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.”

THE HAMMER CLAUSE AND THE RIGHT TO CONSENT

(Are You The Hammer Or The Nail?)

Negotiating an insurance contract can be done fast, cheap, or right.  Even if you have the proper coverage, your premiums will skyrocket if the insurer simply decides to settle cases despite your desire to contest the case.  Even a slam-dunk defense verdict can be settled – unless you (through your agent) negotiate the requirement that you consent to any settlement.

The “right to consent” by an insured is almost never included in a general policy, and must be added by endorsement after negotiation.  It is easier to obtain such a clause in an SIR than a deductible; and is easier still with a higher SIR.  But regardless of whether you have a deductible, low SIR or high SIR, a right to consent may be negotiated.  If it is not requested, it will not be included in your policy.

What Is a Right to Consent

A right to consent clause is, simply, a provision that states that the insured has the right to consent (or not) to a proposed settlement.  Not surprisingly, the most common use of consent clauses is in legal and medical professional liability policies.  Lawyers (and doctors) do not want insurers to settle a case without their consent.  And lawyers make sure that they have the right to consent before an insurer settles a malpractice case.  It is, after all, their reputation at stake.

For the manufacturer, or even in the service industry, the same factors are at play.  The insurer assigns an over-worked, under-qualified adjuster who does not know your product or business who, absent a consent clause, views your claim as an obstacle that can be overcome by settlement.  But, like the lawyer, it is your reputation, and your product’s reputation at stake.

The Hammer Clause

If the insurer agrees to provide a consent clause, it will almost never come without consequences.  The insurer views the right to settle as its right to get out of a case at a fixed cost (the amount of settlement).

If you were to consent, then the insurer’s cost would be fixed, there would be no additional defense costs, and the file would be closed.  If you are unreasonable in your refusal to consent, the result can be tens of thousands of dollars in additional defense costs – and a verdict even worse than the settlement offered.

The insurer will try to protect itself from these results with a Hammer Clause.  A Hammer clause, in essence, caps the insurer’s liability on a case to the amount offered.  However, not all hammers are created equal.

The Sledge Hammer

When the insurer agrees to provide you with the right to consent, it will also provide the proposed language, including the hammer clause.  The hammer clause it will first propose is what RRS calls the “sledge” hammer.  It is so big, so heavy, that it effectively destroys the right to consent.

The Sledge Hammer clause provides that, from the moment the insurer would have settled the case (but for the lack of consent), the insurer’s liability for indemnity payments is capped at the settlement amount, and the insured becomes responsible for all future defense and related costs.  If the case was within the SIR, no additional defense costs are applied against the SIR.

The effect of the Sledge Hammer can be seen in a simple illustration:  Assume that the SIR is exhausted.  The insurer wants to settle the case for $1,000,000.  The client believes that it will win the case, and therefore refuses to consent. The defendant spends an additional $30,000 to get the case through trial and, as expected, gets a defense verdict.

Using the Sledge Hammer, the insurer will NOT pay the $30,000 trial cost.

The insurer will pay no costs whatsoever.  Instead, the client has to pay the additional $30,000, and the insurer gets the entire benefit of the defense verdict.

Indeed, in our example, the insured basically takes on the cost of defense, AND the risk of an excess verdict, even though the SIR has been satisfied.

A Sledge Hammer clause essentially makes illusory the right to not consent.  There is no direct benefit to the right, because savings in future premiums may even be offset by the defense costs.

You can instead negotiate a fair hammer clause.  The fair hammer clause caps the insurer’s total liability to the amount of the settlement it could have settled for, but the insurer continues to pay defense costs up to the capped settlement amount.  After all, had you settled the case, the insurer would have had to pay the entire settlement amount, but would have saved the defense costs of getting to verdict.

The Fair Hammer Clause

Essentially, a fair hammer clause provides that the insurer’s obligations are capped at the settlement amount. A couple of examples will help.

Using the previous example, the insurer could settle for $1,000,000.  You refuse to consent.  The insurer’s total liability is capped at $1,000,000.

It costs $30,000 to get the case to trial.  The insurer continues to pay defense costs. The effective cap on the insurer has been reduced by ongoing defense costs.  As long as the verdict is less than $970,000, the insurer is on the hook for the entire amount.

Thus, with a defense verdict, the insurer pays all defense costs, but reaps the benefit (with you) of the defense verdict.

Similarly, if the verdict is adverse, but less than (in our example) $970,000, the insurer pays the entire verdict.

Further, at any point, you have the right to negotiate a settlement at no cost to you, provided that it is for less than the previously offered amount (plus ongoing defense costs).

So, if you settle the case for $950,000, and defense costs are less than $50,000 (in our example), you pay no additional money.

The hammer, remains significant:  if you lose the case, and the verdict plus ongoing defense costs exceed the offered settlement amount, you are on the hook for the excess.  This is because the insurer has capped its liability at the amount it could have settled the case for.

