Then and Now: Proving a Duty to Defend By Using Evidence Outside of a Complaint
You know, this is actually of more personal interest to me than it is probably of importance to insureds, insurers and their lawyers with regard to determining whether a duty to defend exists in a given case. That is because the rule reflected in the case I am about to tell you about is sensible, intuitive, and consistent with the direction that the case law has been trending for a number of years, and thus should be of no surprise to anyone working in the area of insurance coverage law. As this neat article, with its neat four paragraph synopsis of the case’s key holding, explains, the United States District Court here in Boston has issued a ruling holding that, where the facts between those alleged in the complaint against the insured and those offered to the insurer by the insured differ, the insurer must investigate those competing versions of events before deciding whether to deny a defense to the insured on the ground that the complaint only alleges an excluded claim. There is a practice tip in there, which is that, when representing an insured served with a complaint whose allegations are both inaccurate and uncovered, counsel for the insured should provide the insurer with evidence showing a different factual scenario, one which could be covered and which would at least trigger a duty to defend. There is nothing new in this, and the law in Massachusetts has provided this opening to creative coverage counsel for insureds for decades, going back at least as far as the question of insurance coverage for a dispute between Vanessa Redgrave and the Boston Symphony Orchestra in the 1980s. That said, though, I would suggest that for many years, lawyers for insureds did not come close to taking full advantage of that opportunity and tactic. This District Court case, Manganella v. Evanston Insurance, makes clear both that they should, and that the better lawyers now have begun fully exploiting that avenue for obtaining coverage.
I say this is of personal interest because, many years ago, I represented a party in a major coverage case involving whether particular allegations of sexual misconduct of an uncovered type alleged in a complaint, which were in turn denied by the insured, could be covered and require a defense. Courts at that time focused solely or at least heavily on the alleged misconduct in making that decision, and, as a general rule, would not have considered the insured’s argument or evidence that the truth was different than that alleged in the complaint in deciding the question. Manganella makes clear the extent to which the law has evolved since that time, as it reflects a belief that the actual facts, if different than that alleged in the complaint, should be considered by the insurer and then by the court in determining whether there is a duty to defend in that type of a situation.
Denial of Benefit Claims, The Repeat Player, and Saving Money on Litigation
One of the first posts I wrote on this blog was about insurance coverage and the concept of the repeat player. The idea behind it was that insurers use the same counsel over and over again in coverage disputes, with the result that they put on the field – to use a sports metaphor – counsel who have a great deal of experience with the specific policy provisions at issue and a deep reservoir of knowledge about the effect of different fact patterns on the application of those provisions; the post pointed out that insureds are therefore not well served by using their general outside lawyers to represent them in such disputes, but are instead better served by finding their own “repeat players” to represent them in such cases, who can match the other side’s lawyers in expertise on and familiarity with the insurance policy types, terms and principles at issue.
The same holds true in ERISA litigation, particularly in the realm of denied benefit claims, whether they be short term or long term disability claims, health insurance, 401k issues, pension disputes, employee life insurance or other types of benefits made available by employers. Under ERISA, such benefits are governed by the terms of the plans under which they are provided, and litigation over any of them is subject to certain rules that are consistent across the field, such as those concerning the standard of review, the impact of conflicts of interest on the part of the administrator of the benefit plan, the contents of the administrative record, exhaustion of administrative remedies, regulations governing claims handling, and the scope of discovery. Most plan sponsors and administrators use “repeat players” to represent them on denial of benefit claims, to such an extent that some obtain discounted pricing in exchange for using the same counsel over and over again. This is actually beneficial to all involved on the defense side of such cases, as it creates a dynamic not just of cost savings for the plans, but also of the development of the level of expertise that comes through regular handling of the same type of cases, in this instance denied benefit claims under ERISA; this manner of developing expertise through repetition is exactly what is meant to be captured by the short-hand phrase “repeat player,” and this type of a consistent, mutually beneficial relationship between plans or administrators and their lawyers on such cases is how that expertise gets developed and brought to bear.
