Litigation and Trial - Max Kennerly : Philadelphia Trial Lawyer Max Kennerly : Business and Commercial Litigation : Civil Attorney : The Beasley Firm : Philadelphia Pennsylvania

In a comment on Overlawyered, Ted Frank points to his draft paper (with Marie Gryphon), Negotiating in the Shadow of 'Bad Faith' Refusal to Settle: A Game Theory Model of Medical Malpractice Pre-Trial Settlements and Insurance Limits:

Recent empirical studies of Texas data by Hyman et al, Zeiler et al, and Silver et al suggest that insurance limits affect settlements of medical malpractice cases. Writing separately, Silver argues that insurance limits act as a de facto cap on malpractice payouts, that plaintiffs are being underpaid as a result, and that therefore legislative caps on damages are unnecessary. But this hypothesis is inconsistent with the data, which indicates that forty-seven percent of cases in which plaintiffs obtain verdicts above policy limits are subsequently settled above policy limits. We propose to reconcile the data by accounting for the effects that third-party causes of action for alleged bad-faith refusal to settle — known in Texas as a Stowers action — have on pretrial settlement negotiations. If an insurer in Texas is presented with a settlement offer within insurance limits, refuses to settle, and the plaintiff wins an award greater than insurance limits, the plaintiff is entitled to sue the insurer for the full damages amount, plus punitive damages, for refusal to settle. In this paper, we explore the game theory of medical malpractice settlement negotiations in the shadow of Stowers.

Based on their (admittedly, and necessarily, simplistic) model of malpractice settlements, they run a Monte Carlo simulation.

It's not a bad idea, but they've missed one of the most important factors in settlement — the willingness and ability of the plaintiff to fight through years of risky litigation, trials, appeals and bankruptcy, where they must succeed 100% of the time to recover — and haven't shown why the existence of third-party bad faith lawsuits (i.e., those brought by the plaintiff against the defendant's insurer) contribute more towards settlement than the existence of first-party bad faith lawsuits (i.e., those brought by the defendant against their insurer).

Let's start with the biggest missing element from their model:

Silver, et al. suggests that there are polite reasons not to seek more than [the insurance policy limits]. But this hypothesis contradicts both what we know about the incentives of attorneys and the empirical data. Are we to believe that trial lawyers, out of the goodness of their heart, refuse to seek more than [insurance policy limits]? This seems improbable: the insured doctor is likely to have substantial assets, trusts provide limited protection, and the plaintiff attorney’s fiduciary duty to her client requires her to zealously pursue the doctor’s assets.

There are indeed "goodness of heart" considerations: it's psychologically easier to take an insurance company's reserves — which have been collected and maintained for the purpose of compensating injured plaintiffs — than to take an individual's personal assets.

But let's put that aside and focus on the money. Keep in mind that, in most circumstances, the insurer can't just pay their policy limits and wave goodbye to the defendant while the plaintiff goes after the defendant's assets. If the defendant doesn't want to pay any of their own money, then the insurance company will keep defending them to a full and final conclusion, without paying the plaintiff a dime in the meantime.

Most often, the settlement of an above-policy-limits claim at policy-limits is not due to the goodness of anyone's heart: it's the rational choice between either settling at insurance policy limits and walking away with the money now, or refusing the insurance money and then chasing the doctor's assets for years (with five-or-six figure additional costs) through trial, appeals, re-trials, bankruptcy, bankruptcy appeals, and bankruptcy discharge, which often pays unsecured creditors a fraction of their claim's value. And don't forget: the plaintiff has to be successful in each and every one of those proceedings.

If the insurer actually tenders their full policy limits, then my "fiduciary duty" to the client typically compels me to recommend the client take the policy limits now, rather than starve themselves for years and endure the substantial risks of running the entire civil legal gauntlet — where they must succeed 100% of the time to recover anything — for a theoretical shot at more.

To their credit, the authors admit at the end that they haven't included these factors:

This is still a relatively simple model: it assumes instantaneous and frictionless rulings, rather than an expensive process that may take several years with substantial fees for attorneys and medical expert witnesses. We assume that the trial court’s judgment is 100% accurate, and that there will be no appeal. We therefore do not consider the issue of post-trial settlement. In real life, the risk that a favorable judgment will be struck on appeal one reason why so many large judgments are settled so seemingly favorably, but it is impossible to estimate the size of this effect without qualitative data that the Hyman “haircut” study does not have.

