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For two years now, Allstate Insurance Co. has been embroiled in lawsuits that accuse the company of violating the rights of policyholders through aggressive tactics to keep defense costs low. One group of cases accuses Allstate, the nation’s second-largest homeowner and automobile liability insurer, of using adjusters instead of attorneys to negotiate settlements with potential plaintiffs. Earlier cases accuse the company of improperly using company-owned law firms as defense firms. While much of that litigation is still pending in state courts, on May 23 the legal attack against Allstate over its cost-cutting efforts took a new turn when Allstate was sued in state court in Chicago for using the Internet to solicit unrealistic bids from lawyers wanting to represent its policyholders. Not only are the Internet-based bids being indiscriminately grouped according to broad categories of cases, according to the four-count consumer fraud complaint, but those clustered cases are being assigned to the law firm willing to work for the lowest fixed fee, without regard to the actual amount of work needed to properly handle an individual’s case. As a result, the complaint states, tens of thousands of Allstate’s unsuspecting policyholders in Illinois, who were never told of the new practice, are being denied the legal defense they thought they were buying when they paid their premiums. Maya v. Allstate Insurance Co., No. 01L-006084. No insurance company has ever established such an extreme “cookie-cutter approach to third-party defense work,” says the plaintiffs’ lawyer, David A. Novoselsky, a Chicago sole practitioner who is asking the court for more than $25 million in punitive damages alone. He expects to expand the class action to include Allstate policyholders nationwide. Allstate’s general counsel, Michael J. McCabe, acknowledges his company has quietly committed substantial resources in recent months to a new Internet-based “auction market” approach for hiring some of its outside defense lawyers. But he insists that Allstate’s contractual “right” as well as obligation to provide quality representation to policyholders have not been compromised. “New technology simply allows us now to communicate more efficiently with multiple firms in a closely cropped time frame so they can assess whether they want to handle a particular case at a particular cost,” McCabe says. As for the Internet program’s fixed-fee feature, McCabe says, Allstate has for a long time successfully hired many outside lawyers on that basis rather than the more common hourly rate. That’s an “old issue,” he says. 14 MARKETS SO FAR Allstate first launched the Internet-based pilot project about 18 months ago in 14 different markets, including Southern California, Philadelphia, New Jersey, Phoenix, parts of Texas and, most recently, Illinois. Pat Gallery, Allstate’s vice president of litigation services, says 5 percent of Allstate’s lawsuits are now in the hands of defense firms participating in the Internet program. By the end of next year, however, the program will have been extended, he says, to every major market in the U.S. and is expected eventually to control more than 50 percent of all the cases Allstate defends. The program is being administered with the help of Examen Inc. and its “Legalpath.com” online product, one of several Web sites now operating for the purpose of hiring lawyers. “Legalpath.com is unique,” however, because it is not a traditional auction site as Novoselsky suggests, says Mary B. Clark, the Sacramento, Calif.-based company’s general counsel. As Allstate describes it, all potential participants are screened on the Internet by Gallery’s office based largely on information submitted on a prequalifying questionnaire. Potential Allstate lawyers indicate what kinds of cases they want to handle by checking off preset categories based on a number of characteristics, including type of injury claimed, the cost of the medical care so far and the number of parties involved. The lawyers seeking to get hired are expected to give their best flat fee for each category checked. In addition to having submitted a “competitive” price, Gallery says, the panelists already chosen tend to be those indicating the most experience, the best reputations and the highest recommendations. He adds that most of the lawyers selected on the Internet are lawyers already doing work for Allstate. As policyholders are sued, the cases are placed in the appropriate category, then posted on the Examen Web site and assigned to lawyers, who have 24 hours to accept. Gallery explains that fees are adjusted for the “rare” case that turns out to be more difficult than expected. Clark says the privately held Examen has other insurance companies for clients, but declined to name them. A spokesman for the nation’s largest home and auto insurer, State Farm Insurance Co., says his carrier is not interested in Allstate’s Internet tack. “We are comfortable with the traditional way of assigning cases to local lawyers — by interviewing them in person,” he says. As might be expected, the legal experts are sharply divided over Allstate’s latest cost-cutting innovation and over whether it will result in less-than-adequate defense work as alleged. Plaintiffs’ lawyers sense a new business opportunity as word of Allstate’s “lawyer by e-mail” program spreads. “It’s absurd to think the best law firms with the best track records are going to work for the lowest pay,” says Jeffrey A. Cooke, president of the Indiana Trial Lawyers Association and proprietor of Lafayette, Ind.’s The Cooke Law Office. He adds that he’s sued Allstate “too many times” for allegedly “bad-faith treatment of its policyholders to believe the in-house lawyers’ altruistic ‘good hands’ ” assurances that their Internet project is pro-consumer. In contrast, Craig Berrington, general counsel for the American Insurance Association, says it’s “absurd to assume that Allstate’s customers are somehow being injured” by a new idea that increases competition among defense lawyers and gives them an incentive to work more efficiently. “I think Allstate’s idea means better representation, not less.” Tom Segalla, a past chair of the Defense Research Institute’s Insurance Practice Section, says he sees little difference between bidding for legal work over the Internet and negotiating a retainer over the phone. And Michael Orpett, chair of the American Bar Association’s Tort and Insurance Practice Section, adds that the legal system writes into the Allstate plan a critical “safety valve” in that all defense lawyers have an “uncompromising” ethical duty to represent an insurer’s policyholders to the best of their ability, regardless of what they are paid.

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