ing to note that while insurance companies retain discounted services from insurance defense law firms for their policy holders, they retain different law firms charging premium billing rates for their representation when they themselves are involved in litigation. Typically silk stocking corporate litigation firms are used for this work.
Insurance defense firms face very constrained billing rates and flat-fee arrangements imposed upon them by insurance companies. This author has seen very few billing rates over $100 per hour. The spread between junior associates and senior partners with many years of experience is often less then 30 percent. The founding fathers of many of the first-generation insurance defense firms adhered to the following policies to achieve adequate profitability:
* Recruit quality middle of the class law school graduates from local law schools.
* Maximize financial leverage with high ratios of associates to partners. Ratios of four to one were typical. This was the primary area for profit Inargili.
* Work hard. Both associates and partners worked evenings and weekends. Between 2,000-2,200 annual billable hours were typical.
* The road to partner is long. Many used the experience received at the law firm to prepare them for practice elsewhere and they moved on. Those who remained did not make partner until after ten years or so.
* Tightly control other expenses. Since the law firm typically did not see clients at their offices, they did not require offices in high-rent districts. All other office expenses were tightly managed.
Many of the lessons of the founding fathers of these first-generation insurance defense firms have been lost in transition to second-generation firms. Many second-generation insurance defense firms have tried to spruce up their image in an effort to emulate the corporate silk stocking firms. They have: (1) moved into high cost A or B office space, (2) invested heavily in technology without modifying work processes, methodologies, or practices, (3) lost financial leverage by promoting too many associates to partner, (4) failed to maintain the same level of client communication and understanding that the founding fathers displayed, (5) failed to manage and control office expenses, (6) failed to maintain 2,000-2,200 annual billable hour production quotas, and (7) neglected marketing and business development activities which could have resulted in higher levels of work.
The present state of the insurance defense practice presents numerous challenges to the law firm. These challenges simply cannot be ignored--they will have to be faced head-on. The solutions are complex and will require time to sort through. While solutions can come in different varieties, they will take the form of one of two general strategic approaches.
Reinvent the practice--Stay in the game
For many firms the appropriate strategy may be to stay in the game. These will be firms that have a well-established reputation in insurance defense, where insurance defense represents a major source of their revenue, and where adequate leverage and profitability and leverage exist. These firms will not be firms that dabble in insurance work. These firms will be committed to this practice area and will focus on it exclusively. They will be innovative client-market driven firms that blend contemporary approaches with the lessons learned from the founding fathers.
While it is too early to foresee the actual particulars, some of the following actions will be required to reinvent the practice and stay in the game:
* Get leverage back on track. Tough decisions will be required here. High priced senior associates will have to be let go. Unproductive partners will also have to leave. Paralegals should be hired. Ratios need to get back to 4 to 1.
* Partnership admission criteria will become more demanding. Time required to make partner will be lengthened.
* Compensation will be based upon performance.
* Billable hour quotas will be enforced.
* Expenses will be tightly controlled.
* Flat fees and other forms of alternative billing will be commonplace.
* Unique out-of-the-box solutions will be designed to provide tailored services to meet client needs and differentiate the firm from competitors. The firm will no longer wait for the insurance company to take the lead. The firm will take the lead and provide clients will a menu of service solutions.
* Technology will be employed to the fullest extent to reengineer work processes. It will not be used just for technology's sake or to keep up with the corporate litigation law firms. When technology is employed, old outdated practices and processes will be eliminated.
* Standardized practices and procedures will be developed and used throughout the firm wherever possible.
* Client focus groups, insurance company councils, and other forums will be formed to open up channels of communications with clients in order to mend the tarnished client relationship and reestablish a business partnership. Innovative insurance defense firms will take active leadership roles in this endeavor.
* Aggressive marketing and business-development strategies and plans will be implemented in order to maintain appropriate growth rates and profitability. Relationships with unprofitable clients will be terminated. Marketing with be done as a team approach as opposed to being a function done at the individual lawyer level.
* Both firm and individual personal marketing plans will be commonplace.
Exit or diversify the practice
This strategy will be appropriate for firms that desire to get out of insurance defense work entirely or that desire to reduce their dependence on insurance defense work by diversifying the practice. In this way the mix of the practice can be altered. This strategy will not be easy. It will be a rough road and will take time.
Insurance defense attorneys typically do not have the expertise, experience, or the client contacts in other practice areas such as corporate business. Another factor is perceived image. The business community often views insurance defense firms as second-rate firms. Often the law firm has in essence branded itself as an insurance defense firm. This can be a difficult obstacle to overcome. Client law firms with whom this author has worked have found that it can take five years or longer to accomplish such objectives.
Specific tactics will depend upon the firm's size and the amount of insurance defense work in the practice mix. One of the first steps is for insurance defense firms to try to leverage their litigation experience in order to obtain the defense work from self-insured corporations and general corporate representation. In some instances it may be possible to pick up some of the general corporate representation of insurance companies. This will be a tough road.
Larger firms will require some new blood in the firm with expertise, experience, and a book of business in the desired practice areas. This will require insurance defense firms to consider merger or acquisition. Smaller firms may be able to accomplish these objectives completely internally or with lateral partner acquisitions. Both large and small firms should begin extensive programs of continuing education in desired practice areas. Firm and personal marketing plans should place strong emphasis on creating new business relationships as well.
