Better Litigation Management: A collaborative approach with attorneys can lead to better outcomes in managing litigated claims - Claims Management & TPAs

Improving bottom line financial results has become a daunting task for insurers in this sluggish economy. Confronted by stagnant premiums and diminishing profit ratios, industry managers face overwhelming financial pressures. Consider the recent industry information from A.M. Best, which reported a dismal combined ratio of 110.3 for the year 2000, an increase of 2.5 points from the previous year. Clearly, weathering the economic downturn is critical for insurers who want to stay alive fiscally, especially since booming investment returns are no longer available to offset downward trends.

But with high payouts on premiums, increased underwriting losses and litigation costs, decreasing revenue, and reduced investment income, what strategies are powerful enough to improve insurers' core business? Simply raising premiums is not the answer. In times of flat or declining revenue, business success is defined by the ability to create cost efficiencies. Translation for insurance companies: Control the indemnity and litigation expenses.

Logically, it would make sense for insurers to implement cost-containment strategies that recognize the symbiotic relationship between claims litigation and indemnity. Industry studies show that 20 cents to 45 cents of every dollar spent on claims go to overhead costs, and only 10 cents go to litigation. The remaining 40 percent to 50 percent of the claims dollar goes to indemnity payments--three to six times what is spent on litigation.

Although it is clear that indemnity payments are the most significant element of claims management, many litigation strategies fall short of affecting indemnity in any meaningful way. For example, many insurers rely on third-party legal fee auditors as the anchor for their litigation management strategy.

But line-by-line wrangling over legal bills has little or no impact on lowering indemnity payments. Fee auditing is an after-the-fact approach that can leave lawyers feeling second-guessed in their professional judgment and compromised in their ethical obligations to the policyholder.

Another example of a widely used yet ultimately ineffective strategy is hiring cheaper lawyers and securing lower hourly fees as the primary tactic in holding costs down. Unfortunately, many insurance companies seem to prefer lawyers that charge low hourly rates--even if the firms sometimes bill unusually high hours to make up for it. But in the end, lawyers who work for bargain rates could very well be adding to overall indemnity costs. Even under hourly rate billing, the rate itself is usually the least important factor when considering litigation's effect on overall indemnity costs. The fact is good lawyers usually charge more than lawyers who do average work.

Despite being more expensive, skilled lawyers often require fewer hours per task and can ultimately obtain better results. Since the overarching goal is to select attorneys as strategic business partners in cost control, it follows that the quality of legal talent should be more important than hourly fees. Ultimately, cost-containment efforts should enhance the litigation process, with the objective being improved outcomes and lowered indemnity.

Why the inordinate emphasis on lawyers' fees? The answer may lie in the litigation explosion that has developed over the last few decades. The increased volume of lawsuits since the early 80s, especially in them malpractice and environmental areas, created runaway legal fees and a myriad of associated costs. Moreover, there was also a correlating trend toward high-dollar amounts awarded to plaintiffs. This led to litigation management strategies that focused on increased scrutiny of individual legal tasks.

At times, this scrutiny has led to the substitution of an adjuster's or auditor's opinion over the lawyer's professional judgment. Not only has this development created contentiousness between insurers and their counsel, but also courts have held that it may violate attorney-client confidentiality. In the end, many insurers find that the cost savings associated with third-party auditors and similar strategies is minimal and comes at the high cost of ruined relationships with defense counsel.

A Different Approach

Given the current economic climate and the shortcomings of commonly used cost control methods, there has never been a better time for insurers to reexamine their approach toward litigation cost containment. Recent industry research states that adopting collaborative, accountability-based strategies with counsel is key to achieving an optimal case result without incurring inordinately high legal fees.

While bill review will always be a necessary component in the insurer-attorney relationship, the emphasis should be on collaboration, with clear expectations on budgeting and strategy established up front. Rather than battling over individual legal bills, adjusters and attorneys should collaboratively focus on the total cost of litigation and to reduce indemnity.

