Time-Sensitive Legal Costs Hard To Cut

The maxim, “you have to spend money to make money” doesn'talways apply to the legal profession, which could make it harderfor insurers and risk managers to prod their workers' compensationattorneys to improve productivity by upgrading their technology, arecent panel discussion revealed.

Indeed, law firms that are pressured by insurers and riskmanagers to lay out cash to go high-tech so they can handle morework in less time for their clients are actually being asked tospend more money to make less money, at least in the shortterm, a top insurer acknowledged.

“The cynical view is there is an expense paradox out there,”said Charles O'Connor, assistant vice president of customercommunications at Liberty Mutual in Boston. “Lawyers are living onbillable hours. Thus, if they invest in technology to do more inless time, they are paradoxically raising their capitalexpenseswhile lowering revenues by cutting billable hours toclients.”

In fact, the top problem making litigation cost managementdifficult is this “misalignment of economic models,” the panelistssaid. Law firms, they agreed, look to maximize legal activity toprotect revenue streams, while carriers and risk managers look tominimize legal activities to contain expenses.

Still, this doesn't change the reality that many law firms,particularly “Mom and Pop” outfits, have failed to keep uptechnologically, thereby limiting productivity and hiking legalexpenses for no good reason, the panelists said at a session inOrlando during last month's 56th annual Florida Workers'Compensation Educational Conference. The meeting was sponsored bythe Florida Workers' Compensation Institute, in partnership on anational track with The National Underwriter Company (whichpublishes this magazine).

Indeed, the panelists listed “delayed technology implementation”as one of the key elements hamstringing efforts to get legal costsunder control. “We are building a 'Star Wars' Death Star at 'Plan 9From Outer Space' rates,” said the panel's moderator, H. GeorgeKagan, an attorney from West Palm Beach, Fla., referring to asituation in which attorneys plan to incorporate technology, butdon't commit the dollars necessary to upgrade with state-of-the-artsystems.

The irony of the situation was not lost on the panelists, whoagreed that defense attorneys are even further from the cuttingedge on automation than the insurance industry, which has oftenbeen cited as the poster child for thetechnologically-challenged.

One possible way to resolve this paradox and spur investment bylaw firms in technology is to experiment with “more contingent feebilling, especially on big cases,” according to William Paccione,second vice president and Southeast regional claims manager forGenesis Underwriting Management Company in Atlanta. “The questionis not how many hours the legal team worked, but how much theysaved the client.”

Mr. Kagan, who conceded that “attorneys prosper the more hoursthey bill,” said that while “anything that can break that spell”would be welcome, “the devil is in the details” when it comes toaltering traditional billing practices.

Whatever the solution, the panelists agreed that workers' compdefense attorneys are going to face increasing pressure to controllegal costs, not only from insurers, but from risk managers withgrowing retentions to defend.

Ironically, however, increased scrutiny by risk managers withlarge-deductible plans could raise rather than lower legal costs byplacing duplicative reporting demands on defense counsel, thepanelists warned. Indeed, “serving two masters–the insurer and thepolicyholder” is as tricky as “playing three-dimensional chess,”said Mr. Kagan. “We feel like the child in a divorce. Both Mommyand Daddy want our complete and undivided attention andloyalty.”

The “extraordinary shift in risk-sharing” in workers' comptoward self-insured retentions, added Mr. O'Connor, has created anew dynamic. “Clients feel compelled to manage that deductiblelevel, which creates tremendous duplication,” he said, urginginsurers and risk managers to “avoid conflicts and keep their focuson the common enemy–the [plaintiff] attorneys.”

Legal cost management will only become more complex with thegrowth of professional employment organizations, to which firmsoutsource staffing responsibilities, said John Dubreuil, vicepresident of claims at the Professional Business Owners Associationin Sarasota, Fla.

“With PEOs in the picture, you now have three players in a tugof war with the law firm” on a workers' comp claim, said Mr.Dubreuil, who is a consultant.

The panelists also agreed that “activity shifts” from insurersto lawyers are fueling the growth in legal costs, with paralegalsoften handling claims investigative work normally done by anadjuster.

“The real question is why is this happening?” said Mr. Paccione.“For one, the training of adjusters is not what it used to be. Foranother, the margin of profit is so slim that claims people arebeing forced to handle enormous claims loads, leading to anactivity shift because claims adjusters just don't have the time tohandle all these tasks.”

Mr. O'Connor added that “law firms are telling me that 10 yearsago claims files were six inches thick. Now they are half-an-inchthick, leaving the lawyers and their staff to fill it out so it'sin shape to litigate.”

Other legal cost drivers cited by the panelists include:

The difficulty of managing fees paid to third-party vendorshired by attorneys for research, expert testimony, surveillance andother tasks.

The failure to pursue alternatives to litigation. The panelistsagreed that often the best thing a defense attorney can do forclients is to keep them out of court.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 21,2001. Copyright 2001 by The National Underwriter Company in theserial publication. All rights reserved.Copyright in this articleas an independent work may be held by the author.

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