It’s hard to imagine that flying used to be glamorous, but for those who remember the Concorde, they know it was the epitome of glamour. The supersonic jet flew at 60,000 feet—high enough for you to see the Earth’s curvature—and could blast you from Paris to New York in three and a half hours. Think about that the next time you are in row 52, next to a hungover college student who poured himself into his seat after a 168-hour non-stop spring break party visiting his friends abroad.
It was an odd-looking, unconventional passenger plane, with a sleek and narrow body, sail-like wings, and a pointy nose. At its zenith, flying on the Concorde conjured up images of sipping champagne next to Mick Jagger and Jerry Hall on the way to a party at Studio 54 or a suite at the Plaza Hotel. Phil Collins once opened a concert in London (Live Aid ‘85, if you want to feel old), then flew via the Concorde to a follow-up set in New York on the same day. It doesn’t get more “rockstar” than that.
Unfortunately, just about everything else about the Concorde was a headache. It had a seating capacity of just 100 passengers, and only 20 planes were ever manufactured. In addition, it produced a notoriously loud sonic boom that affected when and where it could operate at high speeds. Most regrettably, the Concorde turned out to be a money pit. Hundreds of thousands of hours and hundreds of millions of dollars, pounds, and francs went into designing and developing the world’s first commercial supersonic jet, subsidized largely by the British and French governments.
The demand, however, never quite matched the hype. At its height, roundtrip tickets from New York to London ranged from $6,000 to $12,000, with most prospective passengers priced out of the market. The flights then operated at less than full capacity. With ballooning expenses and sagging demand, the economics of keeping the Concorde in service did not make much sense.
So, why did the British and French keep pouring money into the project? Was it out of that great love of shaving off a few hours of flying time? How about the prestige or glamour? Nope. They kept spending money for one reason: to justify what they had already spent.
This is known as the “Concorde fallacy” and serves as a great reference point for understanding the problems and pitfalls of sunk costs. Specifically, sunk costs are broadly understood as costs that have already been incurred and will not be recouped. The concept seems simple enough: We continue to make financial investments in things for which we will not see a return. However, it is the second prong that proves most elusive and clouds our thinking and efficient decision making: when we fail to realize we are not getting what we paid for and need to cut our losses, but we keep on spending.
Examples of sunk costs in everyday life are all around us:
• Our kids hate piano, and they are terrible at it, but we’ve already spent $5,000 on a piano and another $10,000 on lessons. Better stick with it.
• A sports team signs a player to a multimillion-dollar deal, and he stinks, but dang it, we’ve spent so much we better stay with him.
• This stock has already sucked up most of my bonus from last year. Better ride it out no matter how much it tanks.
If sunk costs are so obvious, why is avoiding them so complicated?
As defense lawyers and insurance professionals, we think of the concept of sunk costs as a plaintiff’s problem. That is, in your classic personal-injury case, plaintiffs’ attorneys are fronting the costs of the litigation with the hopes of reaching a favorable settlement or verdict. But unfortunately, they are required to spend money—significant amounts of money—without any guarantee of success.
Sunk costs in litigation are what the attorneys or their clients spend chasing that result without guaranteeing a return on the investment. Or, more accurately, when they remain willfully ignorant to the fact that they won’t get those costs back, yet keep spending and spending in a futile attempt to buy themselves out of trouble.
But so what? We’ve likely all been in these kinds of scenarios for various reasons—some more than others. Do we chalk it up to “the cost of doing business?” Yes, if we want to keep doing business as usual. However, as defense attorneys and claims professionals, we need to take a better approach and look at how we spend both time and money on our cases in order to develop a better way of moving forward.
Sunk Costs in the Claims World
One way to look at sunk costs is through the lens of a legal claims matter. A claim is filed, and a case is assigned to outside defense counsel. Standard practice requires an initial analysis to be completed and a budget set. If the claim is in litigation, discovery is conducted, and the defenses begin to shape. At this point, the insurance examiners monitor and advise on critical decisions throughout the process (i.e., motions filed, the discovery sought, experts retained), and the goal is to resolve the claim.
Sometimes, this can be accomplished via motion practice. Nothing is paid on the claim, and the case is dismissed. Elsewhere, claims can be resolved early for a better value than if they were litigated for years. However, when attorneys’ fees blur the proper evaluation of a claim, we face the question of wondering what a reasonable result actually costs.
Take, for example, a small property damage claim. Assume that the claim has a settlement value of $10,000. How many times have you spent $50,000 to get to that $10,000 final number in your professional career? There are probably dozens of examples where this scenario has played out. Of course, this can be an unavoidable consequence of litigation. Sometimes, we just don’t have an option. But what about when it is avoidable?
In sports, defining “winning” is easy. In baseball, the team with more runs at the end of nine innings wins. And the team that wins the last game of the World Series is the champ. Dare we ask: What exactly is “winning” in our line of work?
• Is it securing a defense verdict? If a case proceeds to trial, probably.
• Is it resolving a claim for as little money as possible? Maybe.
• Is it resolving a claim for as little money as possible while spending as little money on attorneys’ fees? Now we’re getting somewhere.
One of the hazards of the litigation world is that we do not focus enough on the costs and what is being spent. Yes, there are those “pesky” guidelines that outside counsel loath and cause heartburn for adjusters. But are those guidelines and initial case budgets working? How closely is either side following those projections? What are they based on? More to the point, how often do we chase low settlements and verdicts and, in the process, run up our attorneys’ fees or litigation costs? What about when reserves are set without honest consideration of what it will take to get a case postured to resolve in that predetermined range? What exactly are we spending to get those wins? And does it even matter?
From our perspective, it all matters. Hence, we need to be aware of the pitfalls of the Concorde fallacy and sunk costs. Unfortunately, we do not have a magic wand or a perfect recipe for running cases more efficiently. However, we believe that asking these questions is an essential first step in restructuring how we’re litigating insurance defense cases as a whole.
Cutting Your Losses
Our professional existence cannot be as cut and dry as operating an airline or putting together a baseball team. Nevertheless, the objectives in those fields—provide safe travel, make money, win championships—are unambiguous. Attorneys and claims professionals may have similar concerns, but there are others. A code of ethics binds us to represent our clients zealously, evaluate claims, and make reasonable offers when liability is clear, lest we commit bad faith.
There is, however, a tipping point in most cases, especially the problematic ones. We spend money to prove a point, to win an ego battle, or maybe just to intimidate the other side into submission. A common refrain from the plaintiffs’ bar is defense expert practice’s brute force and rote nature. We’ll keep hiring expert after expert from the fanciest school with the highest hourly rates while the plaintiffs are forced to use someone you would not hire to clean out your home’s gutters. For what?
We cannot think of our cases and claims like the Concorde: If we just spend a little more money, hire one more expert, take one more deposition, send one more set of interrogatories, then everything will be worth it. Nope.
Avoiding the problems of sunk costs, as in all aspects of rethinking the claims and litigation process, requires a disciplined mind and honest accounting of every claim. As lawyers and claims professionals, we cannot see into the future of a case. But our education, training, and experience have led us to this point. We should, therefore, be able to determine, to a reasonable degree of professional certainty, whether what we are spending on a case or claim will add value to our defense or decrease the value of the plaintiff’s argument. If we do not reframe our thinking, then we are just another desperate player trying to buy our way out of a slew of bad decisions and even worse luck.