PricewaterhouseCoopers

Insurance Digest: Claims Legal Expense Cost Containment: From Short-Term Gains to Sustainable Reduction

Insurers and self-insured companies typically find the cost of defending claims to be among their largest line item expense, and they spend billions of dollars annually on claims legal expense. The Council on Litigation Management (www.litmgmt.org) estimates that annual outside legal expense, inclusive of claims, is in excess of $30 billion for their member companies alone. Some portion of this expense is a necessary and integral cost of doing business because it provides, among other things, a mechanism for dispute resolution and protection against unjust enrichment.

Moreover, there are inherent challenges to reducing claims legal expense, including:

The unanticipated impact of cost cutting on indemnity: Any initiative, its timing, roll-out strategy, and projected results all merit careful consideration. For example, terminating a higher cost law firm that knows the client company's products and underwriter's intent in favor of a lower priced firm with less industry, product and client relevant experience might backfire and wind up costing a company more money in the long run.

Similarly, it would be far from ideal to raise the issue of rate decreases with a law firm in the middle of a trial, defending a product suit after a year of discovery. While doing so might save money in the short-term, it might well jeopardize the future liability of the client company.

The expectation of return: Rarely will a claims organization realize an immediate return on a defense cost-cutting initiative. For example, the savings that result from instituting bill review software will materialize gradually as costs and bills are incurred over time, not all at once.

Despite the challenges associated with change, insurers and self-insureds are finding ways to reduce claims legal expense. PricewaterhouseCoopers recently conducted an evaluation of national and multi-national insurance organizations' claims legal expense cost containment programs and found that all are employing a variety of practices to substantially reduce legal expense.

Adjusters are utilizing:

Claims handling practices designed to avoid litigation;
Litigation management guidelines designed to help in legal resource selection, strategy, management and monitoring of counsel; and,
In-house rather than external legal resources, whenever possible.

Procurement departments are utilizing:

Preferred provider networks in order to leverage economies of scale, and
Legal bill review processes in order to ensure compliance with terms and conditions of engagement.

In-house legal departments are utilizing:

Matter management software, in order to reduce time and cost associated with manual case updates and monitoring, and
Electronic time and expense tracking software.

Yet, despite of these various efforts, claims legal spend still remains high. Why? In short, because very little has changed in the industry's basic approach to containing claims legal expense. The industry continues to rely on the same techniques it has used for years, namely:

Reducing expense by reducing hourly rates;
Reducing time and expense charges by carefully scrutinizing bills; and,
Reducing outside costs by increasing in-house legal staff.

While all of these techniques can reduce expense, they tend to be short-term solutions that do not represent a sustainable overhaul. Only by rethinking its approach to cost containment can an insurer achieve meaningful change. Legal expense cost containment programs that connect activities with real-time data trends will position companies to sustainably reduce legal expenses.

With this in mind, claims executives and legal departments should consider the following actions to avoid incurring unnecessary expenses in the first place:

Defining who and what falls under the legal expense category;
Reorganizing responsibility for legal expense;
Establishing an infrastructure that supports all constituents, rather than just the disparate needs of a few;

Layering this infrastructure with a legal expense program built on a model that continuously evaluates trends and consistently adjusts to address those trends, rather than a model that is built once around the data trends known today;
Using data to drive cost containment activities within the program, as well as to create measurements that can assess the day-to-day value of those activities; and,

Continuously modifying activities in order to address trends identified by the program data. This close looped model will keep program activities current and eliminate the need to focus on outdated problems.

This new approach is in essence a program model that can be adopted regardless of size or line of business. It can both streamline legal expense and reduce operating costs because it addresses the multiple dimensions of the same problem from a singular vantage point. This legal expense cost containment model is not a silver bullet, but it does offer a sustainable, standardized and customized approach to reducing spending from a multi-billion dollar system.