Several years ago, I was engaged by an insurance carrier to defend many of its insureds in some repetitive litigation across the nation. At one point, the VP of Claims to whom I reported and I were asked to brief the carrier’s VP of subrogation on the litigation. The subrogation unit was exploring whether any recovery actions could be brought against those arguably responsible for the losses and costs. (In most insurance companies, pursuing third party claims is the responsibility of a separate subrogation unit).
We were sitting in the palatial waiting area of the subro VP’s office when I spied a picture on the wall of a well-known outside subrogation lawyer. This lawyer was well known for obtaining several significant recoveries of the carrier. I jokingly asked my guy why my picture was not on his waiting room wall. He said, “Steve. The guy whose picture is on the wall makes us money. You just cost us money.”
I thought about that when I saw a recent study by Buford Capitol on the appetite for in-house counsel to pursue recovery actions. (Burford claims that it is the world’s largest and most experienced provider of commercial legal finance.). Trudy Knockless of law.com recently reported on the Study. According to Burford, the Study was done online, and some 300 US and UK GCs responded.
The key findings:
- Only half of the in-house lawyers say they pursue affirmative recoveries when they have claims.
- While in-house lawyers recognize the benefits of aggressively pursuing recoveries, most say they don’t have the infrastructure and process–they know how–to do so.
- And more than 40% say they rely on their outside counsel to educate them about potential recoveries and how to pursue them.
Burford is a litigation funding firm and hence has a vested interest in the findings. But the results of the Study are consistent with my experience. In-house counsel, by and large, either don’t have the appetite to pursue claims or don’t know how to do it. The question is, with the possible amount of potential recovery out there, why aren’t businesses other than insurance companies actively pursuing claims?
The answer is multifold. First, as the Study makes clear, in-house counsel often look to their regular outside counsel to advise them concerning recovery actions. Yet the firms on which many businesses rely for advice are not really equipped or structured to act as plaintiffs’ lawyers and pursue claims. Most of these firms are large corporate oriented defense firms whose business model is the billable hour. The backbone of recovery action handling is typically based on contingency fees.
Most defense firms are pretty risk adverse and not often eager to work on a contingency basis.
The contingency fee model requires that the law firm bear some of the risks of non-recovery and, of course, garner the benefit is successful. Most defense firms are pretty risk adverse and not often eager to work on a contingency basis.
Contingency fee work puts a premium on efficiency. In most business law firms, there is just no recognized way to reward efficiency or the kind of entrepreneurship needed to pursue recoveries on a contingency fee basis. For example, associate advancement is generally based to a greater or lesser extent on the number of hours billed. And partner compensation usually has a billable hour component. But how do you evaluate an associate or partner who works on a contingency basis? To whom fewer hours worked translates to greater, not less, profit. In a word, it’s countercultural.
Defense firms are hard wired to work and bill hours. They are not used to nor do they have much incentive to work less so that the overall recovery to the client can be greater. So if a firm tries to take on a recovery case on a billable hour basis, the cost could quickly overrun the recovery.
It takes a different mindset to prosecute recovery actions successfully
In-house counsel often come from a defense, corporate law firm background, and mindset. Hence they have little experience evaluating recovery actions, their value, and how to pursue them on a profitable basis. It requires an element of risk to go after recoveries; in-house counsel often want to avoid dealing with or justifying this kind of risk to their superiors. Plus, they often have to control costs and justify their spend. They understand and can evaluate hours spent on a matter. Understanding the risk and managing recovery actions is just not something they know how to do effectively.
Add to this that it takes a different mindset to prosecute recovery actions successfully. Plaintiffs’ lawyers look at cases and strategize them differently than defense lawyers. For example, plaintiffs’ lawyers understand that getting a trial date as soon as possible is a fundamental strategic building block. It provides an ending point toward getting the money for the claim. Defense lawyers, by and large, want to push trial dates back as long as they practically can. Their clients typically hold the money, so the longer they can hold onto it, the better. Plaintiffs’ law firms better understand business risks, recoveries, and the contingency fee mode.
As a general matter, corporate America doesn’t trust plaintiffs’ lawyers. Most Plaintiffs’ law firms are considered a thorn in the side of corporations
So in-house counsel seeking recoveries would be well served to retain plaintiffs’ lawyers for the job. But that’s a bit of a tough sell. As a general matter, corporate America doesn’t trust plaintiffs’ lawyers. Most Plaintiffs’ law firms are considered a thorn in the side of corporations. And there aren’t that many business oriented plaintiffs’ law firms around that could gain in-house counsels’ confidence. And it takes an element of trust to get in bed with them and allow them to be the company’s lawyers.
There is a reason that insurance carriers place the responsibility for recovery on a separate unit and hire outside lawyers with significant subrogation (recovery) experience. Those with experience dealing with recovery issues and a different mindset than those handling and defending claims.
So put all that together, and you get at least half of corporations not actively pursuing recoveries and leaving money on the table. (It’s unclear how many of the respondents, if any, in the Burford Study work for insurance companies. Insurance companies understand recovery and subrogation and consider them valuable assets).
Perhaps businesses should look more closely at the insurance model. Perhaps with the help of litigation funders like Burford, there will be an enhanced understanding of the plaintiffs’ practice. And the value of an aggressive recovery strategy.