Taking Law Firms to Task that Don’t Submit Task-Based Bills

You will read more good news about the progress being made by the Uniform Task Based Management (UTBMS) Insurance Initiative on promoting the universal application of the recently articulated Litigation Code Set for strategic bill management in the John G. Kelly Report section of this issue. But what about law firms that for one reason or another don’t subscribe to task based billing and still submit legal invoices on an hourly basis? How can an insurance litigation manager accurately assess the bill from a legal expense management perspective? The solution is to require the law firm to adhere to Rule 1.5 of the ABA Professional Rules of Conduct: Fees. The pain of adhering to a strict interpretation of Rule 1.5 may be the incentive needed to demonstrate the gain of embracing UTBMS and task-code billing.

Rule 1.5

In the absence of formal regulation the American Bar Association (ABA) has enacted Model Rule 1.5 - Fees, to provide lawyers with ethical guidelines on the pricing of legal services. It reads as follows:

CLIENT-LAWYER RELATIONSHIP
RULE 1.5 FEES

(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:

1. the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
2. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
3. the fee customarily charged in the locality for similar legal services;
4. the amount involved and the results obtained;
5. the time limitations imposed by the client or by the circumstances;
6. the nature and length of the professional relationship with the client;
7. the experience, reputation, and ability of the lawyer or lawyers performing the services; and
8. whether the fee is fixed or contingent.

(b) The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.

(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.

An Hourly Based Legal Bill Must Conform to Eight Criteria  

The client is entitled to require a law firm to validate its legal bill on the basis of eight criteria. An insurance litigation manager is well within his rights to request that the law firm provide the insurer with a bill validation guide that substantiates an hourly bill structure in conformance with them. This requirement can and should be inserted in the Rules of Engagement letter sent to the law firm. If the law firm is a panel firm that receives files on an ongoing basis than it should be required to file an annual hourly bill rate fee structure report that validates its rates.

The Hourly Bill Rate Validation Report  

There is no required format for an hourly bill rate fee validation report. However, the report requirement is not met by what is often a cryptic letter issued by the law firm on an annual basis informing the insurer that its hourly rates are being increased by 5% -10%. What the insurer is entitled to do is insist that the law firm provide them with a report that responds to the following insurance litigation management issues:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

The relationship of the hourly fee to the type of insurance. How does the firm justify one hourly rate for differentiated cases?

Is it using a rounding or averaging technique to balance the charge for routine cases against complex cases?

What is the partner/associate allocation policy regarding the assignment of work to the insurer’s cases that endeavors to match the nature of the assignment with the billing rate?

How does the firm determine the rate differentials at the partner and associate level on a junior to senior scale? Is it based on a completely subjective years of practice criterion or is there a grid used that is practices/competencies based?

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

If this is a panel firm that receives an ongoing stream of work from the insurer that provides it with an assured revenue source, alleviating the need for considerable marketing and promotion, what accommodation is being made to the hourly billing structure to provide the insurer with a reduction from the normal “retail” rate charged to one-off clients?

(3) the fee customarily charged in the locality for similar legal services;

The law firm should be in a position to provide the insurer with some sort of fee survey that clearly explains what the local and regional rate structure is with specific reference points to panel firm rates for insurance defense. Glib statements that “all law firms in the locality or region are utilizing this rate” don’t meet the test associated with this step.

(4) the amount involved and the results obtained;

Every law firm must be prepared to reconcile its hourly fee with the results obtained. Local and regional rate structures are at best only projections. An insurance litigation manager is well within his or her rights in requesting a law firm to modify its normal billing rate, even below a volume discount level, where the result bears little or no relationship to the ratio of the legal expense.

Insurers should be using their e-billing systems to develop average cost to results ratios on a business line basis that are at least regionally responsive. If one law firm is consistently exceeding acceptable ratios, the insurance litigation manager is justified in requesting modifications to the overall bill.

(5) the time limitations imposed by the client or by the circumstances;

To this point insurance litigation managers have what might appear to be the advantage in calling law firms to account for their hourly billing rates. However, law firms are also entitled to call insurers to account in accordance with the demands made on them. If the insurer wants premium service or exclusive access to the law firm on demand, then the law firm is within its rights to charge them a customized rate that reflects the nature of the service.

(6) the nature and length of the professional relationship with the client;

Panel law firms who are familiar with the insurer and the nature of the cases assigned to them have no justification for reinventing the wheel every time a routine case is referred to them. Moreover, panel law firms have an implied obligation to advise core clients like insurers on ways and means that services can be structured to reduce costs. This isn’t to be confused with cost cutting. Cost reduction focuses on doing things differently and doing different things in an effort to achieve cost efficiencies while enabling the service provider to continue earning reasonable profits.

(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

Law firms are well known to use this criterion to argue for a premium rate. And there’s no question that if an insurer is involved in precedent-setting litigation, they’ll want access to a top rated lawyer who charges a premium for his services. However, for insurance defense panel firms who handle routine cases referred to them in baker’s dozen bundles, an argument can be made that if not the rate than the final bill should reflect their ability to resolve repetitive cases cost effectively.

(8) whether the fee is fixed or contingent.

This is the direction that many insurers are intent on moving in initiating convergence programs with core law firms. Insurers looking into fixed and contingent fee arrangements are well advised to read this provision carefully and appreciate that there are professional responsibilities that override normal business considerations in the establishment of fixed and contingent fee programs.

Rule 1.5 is to be Interpreted as a Composite

None of the 8 steps takes precedence over another in determining the reasonableness of an hourly billing fee of the overall bill. They are to be read and interpreted as a composite. The good news for insurance litigation managers is that the interpretation is intended to err on the side of the client. Rule 1.5 should be augmented it with a careful reading of S. 34 the American Law Institute’s Restatement of the Law Third The Law Governing lawyers. The restatement makes the point that contracts for legal services are not to be interpreted as commercial contracts but as professional services in which the lawyer by way of professional training is obligated to justify the cost of the service to the client. To quote:

1. Rule 1.5, Fees,Annotated Model Rules of Professional Conduct (Fifth Edition),
Chicago, American Bar Association Center for Professional Responsibility, (2003).