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Last month Thomas D. Harper quit the firm he founded 27 years ago rather than agree to work on a flat-fee basis for his main client, State Farm. The problem started in August, when Harper said the insurance company asked his firm, Harper Waldon & Craig, to submit a blind, fixed-fee bid to continue doing its auto claims defense work. That meant bidding a set fee per case without knowing the case details or volume. For Harper that raised big ethical issues. “It would create a conflict between the business I need to run and my representation of the client I need to serve,” he said. Harper, 59, has handled State Farm auto cases for 32 years—always on an hourly basis. Harper said State Farm’s flat-fee arrangement could give a lawyer a financial incentive to provide only cursory representation to his client, the insured—even if the scheme is tiered so that successive phases of a case are assigned a specific value. Having a sufficient pool of cases reduces conflict pressures, he said, because the money a lawyer loses on a time-consuming case is offset by more routine cases that resolve quickly. So Harper said the first question he asked the State Farm managers at the August meeting was if the insurer would commit to a set number of litigation cases. “They would not guarantee anything,” he said. “I told them I wouldn’t do it because of the inherent conflict with the insured. It would put me in a position where I’d have to cut corners in the practice of law. I wasn’t willing to do that,” said Harper. So Harper, who said State Farm auto cases made up 80 percent of his practice, chose to leave the firm. Harper said State Farm, like other insurance companies, has gradually imposed more guidelines and restrictions on how its outside counsel handle these cases over the years. “I was willing to put up with the reporting requirements and the disregard of my advice,” he said. But Harper said State Farm’s upper management is trying to “impose something where they pretend they are allowing me to have independent professional judgment and in the real world I would have to be doing a second-rate job to succeed financially.” “At some point there’s a bridge too far,” he said. State Farm’s general counsel, Jeffrey W. Jackson, deferred questions to a spokesman, Phil Supple, who confirmed in a statement that State Farm is soliciting “voluntary ‘agreed fee’ proposals” from Georgia law firms. The company is concerned about the “increasing costs of litigation,” the statement said. “We do not believe that alternative-fee arrangements impact the quality of legal representation,” said the statement. “Securing high-quality counsel to represent our policyholders is always a central goal.” The flat-fee plan is not a “one-size-fits-all proposition” and “fee structure would be based on lawsuits’ type and complexity,” the statement said. State Farm did not give specifics on the fee structure or structures it’s considering for Georgia auto cases. The statement also said that the flat-fee proposals are not for all the company’s auto defense work. “Some lawsuits based on their complexity and types of issues are best handled on an hourly rate,” it said. Benefits and risks For the insurer, a flat-fee plan has obvious benefits as a way to control legal costs. But a flat-fee plan could create an ethics conflict for outside counsel representing policyholders, depending on how it is structured, said the State Bar’s general counsel and a representative of the Defense Research Institute, a trade group for civil defense lawyers. And the insurer’s total claims costs could go up, said several current and former defense lawyers, explaining that a flat-fee plan could prompt more cases to go to trial and result in larger plaintiffs’ verdicts. Even though a flat-fee plan could mean more risk for the policyholders, said plaintiffs’ lawyers and a fee consultant, it also could cause defense lawyers to handle cases more efficiently and speed up their resolution. The risks and benefits depend on the particulars of the plan, which State Farm declined to divulge, saying it is proprietary information. A defense lawyer whose firm is also bidding to do State Farm’s auto cases on a flat-fee basis agreed with Harper that the proposed fee arrangement creates a “legitimate concern about the ethics.” The lawyer, who asked not to be identified because the lawyer’s firm handles a lot of auto cases for State Farm, added that holding down legal costs with flat fees could cause the insurer to spend more money in claim payouts. “It is not a very good measure of savings on the indemnity side,” said the lawyer, who said State Farm is expected to make a decision on the bids for the auto work next month. But Harper’s former partner, Russell