The New-Look Law Firm

By Ralph D’Angelo, Senior Counsel, Manager, XClaim Portfolio, Claims Services and Louis A. Frapporti, Partner, Gowlings

The economic landscape for Canadian property and casualty insurers has changed dramatically over the past 20 years. The industry has experienced unprecedented consolidation and increased competitive pressures. The Top 10 property and casualty insurers in Canada controlled almost 60% of the market share in 2010. As a result of these pressures, in an effort to find a competitive edge, insurers have been compelled to develop innovative, more cost-effective methods to deliver insurance services and value to their clients. These efforts have extended to their suppliers and vendors, which have also had to adopt more innovative and responsive strategies to maintain market share. However, law firms, the insurance industry’s most significant supplier of services, have been largely resistant to this trend.

The Value Challenge

For much of its long and storied history, the legal profession in Canada has been somewhat immune from the economic pressures that have buffeted and shaped the commercial and insurance landscape. Its status as a licensed monopoly, among other reasons, has permitted it to at least partially escape the impact of rapid technological advances as well as the pricing pressures from Asia and other emerging economies that have had such a profound impact on commerce in this country and abroad. Nonetheless, like any service industry, law firms are now having to accommodate the demands of their clients, who are looking to retain counsel in the same way they procure other goods and services — i.e. through the use of sound commercial procurement practices geared toward reducing cost and increasing value.

Among the more prominent proponents of innovative and value-based legal service delivery is the U.S.-based Association of Corporate Counsel (the ACC). The ACC is comprised primarily of corporate in-house counsel in a wide range of industry sectors, including the insurance field.

It has expended considerable effort in recent years promoting its “value challenge” to corporate law departments and law firms.

It describes this initiative in the following way: “The ACC Value Challenge (AVC) is an initiative to reconnect the value and the cost of legal services. Believing that solutions must come from dialogue and willingness to change things on both sides, the ACC Value Challenge is based on the concept that law departments can use management practices that enhance the value of legal service spending; and law firms can reduce their costs to corporate clients and still maintain strong profitability. The ACC Value Challenge promotes adoption of management practices that allow both sides to achieve their key objectives.”The ACC outlines an impressive number of approaches aimed at increasing the value of legal services. Among them, the promotion of value-based fee structures (including fixed rates, annual retainers, contingent rates, blended rates or rebates), novel staffing options, data and knowledge management tools and increasing efficiency through technology. Many of these approaches represent relatively radical departures from the traditional lawyer-client relationship, certainly in Canada. Few of these approaches are commonly used within the insurance litigation context, in which considerable allegiance to the hourly rate billing model and traditional modes of interaction between client and outside counsel have held fast.

Notwithstanding the insurance industry’s adoption of innovative service delivery strategies, insurers and their law firm suppliers still exhibit considerable resistance to change when it comes to the provision of legal services. This can be attributed to a variety of causes; among them is an unquestionably strong institutional aversion on the part of insurers and law firms to the disruptive risk that arises in the adoption of change. To the extent that insurers have demanded innovation through the reduction of costs and/or an increase in collaboration or control, their efforts have typically involved putting downward pressure on law firms in relation to their hourly rates or through the creation or expansion of in-house legal departments.

However, an increasing number of insurers and law firms are finding truly innovative ways to take up the ACC’s value challenge. One such example is Gowlings’ XClaim initiative.

XClaim Initiative

Developed over the past several years and in partnership with insurers, the XClaim service delivery model in the insurance litigation field focuses on client value and needs through a combination of aggressive alternate fee arrangements (where desired by the client), novel staffing options, new work processes and a proprietary and custom designed litigation management software application accessible to the client on an extranet portal basis. This business model as been separately branded as XClaim.

The firm’s XClaim group provides defence and subrogation recovery services to insurers through a dedicated staff of insurance litigation specialists who are hired on a contract basis. The segregated nature of this professional group encourages knowledge sharing and close collaboration of staff and counsel. In addition, it facilitates greater cost containment by avoiding the predictable and not insignificant annual hourly rate increases normally attendant to equity track associates who often perform the majority of work on insurance litigation matters.

One of the more significant aspects of this practice is the proprietary XClaim litigation management software platform. Counsel manage their litigation portfolio in close collaboration with claims adjusters and in-house counsel through the use of a claims management software platform that the client accesses through an extranet portal. All claims-related and financial information — including all litigation documentation — is digitized and uploaded onto the system so that the client has full access to its claims files on a remote, 24/7 basis. (See Figure 1.)

Among the more important components of this service delivery approach is the recognition that value is obtained through delegation of tasks to the most capable, lowest-cost legal service provider. Accordingly, the staffing model is leveraged on the aggressive use of administrative staff, law clerks and paralegals that possess specialized knowledge about this practice area. These staff members can function at a high level with less time-consuming oversight required by more expensive counsel. This frees up counsel to focus on tasks that require and benefit from their participation — i.e. tasks requiring legal judgment that only counsel can do.

The use of fixed fees is another significant component of this approach. To use alternative, non- hourly rate fee arrangements, clients and counsel must both understand what value means in the context of the provision of legal services. Value in this context shifts the focus from the hours expended performing a task to the importance or value of that task to the client. It also assumes a full appreciation of the law firm’s costs for providing that service and its need to receive a fair return on its investment. This appreciation is accomplished in part by ensuring that the law firm is given a sufficient portfolio or critical mass of files so that the firm can spread out and average the risk and the costs associated with the program over the entire portfolio of files. This in turn helps lower the firm’s costs.

Working Collaboratively

In summary, this innovative approach to legal service delivery results in greater transparency and accountability, significantly reduced costs and ultimately, much greater value. The legal and insurance industries have great strides to make, which they can achieve by working collaboratively to bring inn ovation to their respective business models. The confluence of new technologies, a willingness to consider new work processes and a tolerance for the assumption of a reasonable degree of risk in pursuing new strategies presents significant opportunities for both insurers and their counsel in the years ahead. Those who successfully meet these challenges will unquestionably reap the rewards.