Interestingly, one should note that there is nothing unique to the defense side when it comes to the benefit of using a “repeat player” in denial of benefit claims under ERISA. You will have to trust me when I tell you that I routinely see the difference when, on the other side of the “v.” from me, is a lawyer who regularly represents plan participants in such disputes, as opposed to a general practice lawyer who represents plan participants only occasionally. This area of the law, like many others, is one where plaintiffs – who unlike the defendants may rarely be involved in such cases – also benefit from retaining a “repeat player.”
Mark Herrmann, the Chief Counsel for litigation at Aon, the insurance brokerage, wrote – whether he meant to or not – of this phenomenon in his piece the other day for Above the Law on “flotsam and jetsam,” in which he discussed the benefits to in-house legal departments of identifying areas of legal work that a company can bundle up and turn over, en masse, to an outside lawyer, who will handle the entire line of work for a fixed, and reduced, yearly retainer. I have over the years met with in-house benefit people and made the same suggestion with regard to a company’s handling of benefit claims, explaining that they are perfect for assigning to one counsel in exchange for a fixed fee payment structure for several reasons, including: (1) they are predictable in terms of time and cost investment, partly because discovery is limited; (2) the exposure to the company is narrow and predictable, because of the limited remedies available under ERISA and the ability to quantify the benefit amounts at issue under the relevant plan terms; and (3) the legal principles are consistent and should be well-known to defense counsel. This combination of predictability of the case with the expertise of the “repeat player” makes benefit claims perfectly suited to being bundled up in their totality and assigned to one outside counsel for a long period in exchange for cost savings to the company assigning the work.
Now as I noted, I have broached this idea over the years with plan sponsors and administrators, but I have to say I have never explained the concept quite as well as Mark Hermann did in his story. Writing as an in-house lawyer, he does a better job, I think, of isolating and describing the benefit to businesses in taking this approach than I have been able to do as an outside lawyer who can do no more than look through the window at the pressures, demands and needs of client companies. If you are in the benefits business, though, when you read his piece on it, think for a moment about how perfectly his description of “selling off” these types of cases fits the environment in which companies handle denial of benefit claims under their company benefit plans, and how well his idea would work for those types of claims.
The Attorney-Client Privilege in Insurance Litigation
My in-box, like most of you I assume, is inundated on a day in, day out basis with offers of webinars, seminars, and the like on every topic under the sun that the sponsors think I might even conceivably have any interest in or professional connection to. Most I ignore without even opening, as not even close to being on point with my professional interests and concerns. Even of that remaining subset of ones that have something to do with my work, or my blogging interests, or my professional development, I seldom pass them along in a post because they often appear to simply be lawyers over-complicating and over-analyzing what should be, and normally is, a relatively simple point or area of law (what, lawyers making something more complicated than is necessary? Who’d have thunk it?). My favorite in this regard are the seminars that are routinely touted to me about the complexities of the tripartite relationship in the insurance context, an area of law in which there is, frankly, little complexity and most of the rules of which I summed up right here in this post some time ago.
A different species of educational opportunity, however, consists of those that actually provide a detailed level of analysis on a question that is in fact complicated, and that presents nuances that need to be dealt with in the day to day hurly-burly of practice. This webinar here, on the attorney-client privilege in the context of insurance coverage counseling and litigation, looks on its face to fall into that category. The privilege, in this context, is a lot of fun for a litigator, like me, who enjoys working with the rules of evidence, and exploiting - or conversely defending against - gaps in the protection provided by the privilege. Two issues that quickly jump to the forefront of my mind even as I write this post - both of which appear to be covered by the webinar - are the interrelationship of the privilege with bad faith litigation, including in particular the impact on whether and how to use an advice of counsel defense, and the possible risk of disclosure by means of discovery from an expert witness. There are many more, but they seem to fall within the broad categories listed in the webinar’s agenda, so rather than my reciting them, you may just want to take a listen.
Do I Need a Coverage Lawyer?