D. Waldon, said that flat fees do not compromise the quality of Harper Waldon & Craig’s legal services. (The firm has kept Harper’s name on the door.) Waldon said in an e-mail that his 12-lawyer firm does work for several clients on an “agreed fee basis for specified cases,” including insurance defense work. “We do not cut corners; we do not compromise on quality; we do not compromise our duties to clients; and we do not compromise our ethics,” he said. Situational ethics The State Bar of Georgia’s general counsel, Paula J. Frederick, said “a flat-fee arrangement is not unethical in and of itself,” but it “does create a potential conflict between the person paying the bill, the client and the lawyers.” “It could be unethical in the way that it’s implemented,” Frederick said. “If it’s a one-size flat fee, it gives the lawyer a disincentive to put the time in.” Frederick said the State Bar has not issued an opinion on insurers paying flat fees for third-party defense work because the question is addressed by Rules 1.7 and 1.8, covering conflicts of interest, of the Georgia Rules of Professional Conduct. According to Rule 1.8 (f), if a lawyer is paid by a third party, such as an insurance company, to represent a client: 1) the client must be informed of the terms of the payment agreement; 2) the arrangement should assure the lawyer’s independence of professional judgment; and 3) lawyer-client confidentiality must be maintained. Rule 1.7, note [10] says a lawyer “may be paid from a source other than a client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer’s duty of loyalty to the client.” “I do think disclosure is important and that the client needs to know,” said Frederick. State Farm declined to say if it will disclose to Georgia policyholders that their lawyer is being paid via a flat-fee plan instead of by the hour. The insurer also declined to answer questions on how much independent judgment its Georgia outside counsel will have in working cases under the new plan. “Does a flat fee pit the attorney’s financial interests against the zealous representation of the client? Is there that potential? Yes,” said Jay B. Harris, a Philadelphia defense lawyer who chairs the Defense Research Institute’s alternative fees and billing task force. Harris said the group is currently looking at the pros and cons as well as the ethical issues of about a dozen alternative-fee arrangements to figure out which fee agreements best minimize potential conflicts, which he said are of particular concern in a “tripartite relationship between an insurer, an insured and a law firm.” But it depends on the fee arrangement, Harris said. “Where you get into trouble is with one-size-fits-all.” A predictable volume of work can take care of some ethical issues, he said, since having cases that will resolve quickly reduces the incentive to give short shrift to a case requiring more attention. State Farm declined to say if it would guarantee any volume of cases to the winning bidders for its fixed-fee plan. Harris agreed emphatically that in insurance litigation, the policyholder should be informed of a fixed-fee arrangement. “Absolutely. You have an obligation to disclose that to the client so the client understands the parameters of the representation—so the client can’t come back later and say ‘my defense was compromised because your incentive was not to defend me,’” he said. He added that he sends a letter disclosing the flat fee to his insured clients if the carrier that’s retained him does not. That gives the client the chance to raise an objection with the insurer if he has concerns, Harris said. Too much lawyering? Plaintiffs’ lawyer Bruce A. Hagen said having insurance defense lawyers working on a flat fee could be a “big benefit” for him. “Maybe it will mean I don’t have to deal with nonsense motions and time-wasting delay tactics. We can get to the heart of the matter and deal with the merits of the case.” Hagen said since plaintiffs’ lawyers are paid on contingency, they must work efficiently. “It’s the exact opposite for the defense. They want to raise ancillary issues, fight battles that they don’t need to fight and get my eye off the ball.” Hagen thinks having defense lawyers working on a flat fee will force more cases to trial. “This system will not allow the defense lawyer to find out the story in advance and talk to the adjuster,” he said. “That is not going to benefit the State Farm insured.” On the other hand, Hagen said, he doesn’t think insurance companies value their lawyers’ opinions on a case under the hourly rate system, instead relying on the adjustor to make decisions. “You’ve got some pinhead adjuster making these decisions based on nothing but some statistical model—not what the case is about,” he said. Gary M. Cooper, a former