Much work needs to be done by management of insurance defense firms. The process will take time, hard work, and dedication regardless of the strategic options chosen. Now is the time to get started.
_______________
John W. Olmstead, MBA, Ph.D, CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis. The firm provides practice management, marketing, and technology consulting services to law and other professional service firms to help change and reinvent their practices. Founded in 1984, Olmstead & Associates serves clients across the United States ranging in size from 100 professionals to firms with solo practitioners.
Copyright 2001 by Olmstead & Associates. All Rights Reserved.
Is there a Limited Liability Entity in your future?
By Donald E. Weihl
Supreme Court Rule 721(d) specifically provides as follows:
(d) The articles of incorporation or association or organization shall provide, and the shareholders of the corporation or members of the association or limited liability company shall be deemed to agree by virtue of becoming shareholders or members, that all shareholders or members shall be jointly and severally liable for the acts, errors and omissions of the shareholders or members and other employees of the corporation or association or limited liability company arising out of the performance of professional services by the corporation or association or limited liability company while they are shareholders or members.
The language utilized in (d) above subjects the personal assets of individual partners, members, shareholders, etc. to the potential of being utilized to satisfy vicarious liability as individuals of claims against other partners, members, shareholders, etc., in the firm.
Illinois has been the only state that does not give individual lawyers the opportunity to create a legal entity that protects the personal assets of individual partners against vicarious liability for claims arising out of conduct of others in the firm when the individual does nothing to participate in the events giving rise to the liability involved.
Beginning July 1, 2003, all of the above will change. Illinois has become the 50th state to adopt rules allowing Limited Liability Entities to practice law in Illinois.
New Supreme Court Rules 721 and 722 will become effective on July 1, 2003.
Thanks to the efforts of the ISBA and the CBA working with the Illinois Supreme Court Rules Committee, the Supreme Court has acted upon the proposals with new rules.
Under the new rules, the firm and responsible lawyers will still have unlimited liability to the extent of their assets for the satisfaction of a legal malpractice judgment. Lawyers with no connection to the conduct giving rise to the malpractice judgment would see their capital contribution in the firm subjected to the malpractice judgment; however, their personal assets other than their investment in the firm would be insulated from liability. This is not to say that lawyers would not continue to be liable for personal guarantees of firm indebtedness or liability for firm obligations personally signed by the lawyers, and it goes without saying that these liability situations would continue with or without Supreme Court Rule changes permitting Limited Liability Entities.
While the Limited Liability Entity concept may be of no interest to the sole practitioner, even firms as small as two lawyers would benefit from being permitted to create a Limited Liability Entity. Just because a firm is small does not mean that every lawyer in the firm is involved in every matter the firm handles. In larger firms it is impossible for every lawyer to be involved in every engagement; thus, the Limited Liability Entity concept is a very attractive alternative to a standard partnership arrangement for medium-sized and large firms. While it is possible to assert that allowing Limited Liability Entities in Illinois will encourage lawyers to keep to themselves and avoid becoming knowledgeable about engagements of other lawyers in the firm, it is not likely that firms will change the way they currently operate now that the Supreme Court Rules allow law firms to be organized under statutes that purport to limit vicarious liability.
Under the new rules, Rule 722 permits the creation of Limited Liability Entities provided the Limited Liability Entity maintains malpractice insurance for the protection of the Limited Liability Entity clients. The malpractice insurance policies are required to have minimum coverage of $100,000 per claim and $250,000 annual aggregate coverage, times the number of lawyers in the firm at the beginning of the annual policy period. The rule goes on to state that a firm's insurance need not exceed $5 million per claim and $10 million annual aggregate.
It is to be noted that the rule specifies "the number of lawyers in the firm" and not simply the number of shareholders, members, managers, or partners of the Limited Liability Entity.
It is also to be noted that neither the Supreme Court nor the committees of the ISBA and the CBA know what the malpractice insurance industry will do in the way of setting Limited Liability Entity's malpractice premiums. Insurance underwriters currently take into consideration as premiums are set the fact that Supreme Court Rule 721(d) specifically subjects equity position lawyers in partnerships and professional corporations to joint and several liability for the malpractice of all lawyers in the firm. The underwriters factor in the fact this vicarious liability encourages management in firms to exercise substantial oversight of engagements handled by the firm. The underwriters also factor in the fact that management of firms takes into consideration the vicarious liability that currently exists when associates are promoted to equity positions and lateral attorneys are asked to join firms.
Conclusion
It is indeed encouraging that the Supreme Court has brought Illinois into the same posture with respect to allowing Limited Liability Entities as the other 49 states. Uniformity has many benefits, not the least of which is the fact that firms formerly avoiding Illinois will now be able to add offices in Illinois to represent their Illinois clients. Allowing Limited Liability Entities in Illinois is certainly a step in the right direction for the economics of the profession notwithstanding that Illinois is the last state to adopt protection against vicarious liability for lawyers completely non-involved in events giving rise to potential and actual malpractice liability.
_______________
Donald E. Weihl practices in the St. Louis-Belleville firm of Greensfelder, Hemker & Gale, and is a past chair of the ISBA Law Office Economic Section Council. dew@greensfelder.com
%20Initial.GIF)