REACTING TO LITIGATION – AN OPPORTUNITY

The Sheriff arrives at your door, bringing greetings from the courthouse far away.  You glance at the documents with a sinking feeling.  You are being sued.  This is never a good sign.  The best possible result will be to spend a lot of money to prove your innocence.

There is a natural tendancy to simply put the documents on your desk.  You can read them later.  The lawsuit is not going anywhere.

Then you realize you have 45 days to respond.  You let the document sit for a few more days.  Before long, you have waited a month, and finally, you send the documents to Risk Retention Services.

You have just made a cardinal error.  While you will not be held in contempt, and will not waive any defenses, you have lost the opportunity to move the action to the United States federal court.

The United States district courts are found all over the United States, and cover large geographic areas.  They have jurisdiction over U.S. federal laws, federal crimes and civil lawsuits.

If none of the defendants are from the “local court” and the plaintiff resides in that state, you may be able to move the lawsuit from state to federal court.

The requirements are that the parties be from different states, and the amount in controversy exceeds $75,000.  It is a rare case where the plaintiff’s attorney is not seeking over $75,000, so the question will come down to diversity of citizenship.

There are several advantages to removal.  First, plaintiff lawyers often “forum shop” to find the best local court likely to bring in a plaintiff’s verdict.  Perhaps this will be a state court located in a city center with a large union population.  Perhaps this will be the local state court, where the judge is the next-door neighbor of the plaintiff or his lawyer.  Either way, the plaintiff is going to seek the best possible courthouse for his lawsuit.

In general, federal courts provide an even playing field.  It covers a very large geographic area, eliminating the prejudices of an urban population.  Its judges are appointed for life, and they can therefore grant motions to dismiss without fear of reprisal from the trial lawyers (plaintiff) who fund their campaign or their reappointment.  Federal courts have attorney law-clerks, who actually read the motions and perform legal research (which is impossible in the chronically understaffed state court systems).

The federal courts often view scheduling orders as orders – not suggestions – so cases move forward more quickly (which substantially reduces litigation costs).

The federal courts employ an expert standard which requires that an expert be qualified, and use the scientific method before being allowed to testimony – and often actually enforce this rule.  State courts are much more likely to let everything in and let the jury decide what is (or is not) junk science).

Thus, there is a natural knee-jerk reaction to remove.  But the decision cannot be that easy.

Perhaps the accident occurred in a very conservative county.  Perhaps investigation has shown that a motion to dismiss is unlikely.  In this case, the potential jury will be better in state court than in the broader federal court (which will include liberal counties).  It may make more sense to leave the case in state court.

Or, perhaps you are in California, where the federal judiciary and Ninth Circuit Court of Appeals are notoriously liberal.

The important thing to take away is that a reasoned decision on where you will fight your lawsuit can have a significant impact on the cost of the defense, as well as the potential result.

However, if you do not remove to federal court within 30 days, you waive your right to remove.  If you file on the 31^st day, the court cannot accept jurisdiction.

There may be exceptions to this rule.  For example, where the plaintiff has filed against a local defendant as well as an out of state defendant.  In that case, you cannot remove (no complete diversity).  Yet, if the local defendant either settles or is dismissed, complete diversity now exists.  You will have 30 days from the date of the dismissal to remove, provided that the removal takes place within one year of the filing of the initial complaint.

The point, however, is that while there are complicated exceptions and rules, you should never sit on a complaint.  When the sheriff shows up, or if you get a complaint in the mail, immediately turn it over to  Retention Services so that counsel can be obtained.  An immediate review of the propriety of removing to federal court will be undertaken.

COURT MEDIATION  RULES CHANGING

Courts nationwide have long recognized that most civil lawsuits do not result in a trial.  Indeed, over 97 percent of all lawsuits filed last year resulted in a settlement or resolution short of trial.  Still, many parties insist that they want to try the case.  Judges seem to know better.

Virtually all federal courts as well as state courts require mediation before assigning a trial date.  After all, there is no sense in filling up a calendar with trials if the case is going to settle anyway.

Unfortunately, many parties simply sent pro-forma representatives, without real authority to settle, because a strategic decision had been made to not resolve the matter at all.

Many courts, exemplified by the Florida state court system, now have changed their rules.  They require that the party, and the attorney, file a certification naming the person who will attend the mediation on their behalf, and certifying that the person who will attend, in person, is authorized to enter a binding settlement agreement.  No more “let me call my boss” for these courts.

