Alternative fee arrangements (AFAs) are currently a hot topic with both claims professionals and defense counsel.
Defense lawyers that are truly capable of partnering with claims departments understand the need for—and benefit of—flat fee and tiered fee arrangements. When compared to the traditional billable hour, they can be beneficial to claims departments and defense counsel if they are used in the right situations and with the right kind of claims.
While the traditional billable hour will almost certainly be the mainstay for hiring defense counsel, AFAs create certain incentives that hourly arrangements do not. When used appropriately, they can help keep defense costs down and reduce time to resolution, while still being attractive to defense counsel who can handle certain claims efficiently. AFAs work because they create incentives for both defense counsel and claims professionals that result in good performance in claims handling.
Incentives Created by AFAs – Above all, AFAs encourage defense counsel to gather information efficiently in discovery. Extraneous discovery that produces marginally helpful information (and runs up fees in cases billed hourly) is not pursued. The sooner the essential information is gathered, the sooner the case can be evaluated for value. This means that AFAs encourage early resolution and shorten the life of a claim. AFAs also encourage the use of paralegals and legal staff for routine tasks, such as drafting form documents.
Incentives Created by Hourly Billing – Traditional hourly arrangements are still the norm. They provide their own set of incentives that result in excellent claims handling. They encourage a thorough case evaluation with early witness interviews as well as witness preparation for deposition and trial. This can make or break a case if the client or witnesses testimony is key to the case. Hourly billing encourages exhaustive legal research and excellent and thorough brief writing. This is essential where a well-drafted and argued summary judgment motion is a real possibility for getting a dismissal before trial. Hourly arrangements also encourage frequent and thorough reporting. Finally, thorough trial preparation is an incentive of the traditional hourly arrangement.
Given these incentives, what cases are appropriate for AFAs and which ones are a better fit for the traditional billable hour? When the amount and type of work on a claim is generally predictable, AFAs encourage efficiency and quicker resolution. The discovery tasks, fact patterns, and injuries must be common and predictable.
Cases involving common bodily injuries with fairly typical diagnostic tools and treatment modalities (office visits, radiology films, physical therapy, rest, etc.) are good for efficient handling. Even injuries involving common surgeries with routine and predictable recovery periods can be appropriate for AFAs.
Claims involving routine and form-based discovery are appropriate for AFAs. In many cases, interrogatories and document requests are the same. Any minor modifications can usually be made by a paralegal or legal assistant, and not by a lawyer (especially when billing hourly).
Cases where summary judgment is not a possibility and liability is clear against the defendant are often appropriate for an AFA. In these cases where the only issue is damages, defense counsel can focus on gathering information about damages. Often what is provided by plaintiff's counsel pre-suit paints a very plaintiff's friendly picture. Pre-existing medical records and employment records may be needed. Defense counsel can obtain this in discovery. AFAs give an incentive to do this quickly.
Large or catastrophic losses involving numerous claimants can lend themselves to fixed or flat-fee arrangements. Toxic tort or environmental cases affecting hundreds of potential claimants need to be handled efficiently. Events like the Gulf oil spill or a massive weather event like hurricane often spawn massive litigation. When these claims get into litigation, defense counsel need to participate in routine and efficient information gathering along with claims professionals. AFAs encourage efficiency in these cases, as well.
Finally, when defense counsel receives a volume of claims to handle (as opposed to the occasional case), AFAs encourage efficiency.
Counsel that only sees itself as an independent hired entity from the claims department will not have the same goals in resolving claims. AFAs can work if everyone is on the same page about how the cases are to be handled, what tasks are expected, and more importantly, which ones are not.
Above all else, defense counsel has to be committed to partnering with claims in being both efficient and excellent at the same time, regardless of the fee arrangement.
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