A recent review of workers compensation data from 393 companies across 16 industry groups (source: Aon Casualty Laser Database) revealed that litigation rates and the percentage of legal cost of total expenses were among the most variable cost drivers in employers' workers compensation costs. As a result, more progressive organizations have changed the means of selecting and managing legal firms by shifting the focus away from hourly rates and toward performance metrics.
As one would expect, the range of percentage of claims litigated of total claims varied greatly by industry (from 2.2 percent in education to more than 12 percent in construction) as did the ratio of legal cost to total expense costs (from 8 percent in public entities to 17 percent in agriculture).
With today's burgeoning analytics and predictive modeling movement, a defense firm's performance is now more likely to be evaluated on the outcomes they produce rather than the relationship the firm has with its client. Savvy companies are looking at predictive models to evaluate performance and predict outcomes, as well as leverage new market intelligence to speed up the litigation process and protect their balance sheets.
Table 1. Table 1
Average of All Industries = 7.7%
Source: Aon Casualty Laser Database
A Task-Based Approach
Historically, litigation management largely meant squeezing your defense attorney's hourly rate as low as possible and ensuring administrative tasks were being performed by more junior staff and at lower billable rates. According to Aon's litigation management specialist, Kevin Combes, more sophisticated organizations have instead implemented guidelines to dictate specifically what activities they expected of their defense attorneys and their staff. According to Mr. Combes, "Studies of workers' compensation programs throughout the US indicate that there are substantive differences in the performance among firms as measured by the outcomes produced and the fees charged."
Mr. Combes suggests that billing codes, such as the Uniform Task Based Management System, were developed by the American Bar Association, adding controls that are task-specific and provide a more structured means of managing legal activity and related costs. A number of specialty legal bill review firms have emerged to provide outsourced legal invoice review support for large, more complex organizations. Recently, other organizations have emerged to begin tracking problematic litigation areas around the United States, such as the American Tort Reform Foundation's Judicial Hellholes annual summary of verdict trends throughout the country.
Collectively, these tools allow companies to more efficiently manage their engagements with law firms and gain a deeper understanding of the venues where litigation is occurring. However, these tools alone cannot answer the harder questions about defense firm performance. A different set of metrics is necessary.
A Careful Look at Data
What data points can we examine to answer the hard questions about which defense firms deliver more favorable outcomes? As indicated above, this requires a fairly significant paradigm shift away from the traditional means of managing litigation to the utilization of more complex analytics and predictive modeling. To get there, organizations need to consider what data is readily available and from there develop specific metrics that correlate with performance.
One of the primary metrics emerging within the litigation management discussion is that of duration, or the length of time a case remains in suit from the moment it is referred to defense counsel until the time the case is settled and closed. Studies routinely demonstrate that time equals money as it relates to legal fees. Duration alone is not a reliable predictor of actual case outcomes, so it is important to look at legal fees separate from the actual case outcomes. The longer a case remains unresolved does not necessarily mean the outcome will be more expensive. Billing practices also need to be considered as some firms may bill monthly while others may bill quarterly. This may protract how long a claim remains open after the settlement has been paid out, as most claim administrators will wait to close a file until the final legal invoices are paid.
What makes litigation management data analysis complex, among other things, is the fact that every case is different. Although there may be similarities in the type of loss or cause of loss, one must consider the multiple differences in fact patterns, jurisdictions, and even the defense attorneys utilized. It is important to be wary of utilizing averages when making comparisons among defense firms, as results will likely skew in a misleading direction. With some thoughtful analysis focusing on severity and other unique claim characteristics, files can be grouped into synonymous buckets, and meaningful performance analysis on duration and associated costs can be achieved.
According to Mr. Combes, another important metric is the relationship between the outcomes a defense firm produces and the legal fees charged. He suggests a simplistic means of explanation is to consider the sum of all legal fees charged over the outcomes produced by a firm. This results in a ratio, which when considered within the context of a broader analysis can be descriptive of performance. However, it is only a single data point. Mr. Combes warns that when conducting this type of analysis, relying on any single metric or key performance indicator (KPI) can be misleading and should be considered within the broader context of all relevant KPIs.
Of course, with data analysis eventually comes the ability to benchmark performance to make comparisons among a number of firms' performance, not only on the cost to defend or pursue litigation but also on the net results—the outcome of the litigation itself.
Impact of Analysis
A few interesting facts have emerged from studies using the approach outlined above. First, there has been no positive correlation drawn between the size of the firm and outcomes as measured by the number of attorneys within a practice. Second, legal fees are growing substantially as a percentage of overall spending. This may be due to the growing complexity of litigation in the United States and is usually evident in the wake of reform; we have seen substantial increases in legal spending as a percentage of overall costs immediately following reform. Lastly, there are often wildly disparate performance results among firms even when adjusting for differences in injury type, severity, claimant/plaintiff age, and other metrics. For example, Aon Lambda Litigation management studies completed a study of California workers compensation programs from 2011 to 2017 and found performance gaps of about $6,000 per litigated claim among firms performing in the upper quartile compared to firms performing in the lowest quartile.
"As litigation costs continue to rise throughout the United States, and as severity trends continue, specialized litigation-focused analytics and predictive modeling will become more instrumental in assisting thoughtful organizations to achieve more favorable outcomes through more sophisticated litigation management techniques," notes Mr. Combes.
In litigation management, as in all areas of workers compensation cost containment, collecting and using data effectively is one of the keys to driving efficiency. The ability to articulate the performance gaps, while avoiding misleading data traps, can help position organizations for substantial savings, often measured in millions of dollars per year.
The author would like to acknowledge and thank coauthor Kevin Combes for his contributions to this commentary.
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