Editor: Please give our readers a brief description of CLM Advisors and your role.
Smith: I’d be happy to. I head the consulting arm of the Claims and Litigation Management (CLM) Alliance (theclm.org). The CLM is an inclusive and collaborative industry group of more than 20,000 defense professionals, all of whom are focused on promoting and furthering best practices in litigation and claims management. The CLM is composed of defense counsel, risk and litigation managers, insurance and claims professionals, and corporate counsel.
CLM’s consulting arm, CLM Advisors, helps law firms, claims organizations, legal departments, and industry service organizations be more successful. We provide general advisory services, market intelligence and benchmarking data, and talent acquisition services. More information about our group can be found at clmadvisors.org.
Editor: What are the current trends within the insurance industry pertaining to efforts to contain litigation costs? Are insurance companies adopting models or best practices from other industries?
Smith: That is a timely question. Over the past 18-24 months, we have seen a significant increase in insurance company initiatives designed to contain litigation costs. In the insurance industry, I would distinguish between what carriers are doing relative to litigation against the insurance company itself and what is being done relative to litigation against company insureds. The latter is what drives the most cost and presents the most challenges.
When it comes to litigation involving insureds, insurance carriers continue to experience per-claim litigation cost pressure, despite the fact that many have fewer litigated claims. In fact, a recent report from the Ward Group identified that, while claims litigation frequency has declined significantly over the past five years, the cost and expense ratio per litigated case has increased.
This increase in per-claims costs is often in spite of new billing arrangements and stricter review of legal invoices. I think this is why efforts to control ancillary litigation costs are emerging as the new focus. Probably the biggest trend we see is the establishment of preferred litigation support service provider programs. By this, I mean that carriers, as the ultimate payers for these services, are now taking an active role in the selection and procurement of specific litigation support providers.
In 2011 the CLM National Litigation Management Study surveyed approximately 50 property and casualty insurance carriers, asking participants more than 146 questions about their cost-containment focus. At that time, one in 10 insurance carriers had a program for records review service, one in five reported a preferred e-discovery program, one in five a records retrieval provider, and almost one in two a national court-reporting program of some type. Without doubt those numbers are on the rise and will continue to do so.
Editor: What are the particular complexities for the insurance industry in selecting litigation support vendors?
Smith: This idea of insurance carriers selecting litigation support vendors directly is a big change from the historical model of having defense firms make this selection. There are some interesting ramifications to this change.
First, this selection process can be complicated for carriers since they must, or at least should, take the needs of the end user – usually their outside law firms – into account. Since cost containment is also an end goal of this process, this can be a complex balancing act for carriers.
Second, insurance personnel must often work to become experts in the specific topic at hand, e-discovery for example, and this can be very challenging. Many procurement officers or claim executives may start a selection process knowing very little about the nuances of a particular litigation support service. As relates to e-discovery, claims executives frequently share with me a high level of frustration in understanding how different vendor approaches would impact their bottom line.
Related to the expertise issue is the fact that the litigation support vendors may have traditionally sold only to law firms. Now they must learn how to sell to a new buying audience – frequently with different industry terms, needs and objectives. That can be quite challenging for the vendors as well. However, it is also a huge opportunity for vendors to educate this new group of buyers, and those who take advantage of that opportunity will do well.
Editor: Please talk specifically about e-discovery as a major cost component. What kinds of analysis and metrics are insurance companies employing to comprehend, track and manage this aspect of litigation and its costs?
Smith: The mantra in these cost-containment programs is measurement – really the ability to measure savings or improvement. As relates to e-discovery costs, this has been very difficult. When it comes to litigation against their insureds, few insurance companies can identify precisely what their e-discovery costs are.
Two industry developments are providing some hope to insurance companies that want to get their hands around e-discovery costs. The LEDES Committee, which is superbly led by Jane Bennitt, has introduced two new UTBMS code sets that can help carriers significantly (utbms.com).
The first set is the so-called L600 codes. They were introduced in 2011, and they capture activity and tasks that relate specifically to e-discovery activities. The second set, the so-called X300 expense codes, were just ratified in February of 2013 and capture expenses related to e-discovery.
I predict that more insurance companies will roll out these code sets to their outside counsel and e-discovery providers as they turn to this area of insured litigation as a cost-containment opportunity. As carriers gain more transparency into the specific cost drivers in the e-discovery process, this in turn will make the vendors’ job easier, as they can in turn explain how their specific approaches and methodologies address those specific issues. In short, these analytics and metrics will help to mature both the buying and selling processes.