Zachry: Cost Drivers vs. Defense Attorney 'Churn' Methods

Thursday, April 16, 2020 | 0

The defense attorney is an important partner in achieving optimum outcomes on claims. But just because I have listed areas of potential mischief does not mean that they should be treated as an enemy.

Bill Zachry

The partnership includes not only handling of claims, but also helps make sure that there is compliance with the laws, rules and regulations; makes sure you are not making bad case law; and, as icing on the cake, also provides valuable training for the examiners on the application of case law.

Some defense attorneys do not realize that their activity results in the churning of the files.

The overall claims frequency for the past three decades has been going down. This is probably due to the change in the exposures. The economy transitioned from manufacturing to service; the advent of the Occupational Safety and Health Organization; and the financial incentives for employers to reduce frequency all have had an impact.

With fewer files in the system, there has not always been a replacement file for every claim that an attorney settled. To ensure a steady revenue stream, some defense attorneys have worked harder to develop relationships with employers, insurance companies and third-party administrators. A few have also resorted to churning files to maintain their income.

Because of the perception of churning and because the allocated loss adjustment expense has grown significantly in many jurisdictions, I have seen that some claims operations begin to treat their defense attorneys as an enemy (or as an expendable cog in a wheel) rather than as a valued partner in the process.

One example of this is the application of attorney bill review. Some of the attorney bill review programs that I have seen are not focused on achieving better claims outcomes, but rather are focused on adherence to written billing procedures.

Does defense attorney bill review result in another churn? I do not know. My gut tells me it is not necessarily improving overall claims efficiency and results. It would be interesting to see an objective study on this issue.

Most claims operations programs have very sophisticated manuals and claims handling protocols that are designed to stop defense attorney churning. An occasional audit for compliance is a useful tool. Another best practice is to dust off the agreement, sit down with the attorney representatives and see what is working and what still could use some help to make it work well for both parties. Make it a living document rather than a binder on the shelf.

Here are a few churning methods that tend to increase the costs or extend the life of the claim:

• Delaying in setting up the files or responding to the claims examiners' requests for information.
• Setting unreasonably low expectations of the claim exposure with the adjuster. If the defense attorney deliberately underestimates the exposure and asks for only half the authority of what is really needed to settle the claim, it results in inaccurate reserves and keeps the files open longer. By “lowballing” the claim exposure from the outset, the defense attorney can delay closure by saying that the applicant is “being unreasonable.”
• Setting medical-legal evaluations that will take a year to get into and will take another half year to get a comprehensive deposition to finalize the findings and get case resolution.
• Not asking for adequate settlement authority, and as a result, not having the appropriate settlement authority prior to communicating with the applicant’s attorney.
• By moving files from one attorney to another in the office.
• By not attempting to settle claims on receipt of the claim, prior to or during depositions, prior to settlement conferences, prior to trials, etc.
• Not understanding the protocol in place to get the settlement authority in a timely manner. Some employers and insurance carriers have special authority protocols that can result in a delay of several months to get settlement authority from senior management or the board.
• Churning can also be the result of making legal appeals on claims where there is no merit to the appeal. The appeal may be recommended by the examiner because he does not like the injured worker, the employer believes fraud is involved, or the attorney wants more legal fees associated with the claim. Appealing cases where there is no merit can be particularly problematic if there is the possibility of making bad case law.
• By not being prepared for trial when a trial should take place.
• By not identifying issues such as subrogation or affirmative defenses.
• By not organizing and cooperating with the sub-rosa professional on how the results will be utilized.

To avoid defense attorney churning, do the following:

• Engage the defense attorney in getting the worker back to work. This is rarely done but can have a significant impact on reducing overall claims expenses. To do this he needs to know the light/modified duties program.
• Educate the defense attorney on the settlement philosophy of the company.
• Claims examiners need to regularly and accurately make their own determination of the exposures in the claim. If there are differences in the projected exposures between the examiner and the defense counsel, those differences should be discussed and resolved.
• Unless there is a plan or expectation to take the claim to trial or if there is a blanket denial on the claim, make sure that the defense attorney has the appropriate settlement authority at all times (from the initial referral). This is not a common practice in the industry but is a best practice that facilitates closure.
• As part of the file review process (or at the double-play claims review), review the plan of action with the attorney and ask what steps will be needed by the defense attorney to follow the plan and get the file closed. The attorney fees should reflect the work done as outlined in the plan of action.
• The attorney should notify the client if he is handling more than one claim at the courts, and discuss how he will overcome problems of focus and conflict.
• Before allowing any appeals, the claim and its facts should be carefully reviewed and approved by senior claims professionals and legal experts for the merits of the case and for the potential of making bad case law.
• When claims examiners are overwhelmed in their jobs, their first instinct is to outsource all litigated claims to attorneys. Your defense attorney can help you avoid this situation. A way limit the abuse of using defense attorneys to do claims work is to clearly delineate the work that will be done by the defense attorney and that to be done by the claims examiner. Defense counsel should not expect to be paid for activity that is the purview of the examiner. However, there are nuances to this process. For instance, most of the time the examiner should set up the consulting medical evaluation. An exception to this policy may be if the attorney has blocked time with a certain medical provider.
• Require timely status reports (can be between three months and one year depending on the file status and complexity). These reports should be discussed at a file review. The report should cover the issues in dispute and provide the settlement/litigation. At the next file review, the defense attorney must be ready to discuss what has occurred; what progress has been made in regard to resolving the issues, settlement and litigation plan; and be ready to explain why there have been delays. If there is no movement between status reports, question the need for a defense attorney.
• Prohibit defense attorney entertainment. Meals should be paid for by claims administrator or be Dutch treat. Gifts and free events should be looked upon with suspicion.
• Don’t be fooled by low hourly rates. That is a red flag that there might be churning.

Metrics for defense counsel:

• Average cost of closed claims.
• Average allocated cost of closed claims.
• Average number of days a file is open between claim reported and claim closed.
• Average number of days a file is open between date of referral to defense counsel and claim closed.
• Ratio of stipulations to full settlements.
• Average number of indemnity days paid.
• Apportionment success.
• Subrogation (identification, credit and recovery).
• Fraud identification.

Bill Zachry is a member of the California State Compensation Insurance Fund board of directors and chairman of State Fund's Audit Committee. He's the former vice president of risk management for Albertsons and Safeway, and a former senior fellow of the Sedgwick Institute.