I have written, in various blog posts, highly detailed, rational and analytical explanations of why parties to an insurance coverage dispute should retain experienced coverage counsel to represent them; I have given long, detailed, argumentative explanations of the same point in a number of seminars. Often the analysis revolves around the fact that, if the other side has an expert in this area but you don’t, you are committing the legal equivalent of bringing a knife to a gunfight. No matter what anyone tries to tell you, you can’t make do with a generalist when you are engaged in a significant dispute over insurance coverage.
Thus, I chuckled when I came across this article here, by an insurance professional, in which he presented a humorous list of what he has learned in 19 years in the insurance industry. If you combine several items in his list, you end up with what may be the most perfect short answer to the question of “should I hire a coverage lawyer and if so, why” that I have ever seen. The answer, in short, is that:
There is nearly ALWAYS more than one possible answer to a coverage question. One is just more correct than the others based on the particular situation. . . . .Fifty states, hundreds of courts, thousands of differing opinions and interpretations. You can be right in some states and wrong in others. . . . It's NEVER ok to guess at the answer to a coverage question.
Plain English and the Insurance Coverage Lawyer
I have written before about why insurance companies use experts on insurance coverage, and why policyholders need to use them too. Indeed, there is little doubt in my mind that lawyers who aren’t specialists in the field often put their clients at a disadvantage when they engage insurance companies in disputes over insurance policies without bringing in someone with years of experience interpreting and arguing over the language in policies. This case here out of the Massachusetts Appeals Court yesterday, involving a seemingly routine dispute over which of two insurers should foot the bill for an accident involving an automobile, illustrates the point beautifully. The court’s decision - which placed the risk on an auto insurer and liberated a general liability insurer - pivoted on one issue, consisting of what exactly is meant by the three mundane words “arising out of.” Plain English words, of course, ones that we have all used since we were children and which everyone knows the meaning of. But to understand and interpret an insurance policy, you need to understand the gloss on those words that generations of insurance coverage litigation have grafted onto them and, indeed, to apply the relevant policy terms you have to give a more precise definition to that term than most individuals would bother to give to it in daily speech. Here’s how Massachusetts law now defines those three little words:
Our cases indicate that the expression "arising out of," both in coverage and exclusionary clauses,
"must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law. Indeed, cases interpreting the phrase ... suggest a causation more analogous to 'but for' causation, in which the court examining the exclusion inquires whether there would have been personal injuries, and a basis for the plaintiff's suit, in the absence of the objectionable underlying conduct."
Bagley v. Monticello Ins. Co., 430 Mass. 454, 457 (1999), and cases cited.
The statement in Ruggerio, supra at 797, that "the expression ['arising out of'] does not refer to all circumstances in which the injury would not have occurred 'but for' the involvement of a motor vehicle," does not weaken the broad standard of Bagley, and that standard has been quoted by the Supreme Judicial Court with approval. See Fuller v. First Financial Ins. Co., 448 Mass. 1, 6-7 (2006). Put another way, what is required for injuries to "arise out of" the loading of a vehicle is a reasonably apparent causal connection between the loading of the vehicle and the injury. See Ruggerio, supra at 798; Metropolitan Property & Cas. Ins. Co. v. Santos, 55 Mass.App.Ct. at 795.
Plain as day, right?
Want to Learn More About the Tripartite Relationship?
Permalink | One of the widest read and linked to posts I have written recently was this one here providing the law of the so-called tripartite relationship in thumb nail fashion. Interest in this topic surprises me to a certain extent, because very much the point of the post was that, despite all the seminars and publications addressing the topic, I really think the rules governing the relationship among insureds, insurers and insurer appointed defense counsel boil down to a pretty simple set of working principles, which I discussed in that blog post.
However, it is clear that many people have a great deal of questions about the topic and want more education on the subject, and I can think of no better sources to answer such questions and provide education on it than the panelists on this upcoming seminar on the topic; among the panelists is Marc Mayerson, who writes the Insurance Scrawl blog on insurance coverage topics.