Of course, the courts miss the point entirely, and on many grounds.  Firstly, mediation is an effective process if the amount of settlement is the open question.  If the question is “how much” should we pay, a mediator can often bring the parties together.  But if there is no liability, and the question is whether to pay, the mediator, and the mediation process, is simply not an effective method of resolving disputes.

Secondly, no matter who a company sends for mediation, there are many people that are relied on in making an effective decision.  There is no question that an officer or director has authority to bind the company.  However, the chief financial officer (how much cash do we have?) the litigation manager (how does the evidence look) and the board of directors (will I be supported) will all impact the decision maker.  Whether you send the officer or director, an employee, or your litigation manager, and appoint him with binding authority, it is the rare individual who will make a settlement decision (particularly for meaningful dollars) without input from his management team and chain of command (up and down).  Just because you have authority does not mean you throw your resources out the window and make decisions.

At Risk Retention Insurance Services, we have long held the belief that the party should be entitled to opt-out of mediation, as they are (for us) almost always an unnecessary expense with no real prospect of settlement.  Rarely, at mediation, does the plaintiff accept a $500 offer (but it does happen on the morning of trial).  But if you are not going to make a substantial offer, why waste everybody’s time.  The attitude that “just because someone sues you means that you should offer a lot of money” makes a mockery of a  justice system which is to apply … justice.

CATASTROPHIC EVENTS CAN BE MANAGED

A catastrophic event is one such area.  For our purposes, a catastrophic event is an event that may result in numerous injuries or illnesses from a single cause.  For example, in the food service business  this could be an outbreak of  salmonella originating at your place of business.  In the manufacturing arena, there may be a defective batch of products, all in the market, and without a means of tracking the products for a recall.

In any of these cases, the most effective way of minimizing damages is to get out in front of the curve, and locate as many potential claimants as possible. Paying medical expenses (often there is no liability defense for a catastrophic event), is one way to satisfy many of the claimants, and may help minimize the potential for a large verdict against you down the road.

First, by aggressively locating and arranging to pay medical expenses, you are showing the victims that you care, are contrite, and are trying to make things right.  People who are hurt and angry are often called … plaintiffs.  Whereas, people who are hurt, but not angry, are called … return customers.   Certainly some of these people may still sue, but it will be limited to the money-grubbers.

Second, by taking care of the claimants at the outset, you show the juries in the money-grubbing case that you are good caring folks that tried to do the right thing.  That way, they will see the plaintiff for the money-grubbing pigs they are, as opposed to the poor innocent victims.  (Apologies to the pigs, who are no doubt offended by the analogy of the money grubbing plaintiff to intelligent swine).

Third, by locating as many victims as possible, as quickly as possible, you minimize the “false” claims.  Train & bus operators in Chicago are instructed their first duty is to lock the doors in the event of an accident.  This prevents people that had no involvement in the incident from making a claim.   Similarly, when you identify as many actual victims as possible at the outset, the fake claimants are easier to weed out.

In this regard, it is very important that as you locate the victims, you withhold certain key information. Claimants who were actually present will know the information and those that are trying to jump on the bandwagon will not.  Meritless claims, of course, should be denied and well- documented.

We had an occasion to work on a chemical spill at a water park.  There were dozens of people exposed, a number of whom went by ambulance to a local hospital.  The medical expenses were immediately paid, and certain key information was withheld in fielding calls.  The owner of the water park personally went to the hospital to express his concern, and ensured that the ambulance bills were sent directly to his attention for payment.  The victims were told where to send their medical bills for reimbursement.

Fortunately, none of the injured needed any more than emergency care (due, in large part to the swift, effective handling at the scene).  Some were very upset at the time, but quickly calmed down.  To date, not a single such victim has retained a lawyer or filed suit, and a number of “fake claims” were rooted out and denied.

Finally, for many businesses, “catastrophic event” coverage can be obtained for a very small additional charge.  This insurance pays for the medical expenses of the victims of a catastrophic event – and it does not count as a claim for liability purposes.  Thus, while an insurer pays for the catastrophic medical payments, without a specific claimant pursuing a claim for additional damages, there are no claims reported or reportable to the insurer for liability purposes.  This can be very important at renewal time.

Talk to your agent/broker about the availability of catastrophic event insurance, and talk to Risk Retention Services about developing a plan for a catastrophic event.  By being prepared for the event, your risk drops precipitously.

ELECTRONIC DISCOVERY HAS ARRIVED

In today’s world, fewer documents are being retained on paper, and more documents are being stored on computer network drives, personal computers, and even “Smart Phones.”

