Do Defense Costs Matter to Insurance Companies?

Defense costs are rarely a big factor to the major insurance companies in 2011
I think there is a conventional wisdom out there that insurance companies will settle cases because they fear litigation costs. I really think, on the micro level in which Maryland accident lawyers deal, all they fear is verdicts. As a result, defense costs seem to be a factor of decreasing significance in settlement negotiations. Most large insurers have “captive” staff counsel offices in major metropolitan areas. Sure, this still costs real money. But the insurance companies don’t quite see it that way. Because these lawyers are direct employees of the insurer, and who do nothing but defend against lawsuits brought against that carrier’s insureds, the cost – the significant cost – get obscured.

Insurance companies – and the Baltimore Sun for that matter – seem sold on the cost savings on in-house lawyers. I get the logic. These lawyers (and their offices and staff) are a fixed cost, so adding one more case to defend does not appreciably change the carrier’s costs, or its settlement analysis on any particular case.

Even in cases where carriers hire outside counsel, the cost of defense may not be a significant factor in the insurer’s settlement analysis. For many types of claims, such as defense of auto accident claims, competition for insurance defense work is intense and frequently defense counsel is competing on price to get a significant volume of work from a particular insurer. It is not unusual for experienced defense attorneys to do this kind of work for hourly rates below $150 per hour. Of course, they pad their bills unmercifully. (I’m kidding, I’m kidding.) Often defense firms will even handle small claims for a flat rate to guarantee a steady volume of work. When a defense can be obtained so cheaply, defense costs are unlikely to significantly affect settlements.

However, for more complex cases involving death, catastrophic injury, or product liability, defense costs may be an issue. These claims often require more skilled counsel than the run of the mill motor tort, and have higher trial costs dues to the array of costly experts required. In cases like these, defense costs still remain a factor in insurers’ settlement evaluations. But even then, because the issue seems to be off the insurance companies’ radar screen, and adjusters are just not trained to focus on it, the idea of costs just does not get much attention.