The Three Rules of the Tripartite Relationship
Permalink | We’ve been a little ERISA heavy here for awhile now, somewhat to the detriment of the insurance litigation half of the blog’s title, simply because of the range of interesting events that have taken place under the ERISA rubric lately. While all that was going on, though, a particularly good collection of articles on different insurance coverage topics have crossed my (electronic) desktop, and I want to pass them along as well; I will try to scatter them in with other posts over the next week or so, until I exhaust them.
One I wanted to pass along is this article here, by two prominent policyholder attorneys, on the tripartite relationship, which concerns the potentially conflicting loyalties of defense counsel appointed by an insurer to defend an insured against a lawsuit that may or may not be covered. This problem stems from the fact that insurers are often obligated to provide insureds with a defense against cases that may turn out, upon further development of the facts of the case, to not actually be covered, in which event the insurer will not have to cover any judgment or settlement, and might even be entitled to recoup from the insured the amount paid to defend the case in certain circumstances and jurisdictions.
Although there is much written and said about the tripartite relationship, the whole topic comes close to falling into the much sound and fury signifying nothing realm, although not completely because there is some substance to the issue, only not as much as lawyers like to make it out to be. The whole issue can really be boiled down to three handy rules of thumb. First, the defense counsel appointed by the insurer must focus only on defending the case as though the insured were his or her only client, and cannot muddle about between the insurer and the insured over any coverage issues that remain outstanding. Second, the insurer needs to retain separate lawyers, in the role of so-called coverage counsel, to take the factual information developed by defense counsel in defending the case and evaluate how it affects coverage. And third, an insured must remember that the defense counsel is solely going to defend the case, without regard to coverage disputes and is not looking out for the insured’s interests with regard to whether any recovery in the case will actually be covered; the insured has to instead hire independent coverage counsel of its own to take steps to parlay the evidence developed by the defense counsel into a commitment of coverage by the insurer.
Problems in Long Term Care Insurance and Lessons for the Rest of Us
Permalink | I criticized the New York Times a couple weeks back about an article on the NFL’s pension and disability plans, basically because the article was animated by an underlying ignorance of recent legal events concerning those plans. It may, perhaps, have been too much to expect that the reporter would have a full understanding of the subtle interplay of the legal and factual history involving that plan, as it played out in the case of former Steeler Mike Webster and his family’s attempt to obtain the benefits to which he had been entitled. Indeed, I recently received a nice note from the wife of a retired player noting that she was just happy to see the Times mention anything about the problem of retired players and long term damage inflicted on them by the sport.
But fairness - along with a couple of points about the article that are germane to the subject matter of this blog - compels me to point out that a prominently placed article in yesterday’s Times, about the claims processing and claim denials of certain companies providing long term care insurance to the elderly, embodies what that paper can do better than almost anyone else, which is put in the person power and intellect to evaluate, and then report on, issues involving massive amounts of information. For those with any interest in long term care insurance, or who may be forced to select a company to buy such coverage from, the article is excellent reading.
Moreover, there are two particular “take aways,” as they say, that jump out at me from the article, and which apply not just to long term care insurance but to all insurance purchasing decisions, from personal policies up to corporate liability policies. First, the article distinguishes the high rate of complaints against certain insurers from the much lower rate of complaints lodged against other insurers. In this area of insurance as well as every other, all companies are not alike. In seminars and in meetings with business lawyers and their clients, I tell people all the time that you need to decide among competing quotes on more than just price, and instead have to make an informed decision about the nature and quality of each of the insurers competing for your business. There is almost always room to quibble over the exact scope of coverage or an exclusion when a claim is made, and some insurers, almost by their DNA, will give the insured the benefit of the doubt on those issues in deciding whether to cover the claim; other companies may well not. This is something that always needs to be factored in when selecting a carrier, rather than just accepting the cheapest quote for the same limits of coverage. The insured needs to have advisors, whether insurance brokers or experienced insurance coverage lawyers, who can inform the insured about those kinds of differences among the insurers offering to underwrite the risk before a decision is made as to which carrier to sign up with. An ounce of prevention being better than years of insurance coverage litigation later, so to speak.