In the good old days, when men were men and women wore skirts, plaintiffs sought documents from corporations and, if they did not exist on paper that was the end of the inquiry.  After all, if the documents do not exist, they do not exist.  Then entered the computer, where nothing is ever, really deleted.  Even if you think you have thrown a document away, it is still may be hidden somewhere on the computer, and can be retrieved by an ingenious hacker or a nosy plaintiff’s attorney.

Our sister company, Risk Retention Services has handled hundreds of lawsuits over the years, and in the past year have noticed more requests for electronic discovery than in the previous twenty years combined.

The risk of having your computer files searched increases with the absence of paper documents that a plaintiff’s attorney believes “must” exist.  Surely, they think, you “must” have all of the incident reports for every incident over the past 20 years.  You “must” have design documents for a product that was put into service 20 years ago.  You “must” have documents showing “why” changes to policies or procedures were put into effect.

Under any of these circumstances, plaintiffs can (and do) seek authorization from courts to get into your computer.   This causes a myriad of privacy and other problems. Not surprisingly, the courts have developed rules to address this new form of e-discovery.

First, the court needs to approve a word search that can be performed to identify those files that “might” be relevant.  Of course, the same word for a product, event, or circumstance, could also bring up documents relating to accounting, billing, pricing, and other irrelevant or in some situations sensitive and private materials.

This requires an expert in language, as well as computers, to design the inquiry to generate the documents that are relevant, while protecting confidential information and weeding out irrelevant materials.  The cost for this sort of inquiry, including the review of hundreds, thousands, tens of thousands or even more documents, can exceed the total attorney fees for the entire case.

This becomes particularly troublesome for the defendant who has produced literally all documents requested, and simply is not believed.

Courts have tremendous discretion in ordering who pays for such a computer inquiry.  A growing nationwide trend is for courts to order the defendant company to pay for all costs and fees if the inquiry results in the production of documents and files that the defendant stated did not exist.  On the other hand, most such courts have ordered that the plaintiff pay for the entire inquiry if no such documents are found.

These inquiries, of course, are in addition to requests for electronic files that are complied with.  For example, instead of producing a paper incident report, it is appropriate to produce the electronic version of the report.  But, how is anyone to know if you really produced everything? Establishing credibility with the court early in a case is critical to keeping the situation under control.

The overall discovery rules are unchanged.  You must either produce or object to documents requested in discovery.  You cannot hide electronic or paper documents pretending they do not exist to avoid the effort of looking for the document.

If everything has been turned over, the plaintiff and his computer guru will not find anything new.  Realize that if the computer guru finds documents that you were intending to hide, they will not only get the documents, but you will likely pay for their efforts.

UPDATE FROM THE CRYPT

We talked in the last newsletter about how much more expensive, and less effective, a case can be prepared when proper controls are absent.

Since then we had two cases arise which illustrate the point perfectly. Both are in rural communities in the northwest and both involve similar products liability claims. One is a claim controlled by RRS and the other by an attorney the insurer hired. Damages are similar, theories of liability are similar and the numbers and types of witnesses are similar.

The RRS attorney has estimated that the case can be tried for a budget of $35,000. The insurer appointed attorney needs a $160,000 budget. Additionally, the RRS attorney has successfully tried several cases involving similar products and the other has not.  And so it continues.

TALES FROM THE CRYPT

(Why Failure To Control Your Claims Will Kill Even The Un-Dead)

We have previously written about how an SIR and a hammer clause can help you maintain control over your claims.  The first step toward an effective risk program is to minimize the risk in the first instance.  That is, building a quality, safe product, employing best practices, and employing good customer service practices all lead to lower claims frequency.  Notwithstanding, unless you decide to go out of business entirely, you cannot totally avoid claims.  Indeed, in some respects, claims are a reflection of a successful business.  The more you sell, the more chances you have of getting a claim.

In the renewal process a deductible policy often appears less expensive. After all with aggressive file maintenance, you should still expect to get good representation.

The reality is that unless you retain the legal right to control a claim, you lose the ability to select counsel, and the attorneys then believe they are beholden to the insurers, and not their client.  No matter how aggressively we work on your behalf, trying to ensure that the attorneys are representing your interests, horror stories abound.

Paying the Lawyer and the Settlement

By selecting counsel, and controlling litigation, you get to select an experienced trial attorney who is working toward the trial and a successful verdict.  RRS selected attorneys generally get a case to trial (in a products liability case) for approximately $50,000.  This benchmark is a guidepost, but has been successfully achieved over the past couple of years in virtually every case, including, CA, the site of our first horror story.

A manufacturer of a certain product was sued in Los Angeles.  Damages were, dripping wet, approximately $350,000.  Liability was quite weak.  There was a substantial likelihood that a defense verdict could be obtained. Unfortunately, the law firm in that case was a relatively large firm, and utilized inexperienced associates for much of the work (which was then re-done by the partner).

