Legal eagles: risk managers who take on legal duties work harder but help lower costs to their organizations

Risk & Insurance, Oct 1, 2003 by Tom Starner

Christine Sheedy, a risk manager at lighting manufacturer Osram Sylvania, faces the typically intense challenges every risk manager faces these days: brutal cost control, a tenacious hard market and persistent competition from foreign manufacturers. In addition, having taken on the responsibilities as the firm's "legal eagle;" Sheedy maintains a keen interest in legal bills. The onerous tariffs associated with the process of settling or litigating property and casualty insurance claims levied against Osram Sylvania, the 102-year-old business spun off by GTE Corp. back in 1993, often amount to tens of thousands, if not millions of dollars.

"We're not sell-insured, but we have very large deductibles, so I need a lot of autonomy and latitude on managing litigation costs," says Sheedy, speaking by telephone from her office in Danvers, Mass.

Osram's small in-house legal staff consists of four attorneys. The risk management department is even smaller, with only two people. Thus, it's important for her to get involved in a process known as litigation management. For Sheedy, it's not just about looking for opportunities to reduce legal fees. She believes litigation management, if done well, also is a good way to share information and data within the risk management department. To make sure that data is shared, Sheedy created a folder that lists cases pending, which attorneys are being used, and what the fee structure for those claims might be.

"That way, if we have a case in Pennsylvania, for example, we can tap in and see if anyone else has used a firm in that area," she says. "We share information and use law firms, both large and boutique specialty firms, on claims."

Most importantly, Sheedy adds, litigation management must be about getting the best effort for your defense dollar, not necessarily the cheapest. "Focusing on one aspect, say per-hour fees, is a bad idea," she says. "You really should focus on quality and reputation of the law firm, and what are they doing to make your job easier."

Of course, every risk manager knows that litigation costs related to insurance claims are part of doing business. But year after year, they have taken a larger and larger chunk out of the company's bottom line.

In a report earlier this year, Tillinghast-Towers Perrin reported that the cost of defending and paying liability claims in the United States hit a record $205 billion in 2001, more than $25 billion over the previous year.

According to A.M. Best & Co., in 2001, insurers spent nearly $13 billion in legal defense costs and other litigation cost-containment expenses. Of course, that doesn't take into account what self-insured companies directly pay out each year to defend themselves in claims and resulting litigation.

The amount of money insurance companies have to spend to defend their policyholders against lawsuits has a direct impact on the cost of insurance, according to the Insurance Information Institute. In 2001, for example, defense costs increased in product liability, where litigation is complex, trials tend to last longer and require more documentary evidence, and more expert witnesses are called to testify.

With so much at stake, risk managers who get involved in litigation management are doing their companies, and themselves, a major favor. By keeping litigation costs as low as possible without compromising quality, risk managers can stave off potential increases in insurance premiums as well as save money for their organization.

Easing the RM's Burden

To attorney John Marquess, helping companies manage their legal bills seemed like an obvious choice and career path. Marquess, along with childhood schoolmate and partner Patrick Woods, formed a legal cost-control firm in the late 1980s, long before legal cost containment emerged as a trend.

That first company, Philadelphia-based Legalgard Information Solutions, remains one of the leading firms in the field of litigation management. The duo sold Legalgard in 1997 and moved across the Delaware River to Haddonfield, N.J., 20 minutes away, where they opened another company by the name of Legal Cost Control.

Legal Cost Control is reviewing all the legal and accounting bills in both the Enron and the Worldcom bankruptcies. The firm's clients also include the Proctor & Gamble Co., Owens Corning and the City of Chicago.

"Historically, we did deal with risk managers, mainly because the insurance industry was very much plugged into the legal control strategy early on," says Marquess. "Large corporations have come late to the game."

He says long-time relationships between in-house general counsel and the firms that handled outside legal defense work made the former not all that keen on taking a hard look at legal bills. But that's changed, as companies seek more and better ways to control costs.

"The financial people, the risk managers and chief financial officers, who often control risk management, grew tired of legal fees going up and up," Marquess says. "From a business point of view, the biggest shift has been that the financial officers have gotten tired of general counsel saying, 'We have it under control.'"