President’s Message: The 3% Discount and Other Oddities

WDC Journal Edition: Summer 2014
By: Arthur P. Simpson

Whenever lawyers assemble, the conversations seem to turn to the lawyer/ client relationship. A particularly important subtopic is the lawyer/insured/insurance company relationship, often referred to as the “tripartite” relationship.

Like any commercial transaction, in the tripartite relationship, there has to be an economic benefit for the parties involved. The lawyer must see an economic return that justifies representation. The lawyer has to compare benefits (both economic and intangible) that can be obtained from alternative employment or clients. For the lawyer, simply stated, the relationship must be worth the effort.

The carrier, whether the client or not in a tripartite relationship, must also receive a “benefit.” They also must feel they are receiving it without incurring an “excessive” cost in comparison to others in the industry. Carrier A cannot pay twice as much as Carrier B and remain competitive in the marketplace. This is particularly true in price competitive markets such as property and casualty insurance.

Economic theory aside, we come to the 3% discount. In addition to a standard insurance billing rate of 50-75% of non-insurance clients, some carriers reward themselves with a 3% discount for bills paid promptly. These companies appear to be congratulating themselves for paying their lawyers’ bills on time. Given the profit margin of most law firms, and particularly with an already below- market rate for services, another 3% reduction is no small matter.

I thought about this practice and decided to try it. It just did not seem to work very well. First, I took 3% off of my auto insurance bill. My agent called me and asked me why I had done that, and I told him that it was my reward for prompt payment. He told me that was not going to work. I forwarded him a copy of my 3% rule, but he told me it still was not going to work.

Second, I tried the 3% rule at a restaurant. I was really paying promptly there and thought maybe I should even get 5%. That did not work very well either.

Finally, the real test came on April 15. I thought the government would really appreciate how promptly I was paying my taxes. My accountant told me that was really a bad idea.

I have also run across a carrier’s “Ten Year Rule.” The rule is: No lawyer with less than ten years of experience can work on a case. I spoke with my carrier contact (who had five years of experience) on this point and offered to call him back in five years. Fortunately, I found out this rule was not to be taken literally. It occurred to me that a doctor is allowed to perform surgery at a younger age than an attorney who appears in small claims court on a $2,200 case. I also wonder how 35-year-old attorneys are going to handle that first matter with no prior experience. (I hope they are not considered too inexperienced.)

In the end, I was forced to face commercial reality. Similarly, the discounting carrier needs to face reality. What is the impact of such practices on long-term willingness and availability of the bar for that client’s business? What is the impact on the supply of lawyers?

This is not a situation where the bar can only point the finger of blame at the insurance industry. One of my favorite stories involves an appellate- level mediation. The dispute was over a claim for attorneys’ fees (ultimately unsuccessful) for a defense. We asked the mediator what the fees were and were told, “It’s not as bad as you think.” It was. It turns out the fees were $275,000 for writing only a handful of briefs and arguing only a couple of motions. At the same time, our office had billed only $7,200 to win the case at the trial court level. Needless to say, I have used that story for all it is worth for many years.

I have more recently seen a case where a firm billed $9,000 to attend a scheduling conference and $11,000 to draft the complaint. These stories are more than urban legends. It is understandable that industry clients can become nervous regarding billing excess issues.

There is one more person in the tripartite relationship, the insured. Is the insured entitled to the cheapest defense, the best defense, or a reasonable defense? Does the defense obligation change if there is no personal exposure? Is the obligation different in a commercial policy as opposed to a personal auto situation? Beyond the law, what does a commercial insured expect from a carrier for its premium dollar?

The lawyer should deliver a benefit just as any provider of the service should deliver a benefit. This should be delivered at a reasonable and competitive market price. The carrier has responsibilities as well. These include prompt payment, guidelines that insure the carrier is incurring expense at a market rate, and not utilizing legal counsel as a profit center based on draconian billing policies. Let’s hope everyone works together to provide the ultimate customer (the insured) with value at a reasonable cost.

Arthur P. Simpson has been a practicing Wisconsin attorney for over 30 years, specializing in civil defense litigation as well as alternative dispute resolution. He is recognized for his handling of complex issues in high-profile cases. Art has had approximately 250 jury trials, over 50 appellate decisions, and has litigated thousands of cases. This experience has given him a unique ability to accurately evaluate risks and execute solid strategies in both litigation and negotiation. Art is a frequent speaker (not just on the Collateral Source Rule), the current President of the Wisconsin Defense Counsel, and has been selected as a Super Lawyer nine times. Art is a graduate of the University of Wisconsin Law School.

© 2014 Wisconsin Defense Counsel. All rights reserved. Simpson, Arthur, President's Message: The 3% Discount and Other Oddities, Wisconsin Civil Trial Journal (Summer 2014)