And the second point is on the same theme. The article references as well that the carriers with, according to the article, shall we say debatable claims practices, had undercut the market in their pricing to build up market share, only to later discover that their premium dollars could never cover their claims exposure. In any field of insurance, you can almost always find some carrier or another underpricing the competition in an effort to build market share. While that lower price may be a short term benefit for the insured, there can be longer term costs to taking advantage of that price reduction and joining that particular carrier. The most obvious ones are that the carrier may well change - in fact will probably have to change - its pricing down the road, forcing insureds to either go looking in the market again for a new carrier or accept a large premium hike, one that may well eliminate whatever pricing benefit the insured received the first time around. The carrier may also, having underpriced, have little appetite for covering claims where coverage is in dispute, possibly leading to claim denials that might not happen with a market rate carrier. And finally, in an example I’ve seen frequently enough to be wary of, the underpricing can lead to such limited ability to withstand a large hit that a few significant claims drives the carrier to simply abandon that product line, throwing the insured into the marketplace, looking for coverage from carriers it had previously rejected in favor of the underpricing competitor.
The Tripartite Relationship and the Attorney Client Privilege
Permalink | One of the more unwieldy of legal fictions is the so-called tripartite relationship among the insured, the insurer, and the defense counsel defending the insured against the claim. Duties run every which way in the relationship, and this beast is at its most cantankerous when one gets into the question of how the attorney client privilege fits in. In particular, if the insured and the insurer end up in a coverage dispute, the question of who has access to the communications between the insured and the defense counsel - just the insured, or also the insurer - quickly becomes a bone of contention.
I have talked before about the difficulty presented by this issue, and how it impacts insurance coverage and bad faith litigation. How exactly is an insurer to get at all the evidence of what happened in the underlying case, or at all of the facts that might shed light on whether or not the loss, in truth, is within the scope of coverage, if much of the evidence on that is laid out in the communications of the party who was actually on the scene - the lawyer litigating the case? A quick example highlights the problem. Suppose, for example, the issue presented is whether a settlement entered into by the insured was actually for losses within the scope of the coverage rather than just having been styled in that manner to try to place the loss within the coverage, and was actually paid for uncovered parts of the lawsuit. What more telling evidence could there be than the information communicated, orally and in writing, to the insured from the defense lawyer negotiating the settlement? After all, she is giving the advice on the settlement and structuring its terms - so if there is a question of whether the settlement is actually covered, shouldn’t that evidence both be admissible and discoverable?
Would seem so, but that isn’t necessarily the law. Which leads me to the real point of today’s post, which is to recommend Marc Mayerson’s review of the case law on this question.
Attorney's Fee Awards, and the Duty to Indemnify
Permalink | I have written before about the American Rule - which requires parties to a lawsuit, in the absence of a fee shifting statute or contractual agreement, to pay their own legal fees - and the exception under Massachusetts law that runs in favor of insureds who prevail in coverage cases against their insurers. The Supreme Judicial Court has now established that this exception runs only to disputes over an insurer’s duty to defend, and not to disputes over the duty to indemnify. Thus, while an insured who proves that its insurer breached a duty to defend can recover from the insurer its legal fees in proving this point, the same is not true for an insured who proves that its insurer breached the duty to indemnify. Here’s the story, with a link to the case.
This resolves an unsettled point of Massachusetts law, as to whether the right to recover attorneys fees runs along with a claim over the duty to indemnify, or instead only along with a claim for breach of the duty to defend. It turns out to be the latter only.
In the long run, it’s a better decision than the opposite holding would have been. A decision to deny indemnity without a reasonable basis for doing so is already punishable in Massachusetts under the state’s consumer protection act. When, in contrast, a denial of indemnity is reasonable, an insurer should be able to try to prove that its coverage determination was correct without having to factor in the risk of having to pay the insured’s legal fees if a court finds that the insurer’s interpretation of its coverage obligations, while reasonable, was wrong.
Investment Management Fees, and Contract Geeks
Two things to chew on over the holiday, other than the turducken (I have always wanted to use that word in a sentence), one to know about before it occurs, the other to note before it disappears. I guess I could take that dichotomy a little further, and note that one concerns the first half of the blog’s title, and the other, the other half.