defense lawyer for State Farm, said he got fed up with that kind of micromanagement and switched to the plaintiffs’ side in 2007 because the insurer stopped relying on his professional judgment in settling claims. Cooper is also Harper’s former partner. He and Harper started out handling State Farm work at Powell, Goldstein, Frazer & Murphy in the late 1970s. When Powell Goldstein decided to stop handling individual auto claims for State Farm, Harper said, he and Cooper opened their own firm in 1984 to keep doing the work. Cooper said insurance companies have changed how they handle their defense litigation over the years. He said State Farm’s adjustors used to pay attention to his recommendations and settle auto cases for a fair value. “Then it got to where it was not our job to tell them. Upper management, who are not lawyers, wanted to control the litigation,” he said. “When I lost full control over my practice, it was time to leave.” Harper thinks “blind bid, fixed-fee billing encapsulates the seemingly inexorable decline from an honored profession into a mundane trade.” From his point of view, it means policy holders will be defended with “shorter depositions, fewer motions and less vigorous discovery, all to be conducted by less experienced counsel.” Insurance defense lawyers use a “belts and suspenders” approach to reduce the risk of an uncertain result or a bad loss, said James W. Hawkins, a consultant on reducing legal costs for law firms and corporate legal departments. Hawkins also started his career handling auto defense cases for State Farm at Powell Goldstein and later served as chief litigation counsel for Kimberly-Clark. If the defense lawyer does less work on the case because he’s getting a fixed fee it could mean the insurer ends up paying higher indemnities, said Hawkins. “Plaintiffs’ lawyers will probably love this,” he said. On the other hand, he said, defense lawyers could likely get the same result for many cases with less lawyering. On the defense side, he said, “I would say we overdo it. Lawyers are not as efficient as they could be. Cases can be worked up in a different manner. I can’t say what the right way is. Everybody is struggling with it.” Hawkins said that until the mid-1970s, insurance defense lawyers tried their cases at the courthouse. An adjustor would deliver the case file with little more than witness statements to the attorney before the trial. He would call out the names of the witnesses who’d been subpoenaed, interview them, then go in and try the case. “What happens today is cases get tried pre-trial,” he said. “Every witness is deposed, every fact is discovered, every nuance in a case is uncovered, every motion that could be filed is filed.” For a flat fee to work, Hawkins said, the insurance company must allow its lawyer flexibility in handling the case and be willing to take on more risk on the indemnity side. He noted that state bar associations that have issued advisory opinions on the ethics of representing an insured for a flat fee have said it’s acceptable, as long as the lawyer has independent discretion in handling the case. “I wouldn’t be very happy as a defense lawyer right now if an insurance company came to me and said give me your lowest and best fixed fee—and by the way, it will be business as usual in what you do, how we manage you and the kind of resolutions we get in suits.” Harris, the DRI member, pointed out that 95 percent of civil cases settle before trial. “But if you take the case to trial, is there a higher likelihood of a higher verdict because you didn’t do x, y and z that you could have done? That’s the $60,000 question,” he said. “If it goes to trial and gets an excess policy verdict and the insured is on the hook—and it’s because the lawyer did not do x, y and z—that’s your conflict,” Harris added. Harper acknowledged that in the majority of cases, there is no risk to the insured because State Farm is going to pay the claim. He also acknowledged that in most auto defense cases, he probably could have gotten the same result with less lawyering. “But I wouldn’t want to be the one or two that we did not get the good result on because we cut corners,” he said. “It matters if you are the defendant that gets hit with an excess verdict.” Harper said he doesn’t understand why State Farm’s other outside auto defense counsel are not more concerned about the flat-fee plan. “I’m befuddled that I’m the only one who quit over the ethical concerns,” he said, adding that most lawyers likely “can’t take the financial hit. These are golden handcuffs.” Asked what his next move will be, Harper said it’s unlikely that he’ll work for any more insurance companies and predicted he will start doing plaintiffs’ work.

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