What Will You Find?

In a previous article that appeared in the May 2017 issue of CLM Magazine, the Audit Committee provided the blueprint for a quality claims audit. However, one aspect of a quality claims file review that has received little attention is the legal review. While there are some fine independent or outside “audit” firms that will take an assignment to review a law firm, the quality review can be used to solidify a working relationship. The advent of the legal bill review has created, at times, an adversarial relationship between law firm and carrier. We believe that there is a way to improve claims quality, build camaraderie, and improve the insurer-lawyer relationship.

Insurance Company Goals for Litigation

Claims management generally takes the lead in determining and communicating litigation objectives. But successful litigation management does not occur in a vacuum, and the tripartite nature of the insurance defense relationship requires careful and frequent communication between carrier, insured, and legal counsel. Why is this step important? Statistics demonstrate consistently that 97 percent of cases settle before trial. With respect to the three percent that are actually tried, a significant percentage of claims are litigated because the claim has been poorly evaluated by the claims professional, the attorney, or both. This illustrates the need to not only develop a litigation plan and strategy, but also to regularly review the plan and strategy at least on a quarterly basis. The re-evaluation should occur within the insurance company (claims professional to supervisor/manager) and between the carrier and outside counsel.

Directions to Counsel

The standard letter of engagement that we like to use is six pages long with 11 sections (not counting sub-paragraphs). In a litigious world, while a standard letter of engagement is an appropriate agreement between the carrier and law firm, we also recognize that it can serve as a barrier to creating or maintaining an effective relationship.

The typical engagement letter covers the scope of the assignment, addresses conflicts of interest (tripartite nature of the representation), and preserves the confidentiality of the client (insured). The letter of engagement often is used as a unilateral “guide,” but we have found it is more effectively utilized as a mutual agreement. Thus, for example, matters like proper staffing of the file (defining which tasks are more effectively handled by a partner versus associate versus paralegal versus clerical), along with hourly rates and billing instructions/guides, are best decided through clear, honest, and open communication between the carrier and the law firm.

We recommend that carriers establish a global letter of engagement with outside counsel to govern their basic relationship on all claims. However, each claim also needs to be reviewed and assessed on a case-by-case basis, as litigation goals and strategies will differ in practically every case. This allows the claims professional to provide input and specific direction regarding each particular claim, and allows defense counsel to provide input and feedback, as well.

Plan the Work, Work the Plan

Now that the ground rules for engagement of a firm for legal services have been established, we need to examine three other questions: How do we ensure that we’re receiving the benefit of the bargain? How do we audit legal files? Lastly, what do we audit when we “visit” the law firm (in person or electronically)?

First, let’s establish the audit ground rules. An audit is an examination and verification of the legal work product to evaluate its adherence to the letter of engagement (litigation management guidelines). We should inspect and verify that the time entries fairly reflect the work product contained in the file, and that adequate documentation for time entries exist. Specifically, our audit papers will measure:

Adherence to the engagement letter guidelines.

o Can we determine from the file whether or not litigation management guidelines were followed?

o Break down the bill to determine the major activities performed, who performed them, and the time spent.

o Is the case properly staffed?

o Are tasks delegated to the proper experience level?

o Should tasks have been performed by partners, associates, paralegals, or other clerical?

Responsiveness to client/clear communication between parties.

o Everyone in the tripartite relationship should be “on board” with the same goals and objectives for the litigation.

o Defense counsel also has an ethical not only to keep the client reasonably informed about the status of the matter, but also to reasonably consult with the client about the means by which the client’s objectives are to be accomplished. Auditors employed by the carrier are not guarantors or enforcers of legal ethics, but they can provide valuable feedback to counsel if they feel client communication could be improved.

Evaluation of loss.

o As previously noted, a percentage of cases that are ultimately litigated can be due to differences in opinions and analyses between defense counsel and representatives of the carrier. The audit should focus on these differences, if they exist, and, more importantly, determine the root cause for the difference.

Jurisdiction/venue.

o Defense counsel (or sometimes the claims professional) may have special knowledge regarding the venue where the suit is being tried or information regarding plaintiff’s counsel, the presiding judge, or typical jury pool.

Tracking billing hours with actions taken (file documentation).

o We once were billed more than 150 hours of legal research on a one-issue appeal with only two previously decided cases serving as precedent (the sum of pages in both decisions were less than 20).

Legal audit findings must be tempered by the potential conflict of interest that resides within the very nature of the tripartite relationship, and the carrier must understand that counsel must exercise a certain amount of independence in order to zealously represent their clients. Audit findings should be used to improve the quality of service to the ultimate client—the insured.