Several years ago, the insurance company I worked for decided to open their own field legal office in a Midwest city. When I informed the local claim manager of the decision, he asked incredulously, "Why does the company want to do that? Our local attorney is only charging us $65 an hour." What the claim manager forgot to mention was that the outside attorney’s per-file costs were among the highest in the region. To be sure, this attorney was engaging in some significant overbilling.
Just like overindulging is a polite term for getting drunk, overbilling is just a polite term for billing fraud. And just as many drunks do not really think that they have a drinking problem, many lawyers apparently do not think they have an ethical problem if they overbill their clients. This sad fact is borne out by a number of important reports and studies over the past two decades. Even the American Bar Association (ABA) has taken official notice of the problems caused by lawyer billing abuses. In 1993, the ABA’s committee on ethics and professional responsibility called lawyer billing problems a "major contributory factor to the discouraging public opinion of the legal profession."
Abusive lawyer billing practices have also been studied and reported on by a number of legal scholars. Considered by many to be the leading academic scholar on the subject of lawyer overbilling, Professor William Ross conducted three important surveys of lawyers beginning in 1991. His most recent survey in 2006-2007 of lawyers in all types of practice settings found a discouraging upward trend in the percentage of attorneys who not only admitted to billing abuses, but saw no ethical problem with it. For example, the percentage of attorneys who believed that "double billing" was unethical fell from 64.7 percent in the 1995-1996 survey to 51.8 percent in the 2006-2007 survey. (To view past survey results on lawyer billing abuses, click here.)
Some legal experts believe that excessive lawyer billing can easily add 15-30 percent or more to legal bills. According to Prof. Ross, insurance companies "may have been the victim of a disproportionate amount of excessive billing."
Stay On Guard
While the good news out of all the reports on lawyer overbilling is that the majority of lawyers do not engage in overbilling practices, the bad news is the compelling evidence that a sizeable minority of lawyers throughout the profession do engage in abusive billing practices and that the insurance industry has been a particular target of billing abuse. It is clear, then, that prudent insurers need to take definitive, defensive steps to further guard against becoming the victims of lawyer overbilling.
Taking definitive steps includes implementing tried-and-true measures, such as hiring only reputable attorneys, securing discounted hourly rates, and having in place and closely monitoring good litigation plans. However, these strategies alone have not shown that they will prevent lawyer billing abuses or will result in lower legal costs. In fact, one step — bargaining for lower rates — may actually lead to lawyer overbilling. As Douglas Richmond, a former insurance defense lawyer put it in Professional Responsibilities of Law Firm Associates: "Clients who negotiate discounted hourly rates are vulnerable to overbilling because, lawyers reason, they are not truly cheating those clients when they pad their time — that extra time is only restoring the firm to the financial position it would have been in but for the clients’ unreasonable insistence on discounts."
Insurers that are truly intent on preventing attorney billing abuse and controlling legal costs need to do much more than they have done in the past. Insurers need to adopt a comprehensive, three-step defensive program that includes: clear billing guidelines based upon the ethics of the legal profession, a good e-billing program, and an effective legal bill review program. Employing all three defensive measures is critical. For just as a three-legged stool cannot stand on just one or two ends, a successful program to defend against overbilling lawyers cannot succeed without all three necessary parts of the program.
Crystal Clear Guidelines
Having clear billing guidelines that are based upon the ethics of the legal profession is a critical component of any program seeking to prevent abusive billing practices. In fact, incorporating attorney ethical requirements on billing for fees and services directly into billing or litigation guidelines is the single most important thing that insurers can do to establish a proper foundation to guard against billing abuses, both deliberate and inadvertent.
There is virtually nothing of any substance found in most insurer billing or litigation guidelines that cannot be reworded to tie directly into an ethical obligation of an attorney. For example, many insurer guidelines provide that "the company will not pay for lawyers doing non-legal work customarily handled by clerical staff." Many insurers and attorneys believe that such a guideline merely reflects something that is a customary practice in the legal profession. Actually, it reflects much more. The guideline mirrors a mandatory attorney ethical obligation. Thus, a better way of stating the guideline would be "the company will not pay for lawyers doing non-legal work customarily handled by clerical staff, as attorneys may not ethically bill for such work."
