Alternative Fee Agreements-As Good Or As Bad As You Make Them

By John Armstrong

We are in an ever changing business environment. The practice of law and the handling of claims today moves literally light years faster than before with the use of email, mobile phones, ipads, and netbooks. We’re plugged in everywhere we go, and can virtually be at the office while vacationing in Hawaii.

The Billable Hour

The billable hour is still the main style of fee agreement, largely because both claims adjustors and law firms understand this basic formula: The law firm charges an agreed upon hourly rate for partners, associates, and paralegals, the time is billed in one-tenth of an hour increments (the “0.1” or every six minutes), each timekeeper must record what activity was done, and frequently is also required to “code” the work with both a task an activity.

But there are alternatives to the “billable hour” described above. It can be mutually beneficial or a train wreck. The difference? How much is discussed up front so that each side, insurer and law firm, understand what’s expected. This post discusses the main alternative fee arrangements this writer has seen and been a part of, and I will discuss the pros and cons of each.

The “Flat Fee”

In complex cases, such as construction defect cases, usually the insurer insuring a large number of subcontractors will request a “flat fee” per file. That is, the insurer will send a large number of files but will only be charged a single attorney’s fee for each file (the insurer ordinarily covers hard costs, like court reporter fees and filing fees too). This arrangement can work well but two problems usually arise. First, the insurer may not send enough files to warrant the volume discount. This can be hard to do unless the claims adjuster consistently has a steady flow of a known number of files. Too few files, and the idea of volume pricing is out the window. Second, there has to be a mechanism to get a file out of the “flat fee” arrangement if a flat fee suddenly requires more work, such as a large number of depositions or extensive law and motion. Often, this happens when a flat fee subcontractor file becomes the target defendant whose work primarily caused the plaintiff’s damages. At that point, both the plaintiffs’ counsel and the general contractor’s counsel team up on the culpable subcontractor who is now facing a two-front war—not really a good candidate for flat fee work. On the other hand, if you represent the electric door knob polisher, odds are the insurer and law firm are safe in keeping this subcontractor in the flat fee arrangement.

Another variety of the “flat” fee is where a the law firm get a flat fee per month during the life of the file. This may make financial sense where the insurer and defense counsel believe that there is going to be a lot of litigation and where it is unlikely that the case will settle until closer to trial. This requires some sophistication on both the law firm’s and on the adjuster’s part in that the flat fee per month should be enough to cap what would be expected overages in certain months while generating enough income for the firm that the file gets appropriately staffed. The law firm benefits by being able to plan that it will get X amount of fees each month, and the adjuster knows that the fees will never exceed X per month.

The Contingency Case

This usually occurs in the subrogation cases. However, if you have a file where the insured has attorney’s fees clause in its favor, and it appears objectively likely to both the insurer and defense counsel that the insured is likely to prevail and there is another insurer or a solvent plaintiff who could pay attorney’s fees, then such a defense file may be ripe for a contingency or “blended” fee, that is a guaranteed lower hourly rate plus the right to recover fees if the defense counsel are successful. These type arrangements work only when there is a candid, upfront discussion regarding how fees will be split, what costs the insurer will pay on monthly basis, and which will come out of the recovery, if any. And, of course, different percentages can be negotiated, such as a lower percentage if counsel obtains a recovery without having to file suit, and a greater percentage if counsel has to file suit, and a higher percentage if the case has to be taken to trial or settles at trial. Where things go wrong is when there is no clarity on who is paying for costs, what percentage recovery occurs at which point time, etc.

The Blend

Alternative fee agreements have few limits. You can be as creative as you want. It is possible to blend the billable hour, with a modified flat feet, with a contingency component. If your bold enough to move from the billable hour, its best to thoroughly discuss the litigation and trial plan in advance. I would also recommend requesting a billable hour defense budget, because this will provide information on what type of alternative fee agreement might be best for the case. In sum, alternative fee agreements can work, but they do require more work and thinking at the front-end so that insurer and counsel knows what’s expected from each other.