The first: Susan Mangiero, who writes the excellent blog Pension Risk Matters, is hosting a webinar on November 28 covering issues related to investment fees, the management of 401(k) plans, and fiduciary obligations. The webinar, covering “401(k) plan fees - what they are, how they can affect reported performance and the fiduciary practices that address investment management fees” is driven by the fact that:
In the aftermath of the Pension Protection Act of 2006, 401(k) plan sponsors are required to carefully select "fiduciary advisors", identify appropriate default investment choices for participants and comply with more rigorous federal reporting procedures. All of this could spell trouble for retirement plan fiduciaries who fail to realize that regulation, public awareness and employee angst put them in the spotlight as never before. This is especially apropos with respect to plan fees.
You can find more information on the webinar here.
The second: Insurance coverage lawyers, almost by definition, have to be contracts geeks. At the end of the day, what they are really doing is fighting over the language in contracts, a particular type of contract certainly, but contracts nonetheless. And here, before it vanishes from the internet, is the story of how much money there is in not being a contracts geek.
The Attorney-Client Privilege in Insurance Coverage and Bad Faith Lawsuits
Like all of you, I am sure, I receive almost daily pitches in my in-box for seminars, podcasts, books and publications that promise to educate me on various topics that the pitchers have decided I must be interested in. Of course, these may be the same marketing wizards who send me twenty pitches a day for on-line pharmacies, so I may be giving them too much credit when I assume they are actually targeting their offerings to my professional interests in such topics as patent litigation, ERISA and insurance coverage. Nonetheless, sort of like playing horseshoes, they do sometimes come close to the mark with the offerings they email me.
This one caught my eye the other day, for a teleconference on the attorney-client privilege, with the hook that the privilege is supposedly under assault in the context of insurance coverage litigation. The short version pitch that was sent to me goes like this:
The sanctity of attorney-client privilege has been shaken by court decisions allowing discovery of attorney-client communication in the context of certain insurance lawsuits. Attorneys and clients must always be conscious of preserving the privilege, but insurance disputes gives rise to unique areas of concern.
In insurance cases, counsel often become involved prior to litigation, during the claims process - for coverage advice or to assist with investigations. These pre-litigation communications often end up subject to discovery.
Some courts have found the privilege waived in bad-faith suits where the insurer relies on an advice-of-counsel defense - sometimes even without that defense being raised. Insured's counsel also argue that attorneys who participate in insurance investigations are not providing legal advice but are acting as adjusters whose communications with the insurer are not privileged.
Now, I have litigated these issues a number of times. While I have sometimes won these disputes outright, more often than not, the court finds a way to split the baby and give some limited and controlled discovery while at the same time imposing some restrictions intended to protect the primary communications at the heart of the attorney-client relationship, namely those in which actual legal advice itself is transmitted.
There are a couple of points that jump out at me about this whole issue that I wanted to mention. The first is that there is some truth to the argument that it is hard to investigate the facts at issue in both insurance coverage and bad faith litigation because of the attorney-client privilege and work product doctrine, and it is often necessary to carve out some exceptions to those protections against discovery to allow discovery in those kinds of cases to proceed. This often holds true for both insurers trying to learn the underlying facts of the claim over which coverage is being disputed and for insureds trying to learn the facts of what the insurer did with regard to coverage, or the denial of coverage, for such claims. The simple fact is that lawyers for the insured, in defending and settling the underlying claim, and lawyers for the insurer, in providing coverage analysis and recommendations, are participating in activities that are at the heart of insurance coverage and bad faith litigation, but do so while engaging in what would normally be privileged communications. Effective prosecution and defense of these types of lawsuits therefore often raises the question of the extent to which discovery is proper in light of, or instead precluded by, the attorney-client privilege.
