“City lawyers admit overcharging clients.” “Role of highly paid lawyers slammed.” “Lawyers cushioned from M&A downturn.” These are just a few of the headlines which have appeared in the national press over the past month, berating lawyers for, well, earning too much money.
Many insurance lawyers, or more precisely those lawyers who act for insurers on the fast-track claims that make up a massive 80 per cent of insurance litigation, can only read such headlines and weep. While most City firms will charge clients between £200 and £400 for an hour of a partner's time, for fast-track insurance work, a partner's hourly rate can, and often does, descend to as low as £50.
Of course, fast-track litigation is not the only type of insurance work, but as it makes up a staggering 80 per cent of the market it is most insurance law firms' bread and butter. Privately, many partners specialising in acting for insurers say that they do not want to do it. They were led into the area as it was previously a lot more lucrative, and now it no longer is, they cannot get out.
“Hourly rates for a partner acting for a defendant insurer are less than those for a trainee acting for a claimant,” says Nigel Roden, Berrymans Lace Mawer's head of liability in Manchester.
So how did this sorry state of affairs arise? Until roughly 1997, most large composite insurers employed hundreds of law firms to process their claims. The lawyers charged mainly what they liked, until the insurers started to realise how much this practice was costing them.
Beachcroft Wansbroughs insurance partner Nathan Butcher says: “Until the late 1990s, in fast-track litigation, the costs paid out by insurers to their solicitors and the claimant lawyers were greater than the damages paid to the claimant. If a claim was for £3,000, the insurer could end up paying £6,000 in costs. What then, was the point of using lawyers?”
Then the large insurers came up with a new concept that they are generally loath to
talk about – the panel. The insurers created their panels as a way of rationalising the procurement of legal services; in other words, giving business to less firms. Law firms accustomed to making money out of insurers, no questions asked, were suddenly asked to apply to be on their clients' panels.
Large insurers, such as Zurich, CGNU (now trading under the 'Aviva' banner), Axa and Royal & SunAlliance all now have panels. Generally, they operate a large central panel for fast-track claims, in areas such as personal injury, alongside satellite panels of individual partners in law firms for more specialist work.
And once the panels were created, they just got smaller. In 2001, Axa streamlined its general insurance panel from 30 firms to just 13 and CGNU slashed its panel from 40 law firm offices nationwide to just 10. Lawyers are waiting with baited breath to see what the panel review currently being carried out by Zurich will bring.
Royal & SunAlliance was one of the first insurers to reduce its panel. It began slashing the number of law firms it instructed in 2000. That year, firms such as Berrymans Lace Mawer, Davies Arnold Cooper and Vizards Staples & Bannister were still working for the insurer. Now they are long gone. In 2001, Royal & SunAlliance decided to use Badhams, Davies Wallis Foyster and Bristol-based Lyons Davidson exclusively. The Royal & SunAlliance trio now runs all the insurer's in-house legal departments. They are paid on a contractual rather than an hourly basis, with no other firms likely to get much of a look-in until Royal & SunAlliance embarks on its next review.
Given the deep cuts of recent years, it is the threat of the dreaded panel 'review' – for 'review' read 'cut your rates or we will cut you' – that keeps defendant insurance law firms on their toes. Most lawyers complain that while they are forced into charging lower rates to stay on panels, the insurers are creating more extra work for them than ever before. “They treat us in the way that supermarkets treat British farmers. Sometimes it feels like they're only paying us enough to keep us alive. But, like the farmers with the supermarkets, who else could we go and work for?” one particularly beleaguered insurance lawyer says.
To stay on a panel, law firms must embrace the concept of 'value-added' work, such as giving free in-house seminars to the insurance client. For example, lawyers have to provide audit information to insurers on every aspect of every claim they process. “It's like they've outsourced their accounts department to us, but we don't get paid,” the same disgruntled lawyer says.
Most of the large composite insurers will also send an external auditor round to check law firms' files as often as every month, which means a lot of extra work. “That's like being a teacher and having the Ofsted inspectors in every four weeks,” an insurance partner at one City firm complains.
In the past 12 months, many of the larger insurers have started using league tables to show the results of their audits. “You're audited on things like response times, turning around cases and effectiveness in round table discussions, and placed in a league table,” another insurance partner at a London insurance firm says. “This is a way of instilling competitiveness and insecurity among law firms. I saw one league table recently where there was only a 5 per cent difference in the score of the top firm as compared to the poor souls at the bottom. But if you're at the bottom there's an obvious fear of relegation – being dropped from the panel at the next dreaded review.”
So what do those at the bottom do? Of course, they promise to cut their rates even further. And it is the large national insurance firms which have suffered most from losing their places on insurers' panels. Very few have escaped unharmed or without some restructuring, but there have been some winners to emerge from the endless swathe of panel cuts and reviews. Those that have planned and developed their businesses around the panel system and around the insurers' new way of doing things have emerged as the winners.