Squarely tying guidelines to a lawyer’s ethical obligations will keep guidelines from appearing to be arbitrary requirements of the company. It shows that the guidelines are not just reflecting customary or accepted practices, which must sometimes give way if the attorney believes they interfere with the attorney’s professional judgment. Linking billing and litigation guidelines directly to an attorney’s ethical obligation will likely change the dynamics of most billing disputes. It will serve to refocus and elevate most billing disputes to a more appropriate discussion of what the ethics of the legal profession provide with regard to billing for particular tasks or costs.
e-Billing Programs
The second component of a successful program to combat lawyer overbilling is a good e-billing program. This is absolutely essential in eliminating billing abuses, as it will provide all the data necessary to better spot not only individual instances of billing abuse, but also those hard-to-detect abusive billing patterns. For example, some lawyers routinely round up time or charge minimum amounts of time for tasks rather than charge the actual time spent on those tasks. This might include something like letters always being billed in even increments, such as .2, .4, or .6 hour. A good e-billing program can provide a statistical report across all submitted legal bills to show such suspicious billing patterns. Comparisons can be made among different attorneys in the same firm or among different firms to identify or confirm suspicious billing trends.
E-billing programs electronically scan submitted attorney invoices and apply rules that mainly come from requirements in a company’s billing guidelines. Rule violations are flagged for the reviewer’s attention. One key benefit to this feature is that the e-billing program, in addition to catching large items, catches many smaller charges that the bill reviewer has overlooked or has difficulty catching manually. These smaller charges often include improper rates and miscalculated costs, which can sometimes add up to one-to-three percent of the total charges in the legal bill. Catching billing errors that are often overlooked or hard to spot manually not only saves on legal expenses, but also it leaves the reviewer with more time to subjectively analyze the more substantive portions of legal bills.
A word of caution about e-billing programs: Not all e-billing programs are alike. Reporting capabilities can vary greatly among them. Also, some e-billing products are better suited to a corporate rather than an insurance company environment. So it is important to choose an e-billing company that has a focus on providing a system that is suited to the insurance industry, provides a wide array of standard reports, and provides the user with the ability to create custom reports.
Review the Bills
While having a good e-billing program and comprehensive billing guidelines are important steps to take in combating lawyer billing abuses and controlling legal costs, the benefits that can come from both will not be fully realized if there is not an effective legal bill review program to subjectively review the legal bills. In establishing an effective legal bill review program, one thing is clear: it is virtually impossible to have an effective program by having the entire claim staff review their own legal bills. Except in the smallest of companies, it is simply not possible to properly train, calibrate, and adequately monitor a large staff of adjusters reviewing legal bills. Just like it is with any department-wide task, some adjusters will do a very good job, while others will not. As a result, mixed messages will be sent to law firms on what the company will and will not accept and, most importantly, legal cost savings based on eliminating lawyer overbilling will be minimal.
Establishing an effective legal bill review program generally requires having a dedicated legal bill review unit (LBRU). Legal bill review units can be staffed with insurance defense attorneys or experienced litigation adjusters — or a combination of both. In addition to providing the maximum amount of protection against billing abuses, a dedicated in-house legal bill review unit will provide consistency in legal bill reviews (which law firms will actually appreciate) and send a signal to all that the company is serious about preventing lawyer overbilling.
It may be discouraging for insurers to realize that some outside counsel they have established relationships with might be engaging in abusive billing practices. It is tempting to just think that this only happens with lawyers who work for other insurance companies. But remember it is more likely than not that those overbilling lawyers who work for other insurers also work for your company, as well. As a result, all insurers need to take definitive, defensive measures to guard against being fleeced by their own lawyers.