The second point that jumped out at me is that this is another one of those issues that is, much like what I talked about in my post yesterday, deja vu all over again. It seems like every several years - maybe it works out to be once every generation of seminar presenters - the books and the articles and the seminars appear declaring the attorney-client privilege to be under assault as a result of discovery rulings issued in the context of insurance coverage and bad faith litigation. I don't know for sure, but it sure seems to me that, despite these periodic "the sky is falling" pronouncements, the attorney-client privilege is still alive and well, and being raised in response to all sorts of discovery requests.
Insurance Coverage Trial Exhibits
I added a new category today, Insurance Coverage Trials, as a place to collect useful tips, ideas and articles on trying insurance coverage cases that might be useful to readers of this blog who either try such cases or hire (and thereafter manage) lawyers who try such cases. What prompted this idea was a long and very comprehensive pretrial conference in a patent infringement action I am litigating, during which I got to thinking about trial graphics and other fancy doodads and geegaws to submit to the jury; this in turn reminded me of Marc Mayerson's terrific, near scholarly recent piece about designing and admitting into evidence trial graphics in insurance coverage litigation. Marc talks in detail about best practices in designing these types of trial aids, and about the rules for getting them before the jury. What I like best though, I think, is that his post is really focused on design issues, and about what types of graphics best communicate information to a jury.
Readers of other posts of mine, like this one here, know I have a layperson's interest in design (the very thing which got me interested in intellectual property litigation and rights in the first place), so it is fun for me to see a lawyer address from a somewhat different direction, namely that of graphic design, a subject - trial graphics and exhibits - that litigators normally don't consider from that perspective.
Coverage Lawyers, and How to Pay Them
It seems like everyone is weighing in on the question of billable hours and alternative fee arrangements these days. My colleague and occasional lunch companion - and forceful proselytizer for abandoning the billable hour - Chris Marston weighed in on his blog the other day on the evils of the billable hour and his belief that alternative fee arrangements are better for both the client and the law firm representing the client. Chris' post caused Arnie Herz to tag Chris' firm as "cutting edge" and provoked a thoughtful commentary from Carolyn Elefant on who should bear the risk of mistakes made in establishing a non-billable hour pricing arrangement.
Chris' comments lay a nice foundation for considering a particular question that has often puzzled me, namely whether a policyholder should ever pay coverage lawyers by the billable hour, given certain fee shifting rules available to policyholders - but not to insurers - and a particular structural aspect of coverage litigation. Under Massachusetts law, a policyholder who prevails on a coverage case against an insurer can generally recover his attorney fees from the insurer, in one of those remarkable and relatively rare exceptions to the American rule (under which all parties are generally responsible for their own legal fees and costs). In addition, Massachusetts' bad faith statute - Chapter 93A - under which claims for insurance bad faith are prosecuted, presents still another avenue for recovering fees from an insurer. Beyond that, when a policyholder sues its insurer after a loss, the amount that is being sought from the insurer is usually either already a sum certain (the amount of the loss already being known) or can be readily guesstimated. Still beyond this, an experienced insurance coverage litigator ought to be able to make a fair guess - known in other businesses, such as home remodeling, as an estimate - from past experience as to how much time will have to be put into such a case to prevail on behalf of the client.
Given these avenues for fee shifting to the insurer if the policyholder prevails, the ability to craft a contingency arrangement based on the known value of the loss and the resulting likely amount of recovery, and the knowledge base of the experienced practitioner, there seems little reason why someone suing an insurance company should ever have to pay by the hour. One would think that a policyholder could expect a fee arrangement calculated on the basis of the likely recovery, and structured around the likelihood of recovering fees at the end of the day from the insurer if the lawyer was right to recommend challenging the insurer's coverage determination in the first place.
If you take this little thought experiment a step further, such a paradigmatic shift in how policyholders compensate their coverage lawyers would likely benefit not only policyholders, but insurers and the court system as well. The simple fact of the matter is that insurers are not always wrong on their coverage determinations, no matter what many policyholder lawyers may think. In fact, given the amount of coverage decisions they make on a given day, the relatively few that are challenged in court, and the even fewer that are ever overturned by a court, it is fair to say that insurers are right far more often than they are wrong. You can almost prove this point by a faux mathematical equation: number of coverage decisions by the insurance industry in a year, minus the number reversed by a court in a year, leaves behind a whole lot of coverage determinations that are simply correct.
