble ability to select the right fee arrangement for each and every case which gets assigned to outside firms.   Having a single, alternative fee proposal is barely better than the hourly rate concept it replaces.

How can outside lawyers offer more? By letting the clients, the law departments and general counsel we serve pick the arrangement.  This can be done either by a.)  offering the client a list of several alternative fee options; b.)  listening to the client to hear about what they have been using and what they like (that is what good service is all about):  or c.) collaborating somewhere between these two approaches to tailor an arrangement that works in a particular case for both the law department and the outside lawyer.

There is no magic to it.  It is simply a matter of demanding options from outside lawyers so that clients are comfortable that with cost control over the assignment, and the alignment of the clients interests and outside counsel’s interests.