The insurer tried to control costs.  Indeed, the lead attorney told an RRS litigation manager that he could not “believe that the insurance adjuster was questioning his bill, nobody has questioned his bill in 10 years.”

The RRS manager asked whether there was any basis for questioning the bill, to which the attorney replied

“well, of course.  Everyone knows you can’t make money at $200 per hour, so we double the time on the bill, but everyone knows this goes on.  The adjuster has no business questioning my bills!”

One month before trial, the attorney submitted another bill and a budget to get the case through verdict.  He had now billed $200,000, and his budget asserted that it would cost another $250,000 to get the case through trial.  The case settled for $250,000.

You cannot blame an insurer for cutting its losses.  Their attorney was saying that it would cost the same amount going forward — $250,000 – whether the case settled, or the case was tried (to a defense verdict).  But, by settling, the insurer eliminated the risk of an adverse verdict.
Of course, the attorney had already billed and been paid $200,000, so the attorney successfully got paid without the stress of a trial.

Had the appropriate attorney been hired and controlled, the question would have been whether to try the case for $10-$20,000, or settle for $250,000.  The math works very differently with a properly managed file – and you can only manage what you control.

Where the attorney and his firm are hired by the insurer, you cannot control rates, billing practices, or competence.  But, in the end, you do pay the bill.

Paying the Incompetent Lawyer

A lawyer is nothing without competence and credibility.  This is why it is so important that the attorney retained be local (so the judge knows the attorney) and that the attorney retained has trial experience.  This way when an issue comes up he does not learn, for the first time, the basic law much less the nuances.

We always insist that attorneys only assert defenses that can be supported by the evidence or the law.  This way, the attorney will always have “truth and justice” on their side.  Also, the attorney can say that if they do not see the evidence, they do not assert a fact as being true.

But part of this comes with experience – knowing the defenses that are actually applicable to a case.

Thus, it was ever-so-frustrating recently when a well known partner, with trial experience, was retained to handle a subrogated products liability case in a small-SIR case.

A workers comp carrier was suing a retailer and the manufacturer whose product was involved in their insured’s accident.  Because the potential damages were high, the insurer took control of the case immediately. The attorney they hired, being very busy, had an associate with six years of experience handling the case.  No further word was heard from the partner for 8 months.

Shortly thereafter, the associate left the firm and it was announced that another associate had been assigned to take over the case.  This associate had been licensed just two years ago, had no practical experience at all, no experience with the product, and evidently no experience in the law.  The partner was apparently too busy to handle the case.

The associate filed an answer asserting twenty-nine defenses to an indemnity complaint.  The retailer was not covered by the vendor’s endorsement, and in California, the vendor (retailer) is entitled to recover all attorney fees and damages if the manufacturer is found liable but retailer is not.

The attorney asserted as defenses that there was a release (there was none); asserted that the retailer had waived any right to indemnity; asserted that indemnity should be barred because of an act of god (not kidding).  The attorney also asserted that the retailer assumed the risk.

When the client (RRS) complained, repeatedly, that this attorney was not qualified, and was asserting frivolous defenses, the client was told by another law firm hired by the insurer that the insurer had the right to select counsel, and the client had no say in the matter.

Of course, the client is the one who has to explain what evidence exists to support the defenses asserted by the attorney, and the incompetent attorney is the one who loses credibility.  But if the attorney loses credibility – it is the client who really loses.

Sometimes Truth Prevails

Some insurance companies actually charge more for an SIR than they do for deductibles.  They figure that if you mess up a case, they are the ones who pay for it above the retention amount.  Add the difference in premium and the fees charged by a third party administrator, and it can sometimes seem that a self-insured retention is not cost effective.

But the assumptions are only valid if insurers actually properly control the claims, and if you did not have to pay for insurer mistakes through increased premiums.

We were recently involved in a case in Utah, where the plaintiff filed suit.  The attorney for plaintiff discovered that the defendant had a relatively large SIR, and that Risk Retention Services was handling the litigation for the manufacturer.  The attorney then went to the Risk Retention Services website.  Before depositions commenced, the attorney called the manufacturer and asked to dismiss the case – on the merits.  When asked why, our attorney was told that “We were looking at the numbers, and realized that while we think we have a strong case, you are going to make us fight every step of the way, and pay experts, and even then will not be offering us money.  It is simply not worth the time and effort to chase a losing case.  We looked up the manufacturer, and their risk managers, and this is not a fight worth having.”