Given the sheer volume of claims and a reliance on non-automated business practices, the industry is not well equipped to accomplish this change. Therefore, a total solution calls for investment in the right technologies for supporting a collaborative environment. The litigation and analytical tools that technology offers add value to processes, highlight areas for cost savings, and provide ease of use for staff.

But technology alone will not deliver the desired results. Only when technology supports a strong internal commitment to collaboration is it possible to begin attacking indemnity at the outset of the relationship rather than waiting to attack the lawyers after the bills come in.

Collaborative, Analytical Tools

Collaboration is the linchpin of a successful litigation cost-containment strategy. A recent study presented by the Aon Corp. in Chicago showed that without effective collaboration, loss overpayments equaled a whopping 17 percent of the total loss indemnity payment on litigated cases. Communication between claims personnel and attorneys is typically less than ideal, resulting in delays and wasted resources when changes occur in strategy or settlement.

To combat this tendency and improve communication, many insurers are choosing technology to effectuate collaborative relationships with their attorneys. By using these technologies, insurers and their lawyers can work together to devise a game plan for each case, determining what legal tasks need to be completed on an individual claim. They can also anticipate the time frame in which to complete those tasks. Finally, they can come to a general agreement about the cost of the legal services and continuously compare the bills with the established litigation budget.

Implementing Internet-based technology is a fast-growing strategy that offers many options for value-added communication. For example, threaded, real-time discussions between adjusters and counsel can be used to track issues and share constructive thoughts on how to resolve them, quickly producing good case results. Adjusters and counsel can also ascertain where billings are in relation to the previously established budget. Insurer guidelines can be easily flagged and checked by collaborative software, which speeds invoice review and encourages lawyers to submit better invoices.

With the capability for documentation to be electronically centralized, file reviews are radically simplified. In all situations, both the lawyer and adjuster are able to see the same information at the same time on their desktop computers, resulting in effective, efficient, and proactive efforts toward an optimal case resolution. In addition to supporting litigation tasks, technology also offers analytical tools that allow insurers to identify trends, patterns, inefficiencies, and quantitative information across a variety of categories, providing a top-level analysis that ultimately adds value to collaborative litigation management tools.

As necessary as budgeting and billing methods are, greater improvements in overall cost reduction result when they are a component of accountability-based relationships. Over the course of these relationships, insurers must take a proactive stance to ensure that good results are being produced. To that end, insurers need to employ analytical tools that measure law firm performance. Insurers now have tools that allow them to consider a specific lawyer's performance, both from a quantitative and a qualitative quotient. Panel selection, a historically ad-hoc process, can now be a product of the total cost outcome.

From a qualitative perspective, claims personnel must be able to quickly and easily ascertain how well counsel is communicating, delivering value, and moving cases toward resolution. Tools today allow for a quick analysis of the performance of a specific lawyer in any one type of litigation narrowed down to a particular county.

Quantitatively, advanced analysis solutions not only consider litigation fees but also indemnity when evaluating performance and total cost outcome. Claims managers need a clear view of which firms are the most efficient and which are ultimately achieving the best indemnity results. Creating lawyer accountability with analytical tools is a necessary step toward lowering indemnity costs. With an accurate, consistent, real-time look into the status of litigation, claims managers can maximize the accuracy and meaning of litigation results, and positively affect the bottom line.

The industry needs to move from its emphasis on legal fees toward improving the entire litigation process through strategic partnering with legal counsel. Collaborative litigation management, supported by the right technology, creates a hands-on approach to litigation management.

While insurers will not, and should not, try to supplant their lawyers' professional expertise, they can become more involved with strategic decisions in litigation management. Expect to see great cost savings when collaborations are supported by technology that gives insurers the tools to focus on the relationship between litigation and indemnity.

Faiz Ahmed is CEO of Visibility, a Chicago-based application service provider that delivers litigation management solutions to the insurance industry.

COPYRIGHT 2002 Axon Group
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