If insureds compensated their coverage lawyers not by the billable hour, but instead by the fee shifting and/or contingency bonus they would receive if successful, one could expect semi-frivolous lawsuits against insurers, and even those of at best debatable merit, to be brought far less often than they are currently. It would only make sense that if an insured's lawyer was paid to be right about whether to challenge a coverage determination in court, rather than being paid simply for challenging the coverage determination - rightly or wrongly - in court, policyholders would almost certainly receive from their attorneys the type of objective analysis of coverage that is needed to properly determine whether a coverage determination is right or wrong, before a decision to sue an insurer is made; it would now be in the best interest of both the insured and the insured's lawyer not to file lawsuits against insurers on which they are unlikely to prevail. This would be a nice change, both for the burdens on the courts and the costs to insurers of simply being in business, from the current environment in which it is fair to say that some, but certainly not all, lawyers sue insurance companies simply because, to borrow from the bank robber Willie Sutton, that is where the money is.
Objectivity in Providing Coverage Advice
With too much on my plate at the beginning of the week, I told David Rossmiller that I was not going to borrow from his terrific post early this week on the thought process needed to provide advice on coverage issues. As the week has gone by, however, I find myself regularly returning to it. Moreover, I think some of my coverage obsessed readers, friends, clients and colleagues would appreciate it as much as I did, so I changed my mind. At the heart of the post, David talks about the thought process that one must apply when counseling clients on coverage:
This brings to mind something that separates the practice of insurance coverage law from some other kinds of legal practice. I mention this because last night I was reading a blog written by a so-called trial lawyer that frankly made my jaw drop, because it purported to analyze case law but was so lacking in objectivity and fairness as to be disgusting. (I'm not going to mention who this is because it was so evidently written in a bid for any kind of attention, negative or positive, that recognizing these efforts by name would merely reinforce the delusions at their root). Coverage lawyers can have their own views on the world, but when they start wading chest deep in serious analysis of cases and insurance policy language, in my view they have to strive for maximum objectivity and suppress emotion and bias in favor of an intellectual sorting process similar to playing chess. If they don't remain objective and allow bias to influence their thinking, it is too easy to make a mistake and then gain a new bias: defending your own previous substandard analysis.
I think David has captured perfectly one of the hardest things for those of us who move back and forth between litigating different types of cases and rendering coverage advice, namely the need for advocacy in the former role and strict objectivity in the latter.
Insurance Coverage Counsel and the Repeat Player
I often mention in seminars and meetings a point that I call "the insurance company and the repeat player." In doing so, my intent is to emphasize to insureds and their usual counsel the importance of retaining experienced insurance coverage lawyers to represent them when issues arise involving insurance coverage and insurance policies, whether they arise in the context of negotiating a policy, seeking coverage for a loss, disputing a coverage determination, negotiating a resolution of a claim with an insurer, or litigating a coverage dispute with an insurer.
The allusion to a repeat player is meant to drive home the point that the insurer in such a scenario is always using an expert on insurance coverage to represent it and even more than that, is probably using an attorney who has thousands of hours of experience working with the exact insurance product at issue; the attorney is a repeat player. The insured, to have any chance of competing on an even playing field, needs a repeat player of its own - i.e., an experienced insurance coverage lawyer with expertise in the type of policy and coverage issues involved in the matter.
My thoughts on this go further, but I will not repeat them all here (or what else will I have left to post on in the future?). What brings the point to mind right now, however, is that Rees Morrison has a post on his Law Practice Management blog on the Horndal effect, the improvement in efficiency and effectiveness that flows to the repeat player, only he discusses it in the context of the benefits captured by in house law departments when lawyers in the department become specialists and "repeat players." His description of the economics that underlie the idea of the repeat player captures this point beautifully. To quote in part,
As in-house counsel handle matter after matter of a similar kind, they gain experience and they can do more, better, and in less time. The knowledge they accumulate can be thought of as a by-product -- a spillover from the repeated production of advice and counsel