Professor Herbert M. Kritzer’s upcoming law review article on the practice of insurance defense lawyers “The Commodification of Insurance Defense Practice” is something that everyone involved in construction defect litigation, or contemplating construction defect litigation should review. It is very beneficial for litigants to understand how the relationship between the three players who will be involved for each Defendant entity (insurance carrier; contractor-policyholder; defense attorney) works, and where the loyalties and long-term relationships lie. Oftentimes, a particular attorney does a great deal of work for an insurance company, and he has never worked for his Subcontractor client before, and never will again. You can guess which master the attorney is tempted to serve.

Prof. Kritzer spent several months working as a paralegal in an insurance defense firm, working on various garden variety matters that an insurance defense firm would handle: auto accidents, personal injury, products liability, subrogation and coverage. This mix of business is typical of a mid-sized to large insurance defense firm, although there are many that specialize in one type of work. It has been our experience in New Jersey that the majority of defense lawyers in construction defect (CD) cases are not specialized construction defect attorneys, and they practice in a firm similar to the one that Prof. Kritzer wrote about.

The study described a law firm under pressure from the insurance carriers, where there was an extreme focus on case turnover, cost-consciousness, and tension between carriers and the attorneys that they paid to defend policy holders. Due largely to the “loss-leader” billable rates that carriers are able to get from these law firms, there is tremendous pressure on the law firms to work the files as little as possible, to delegate as much of the work as possible to non-lawyers or to junior lawyers who cost the firm less. These firms also give great weight to the bottom line out-of-pocket expense to the carrier, since the insurance company is always trying to reduce the amount of money it pays for attorneys and for indemnifying its policy holders. Insurance companies are, after all, publicly traded and highly regulated. There is a tremendous amount of scrutiny over their cash flow. Prof. Kritzer also found that there was a tremendous ministerial burden on the lawyers to produce budgets and litigation plans up front, then to try to stick to those prognostications as much as possible. Along with these demands and the low hourly rates, there are often very few assurances of loyalty from the carriers, who frequently threaten to move the files to a competing law firm for any (or no) reason. In this uncertain pressure-filled environment, the insurance defense attorney is expected to place the needs of his client (the policy holder) first, and not take any actions which would jeopardize the policy holder’s insurance coverage.

I spent many years as an insurance defense lawyer doing construction defect defense, and Prof. Kritzer’s observations and conclusions ring true in many ways. The firms that specialize in CD cases are often able to justify slightly higher hourly rates, so some of the economic pressure is reduced. Also, many insurance defense firms, and CD specialists included, seem to ascribe to that old saw: “We lose money on every billable hour, but we make up for it with volume.” Firms are often reluctant to start talking about settlement until a file has been billed sufficiently, and this can often mean years of discovery and motion practice. As a party in a CD case, you will often find that the case takes on a life of its own, once the defense attorneys start churning the file, even if nothing they are doing seems to be helping their cause. Of course a healthy and competitive market for insurance defense attorneys tends to counteract this phenomenon. A surefire marketing strategy for a CD defense firm is to show how much less time and money they spend defending a case than their competitors. If a carrier is hesitant about which attorneys to use, or it feels that other firms unnecessarily pad their bills, this race to the bottom is often very persuasive.

I have found that the handling of any given case depends largely on the experience and attitude of the individual adjuster assigned to the file, along with the experience and skill of the attorney handling the case. A good attorney can usually tell early on in the life of the case whether it is defensible, or whether it should be settled. A good adjuster instinctively knows how to evaluate these cases, and trusts his defense attorney to both push him in the right direction, and to provide sufficient analysis and documentation to support his decisions. Adjusters have to justify expenditures to their superiors, and they can only get away with spending money on a case if the attorneys will help them explain why paying money to settle the case is smarter than risking an adverse result at trial. While Prof. Kritzer=s experience of penny-pinching and second-guessing is certainly common, there are many adjusters who have faith in their attorneys and will follow their advice, even if that advice means that the case should settle for the policy limits, or be defended through a trial.