The Take Away

To protect your risk, the mere right to refuse to settle provides substantial motivation on the insurer to work with you on a unified plan.  But the insurer will know what a good consent (and hammer) clause consists of, and the ones that really give you no rights at all.

It is up to you and your agent to make sure that the consent clause (and hammer clause) is effectively negotiated to protect your interests.

One final benefit – the insurer, knowing you have a hammer clause, is much more likely to work with you and not work to try to settle a case without your consent.  If it tries to work a settlement unacceptable to you, it cannot use your lawyer (this would create a conflict of interest for the lawyer, who is appointed to represent you).  It is also much more difficult for the insurer to try to negotiate when it does not have the authority to close the deal.  Thus, you have far more control over the litigation and the settlement than you would without the hammer clause.

THE CPSC INFORMATION DATABASE GOES ONLINE NEXT MONTH!

For the past year RRS has been telling clients that the CPSC database is coming and that time is fast approaching.  Notwithstanding several delays the time has finally arrived. It is now scheduled to go active online March 11, 2011 and with it comes a new tool for plaintiffs and their attorneys to use against manufacturers, importers, and private labelers (“Manufacturers”).  The searchable consumer product safety complaints database is the result of the Consumer Safety Protection Improvement Act (CPSIA) which Congress passed in 2008 in response to issues primarily related to imported products especially children’s toys that contained unsafe levels of lead.  As usual in their zeal to address one high profile problem the legislators cast a wide net.

One aspect of the CPSIA of 2008 directs the CPSC to provide a way for consumer complaints regarding products subject to CPSC jurisdiction to be available in a searchable public database. The database will be searchable by manufacturer and product name.  It is designed to be very user friendly. Reports of harm may be submitted by users of products and their attorneys, consumer groups and those who merely observe others using products.  In other words, anyone, particularly anyone with an agenda can submit a report. This database is a veritable gold mine for some and minefield for many.

The database will contain “reports of harm” which can include any injury, illness or death or even simply the risk of injury, illness or death relating to the use of a consumer product. Reports of harm must include the following information: description of the consumer product; identity of the Manufacturer; description of the harm; incident date; category of the submitter (includes: consumers, governmental agencies, healthcare professionals, child care service providers and public safety entities); contact information verification and consent. There is no requirement that the CPSC verify these reports in any way.  However, the CPSC is required to transmit the report to manufacturers within 5 business days of receiving it.  The burden is exclusively on manufacturers to correct false and misleading reports.

Recognizing that some complaints are not well founded, the rules afford an opportunity for the manufacturer to respond. For the CPSC to consider the response before the complaint is made public, the rules require that the Commission receive a manufacturer’s input within 10 days of the CPSC sending the notification. Otherwise, the complaint becomes public regardless of its veracity.

Recognizing that the decked is stacked and the CPSC is holding all the aces it is imperative that Manufacturers register on the CPSC’s Business Portal.  Doing so will allow Manufacturers to receive electronic notification of any complaint.  Manufacturers that do not sign up will receive notice by mail, however, for a response to be considered it still must be received subject to the ten day rule.  Registration is online and allows companies to designate primary and secondary contacts, and affords Manufacturers to opportunity to respond in the timeliest manner.  Registration can be done at http://www.saferproducts.gov.

Even if a consumer’s report of harm is materially inaccurate, and a manufacturer submits a comment in a timely manner, the CPSC will still publish a report if no determination has been made before the ten day deadline.  The Commission defines material inaccurate information to mean that is must be false or misleading and be substantial and important as to affect a reasonable consumer’s decision making about the product.

This applies to both consumer reports and to manufacturer’s comments.

Given the rules of this game, time is clearly of the essence.  However, Manufacturers comments will be published with the consumer product safety complaint as long as the correct procedures are followed.  The CPSC procedures requires that the comment must: 1) relate to specific information within the report; 2) state the unique identifier provided by the CPSC; 3) verify that the report and comments were reviewed by the manufacturer and are true and accurate; and 4) the manufacturer must affirmatively request publication of the comment.

Consistent with past Commission practice Manufacturers may request that portions of a report be designated confidential.  Once again the burden is on the manufacturer who must follow specific procedures in order to gain confidentiality.  The manufacturer must 1) specify which portions should be confidential and demonstrate harm if released; 2) submit the request prior to the 10 day deadline and 3) agree to assist the Commission in the defense of any judicial proceeding that thereafter might be brought to compel the disclosure of said information.

Needless to say this system will be onerous to many manufacturers and the potential for it to be abused will be great.  RRS can help you meet the challenge of responding to CPSC reports in a timely and effective manner.  We offer CPSC consulting and other services that include registration, assistance in monitoring for complaints, follow-up and response, as appropriate. Please contact Paul Junius if you are interested in taking a proactive approach to managing this source of government sponsored public exposure.