IF IT SEEMS TOO GOOD TO BE TRUE: The Problem With Cut-Rate Subrogation Vendors

Litigation is rarely cheap, but it is often necessary. Nowhere is this truer than in the area of insurance subrogation, where those who resist paying subrogation claims assume that insurance companies are loath to pull the trigger and file suit and will, therefore, never pay full value on subrogation claims with even the clearest liability facts. For decades, the insurance industry has been paying special attention to the attorneys’ fee line item in their claim department budgets and have been going to great lengths to find the perfect balance between keeping litigation fees and costs in check and maintaining high quality representation. Insurers have turned to litigation budgets, in-house counsel, litigation management guidelines, litigation vendor databases, and law firms with lower hourly rates. An entire litigation cost management cottage industry has sprung up and some insurers have even turned over the distasteful task of disallowing certain lawyer time entries and expenses to cost management vendors whose very existence is justified by cutting as much as possible from fee bills.

The problem of runaway fees began and remains primarily within insurance defense litigation, but the mindset of cutting costs has quickly spread to other areas of litigation, including subrogation. It is difficult to assess whether a large hourly attorney’s fee in a defense case resulting in a defense verdict is justified, because it is an open-ended evaluation. Defense lawyers must react to and defend against the case asserted by the plaintiff, whether it has merit or not. A fee of $100,000 which saves $1 million on a defense file is worth it in hindsight. In subrogation cases, however, cost-efficiency must be built into the handling of every file because subrogation is only as successful as it is profitable. If you spend $5,000 to recover a $5,000 subrogation claim, the only winner is your lawyer.

Subrogation files are most frequently handled on a contingency fee basis, which makes the cost containment goal less elusive but limits the litigation management options available to the insurer. As a result, one illusion which the insurance industry seems to be chasing is the specious notion that lower contingent fee percentages translate into higher net recoveries and, therefore, a more successful subrogation program. If 33 years of subrogation litigation experience has taught our firm anything, it is the fallacy behind that premise. The only path to true subrogation success is a genuine partnership between an insurer and a law firm it trusts.

A new generation of opportunistic subrogation and claims vendors, often owned by lawyers who have experienced firsthand the cost-conscious insurance industry’s attraction to low rates, has had great success by offering contingent fee rates too good to be true. Idioms which have weathered the test of time usually have a basis in fact and the pejorative phrase “built by the lowest bidder” is no exception. The lowest contingent fees guarantee that many files will be settled for less than their true value and that larger files that should see the inside of a courtroom in order to get top dollar never will. Like insurance catnip, however, the low contingent fees serve up the mirage of fee containment while simultaneously devaluing an entire book of business. The only winner here is the short-lived vendor, who profits by selling short the wheat and leaving the client with the devalued chaff.

We know the above to be true because we are approached weekly by vendors desperate to find lawyers capable of accepting the files that won’t settle on an even lower percentage contingency fee basis. We regularly hear from frustrated insurance managers being told that their files which did not settle quickly suddenly have no subrogation potential and should be closed. Decision makers are sold on a PowerPoint presentation and the lure of quick results at bargain basement prices. Without exception, they are later universally disappointed and must scramble to salvage what they can. It is similar to the unfortunate phenomenon of “sign and settle” trial lawyers who advertise using celebrities or sports figures, but try no cases. If a case doesn’t settle, they must try to refer the case out and retain a percentage, all but ensuring the devaluation of the poor victim’s case.

A $75,000 recovery in a $90,000 subrogation claim litigated on a 1/3 contingency fee is preferable to a $30,000 recovery on a 15% contingency fee. The subjective nature of subrogation success allows a good file to be easily misrepresented as a bad file in order to justify a quick settlement. Unfortunately, it is often easier for subrogation claims managers to sell an 18% contingent fee than to assess the true recovery potential of a large case which is settling for little or nothing at all. Far too many in our industry go for the quick buck – skimming the cream while leaving behind a treasure trove of subrogation potential to slowly decay until statutes of limitations are mere weeks from running. Taking the road less travelled means that the bulk of files referred by such vendors have less than 30 days left before being time-barred. Lawyers know the number of hours necessary in order to ready a file for trial and, if that number exceeds the potential profitability of success based on a reduced contingency, they won’t stay in business long. The subrogation vendor working on cut-rate contingency fees is faced with that stark truth when they try to assign to counsel the majority of files that do not settle quickly at discounted value. When even lower rate vendors undercut the cut-rate vendors, the result is disaster. For these entrepreneurial opportunists it is not about getting good results across a wide spectrum of files for their client – it’s about making any promise necessary to get the business in the door and milking the files for settlements the client could have achieved with just a phone call. Unlike law firms, subrogation vendors don’t have to follow attorney ethics rules and obligations and owe no fiduciary duty to ensure that the client’s best interests are being served. Time and time again we see independent audits revealing millions of dollars unrecovered and left on the table and, by then, it’s often too late.

Not all subrogation vendors are equal, however. We work with some excellent vendors who have fashioned contracts with their clients that escalate the fees or otherwise see that its attorneys are fairly compensated when litigation is necessary. However, as cut-rate vendors continue to flood the marketplace, the good ones are becoming the minority. When insurers are approached by the cut-rate vendor and its impossible promises, they should ask the vendor to explain the math behind how the majority of its files will be litigated. How will they settle those cases with clear liability for 100% when the nuclear option of litigation isn’t available to them? Find out specifically how the vendor proposes paying for attorneys when cases need to be litigated and have them set this out in writing. Ask for case examples that demonstrate the vendor’s successes and failures in the litigation process.

Cheaper is rarely better. My favorite ice cream store has a sign: “You can find cheaper ice cream somewhere else; if you want cheap ice cream, go there.” Litigation is not a “commodity”. It is a professional service like brain surgery and engineering. When you need it, you have to get it right. If your adversaries win by paying significantly less than what they owe, the entire industry suffers. You cannot lose when subrogating on a contingency fee, but those who fall for the idea that this isn’t enough, can lose everything to cut-rate percentages. As a law firm, we sell expertise, value, and proven results. The three go hand-in-hand. Clients who think they want cheap rates occasionally go elsewhere, but we inevitably see them back again – wiser and more determined to understand what it means to win.

Successful subrogation requires that the pointy end of the subrogation sword – a genuine threat of litigation – must always be hanging over your adversary’s head. Value, experience, legal knowledge, availability, prompt and thorough reporting, and the willingness to strong-arm top dollar recoveries in every matter entrusted to it are the trademarks of a good litigation law firm. Everything else is smoke and mirrors. Successful subrogation requires the best – not the cheapest. Recall the story of the engineering consultant who was called to repair a broken machine that had brought a factory to a stand-still. He tightened a single screw and within about five minutes the whole factory was back on line. When a $1,000 bill was received, the factory owner was outraged, “You spent just five minutes here, tightened one screw, and we received a bill for $1,000!” The consultant smiled, “The tightening of the screw was free. The $1,000 was for knowing which screw to tighten!”

There are no short cuts in life, and that includes subrogation. Fast food is popular because it’s convenient, it’s cheap, and it tastes good. But the real cost of eating fast food never appears on the menu and is rarely discovered until it is too late.

If you have any questions regarding this article or subrogation in general, please contact Gary Wickert at gwickert@mwl-law.com.

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Gary L. Wickert
Partner

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Gary has 35 years of litigation experience and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and a national and international speaker and lecturer on subrogation and motivational topics.