How Flat Fee Billing Savings on Legal Fees Can Evaporate When Other Factors Are Considered

“When fully paid beforehand, you are more than a common mortal if you can feel the same interest in the case, as if something was still in prospect for you, as well as for your client. And when you lack interest in the case the job will very likely lack skill and diligence in the performance.” A. Lincoln

In looking back at prior posts for the past couple of years, I see that I made some promises to follow-up on some posts with some additional information or insight. So a part of my New Year’s resolutions for 2016 will be to make good on these promises. And to get a start on this resolution, I will follow-up a prior post on Alternative Fee Agreements (AFA) entitled “Alternative Fee Agreement Savings: Real or Illusory?”

In my prior post on AFA, I wrote that the articles on the successes of AFA tend to state success in a conclusory fashion and offer few, if any, details on how that success is measured. As I noted, I am left to wonder if the insurer or corporation using the AFA “actually reduced legal costs by some degree, are they still paying too much for legal expenses? (If not, how do they know this?)” Also with regard to insurers with flat fee agreements for litigated files, I wanted to know “how did the flat fee agreements affect cycle times or indemnity results?”

I had promised to follow-up with a post about a study I did for an insurer that measured the results between a firm with a flat fee agreement and a firm that billed on an hourly basis. The parameters of the flat fee agreement were that the agreement called for the firm to receive a flat fee of x dollars per file. The flat fee amount was set at 10% less than the amount per case that the company had been paying on average to hourly fee firms.

Importantly, for comparison purposes, both firms received a similar number of new files a month (ranging from 20 to 50 files per month). Also both the flat fee firm and the hourly fee firm were in the same geographical area and both firms received like cases, many in the same counties. Thus, this was about as an apples to apples comparison as you could hope to get.

So while the company on the surface did save about 10% in legal costs on a per file basis, the study indicated that both cycle times and indemnity costs increased with  the flat fee billing firm. To take the issue of cycle times first, as shown in following chart  Flat Fee v. Hourly Billing Cycle Times, cycle times increased during the later years of the flat fee agreement for the flat fee firm while cycle times remained relatively constant for the hourly billing firm.

But why did this increase in cycle times occur? Remember that one of the chief reasons for using a flat fee agreement cited by proponents is that a flat fee eliminates the temptation by attorneys to keep files open longer so they can do more billing. But while it is true that a flat fee agreement will eliminate a reason for an attorney to keep a file open longer so he can bill more, it is also just as true that attorneys with a flat fee agreement may not have any incentive to work on a file to close it out as they are not getting paid any more to work on the file.

Consider the following illustration. Consider that you are an attorney and have both flat fee files and hourly billing files – all of equal importance and all with an equal amount of work to do. Do you first work on the flat fee files (for which you will receive no additional compensation) or do you first work on the hourly billing file (for which you will receive additional compensation)?

You would be less than human (and your partners would think you have taken leave of your senses) if you said that all things being equal, you would work on the flat fee files first and get around to working on your hourly billing files as you found the time to do so.  We can only assume that the flat fee firm in the study gave priority to other hourly billing work as there is no other plausible way to explain the widening difference in cycle times.

Whatever the reason for the increase in cycle time (remember the study is based upon examination of hundreds of files), the study also indicated an increase in indemnity payments per file for the flat fee files versus the hourly billing files. This should not be a difficult point to understand. One of the first things I learned when I got into the claims business was the adage, “a claims file does not get better with age.” Any study that I have ever done for an insurer has always indicated that the longer files pend, the more in indemnity is paid out.

Finally, there is the additional staffing costs to be factored in when the average cycle times increase. This can best be seen in the following example. Consider that you need 10 file handlers to handle 100 files each and that those files close in 12 months. Now factor in that the cycle times have increased to 14 months. To keep the same file load at 100 per file handler, you would need to add more staff.

In summary, while flat fee agreements can save money when only the legal costs per file are measured. But those legal cost savings can evaporate or be outstripped by increased indemnity payouts or increased staffing costs when cycle times for flat fee agreements increase.

I have no doubt that AFA or flat fee agreements can actually save money and work in certain types of situations (e.g., corporate transactional work) or even in a one-off litigated file situation. However, in so far as flat fee agreements working in an insurance claims litigation context for hundreds of litigated files, I must remain a flat fee agnostic – especially when factors other than legal costs are considered.

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  Unsure if your company’s flat fee or alternative fee agreements are actually saving money? Please contact me at john.conlon@theclm.org to discuss how CLM Advisors can help you get the answers you want on your flat fee or alternative fee agreements.

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