Trials take years. We make no effort to compare the value of a settlement in the hand with a judgment several years in the future that is stayed by appeal. On the other hand, Texas has relatively generous post-judgment interest rates with a floor of 5%. Expanding the model to consider the time-value of money from early settlement would be useful in adjudging the merits and effects of the so-called “early offers” reform. As Zeiler notes, such time-value can also result in settlements below policy limits by virtue of aggressive negotiating by insurers.

Those two economic issues — the risk of losing on appeal (and/or retrial) and the time value of money — create a massive disincentive against attempting to pursue assets beyond the insurance policy limits. Post-judgment interest is generally irrelevant in the context of cases with damages/judgments larger than insurance proceeds: unless the plaintiff wants to go all the way through appeals, retrials, judgment execution, and bankruptcy, then, regardless of any post-judgment interest, the plaintiff's recovery is still effectively capped at the insurance policy limits.

That's the first problem: the failure to consider the effect of the willingness and ability of the plaintiff to fight through years of risky litigation on settlement.

Here's the second problem: the authors "add a Stowers factor S, which is equal to expected Stowers recovery given a victory at the underlying medical malpractice trial" but don't say how they calculate S. More importantly, though, they don't explain why a third-party bad faith recovery would be expected to be any larger than the first-party bad faith claim available to the doctor if she believes the insurer did not handle the case properly.

When an insurer worries about a potential bad faith claim, they're not just worried about the plaintiff suing them. Indeed, they're usually more worried about the defendant suing them.

Like Dr. Woo:

Robert C. Woo is a Seattle-area dentist. An online guide praises his "first-class service" and "painless procedures." It is likely that Tina Alberts, his former assistant, disagrees.

Alberts cared for pot-bellied pigs, a frequent topic for office banter. Dr. Woo enjoyed taunting her with accounts of his boar-hunting trips, and a picture of a skinned pig hanging from a hook. He predicted a similar fate for Walter, her beloved pet pig. Dr. Woo informs us that this was all part of a "friendly working environment."

When Alberts required surgery to replace two teeth, Dr. Woo saw an opportunity to cement this self-impression of bonhomie. Once she was completely sedated, he halted the agreed procedure, and began a new one. Replacing her teeth required the temporary installation of standard false teeth. Dr. Woo had secretly ordered a second set of temporary teeth, shaped like boar tusks. Removing her oxygen mask, he inserted the tusks and - we must assume this was part of the friendly working environment - took photographs of her with her eyes and mouth pried open. Returning at last to his professional duties, he removed the tusks and inserted the correct temporary teeth.

A month later, Dr. Woo's staff presented Alberts with the pictures at her birthday party. The fun-loving Woo described them as a "trophy" to take home. Home she went, never to return. Instead, she sued Dr. Woo for battery, invasion of privacy, medical malpractice, and a host of related claims.

Dr. Woo's insurance company refused to defend him in Alberts' lawsuit. Dr. Woo settled the case on his own for $250,000, then sued his insurance company.

And won:

Because his insurer should have defended him, Dr. Woo recovered the $250,000 he had paid Alberts. But he also claimed emotional distress due to his insurer's abandonment. Despite "the absence of any medical, psychiatric or expert testimony" attesting these injuries, a jury awarded him $750,000, which suggests the rather even quality of justice throughout the judicial system of Washington State. And naturally, Fireman's had to pay for Dr. Woo's legal costs.

The end result was exactly what Ted Frank and Marie Gryphon's paper is supposed to focus on: a situation in which an insurance company was forced to pay more than the policy limits for a malpractice claim. Yet, in Dr. Woo's case, the third-party Stowers action had nothing to do with it — it was a purely first-party claim brought by the doctor. 

I hope there's more study down this field; the world of litigation and defense & indemnity insurance is ripe for rigorous game theory analysis. But it needs to be as thorough and rigorous as the study of any other economic situation.

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Via Atrios, we have Stanley Fish's recent NYTimes column, The Rise and Fall of Academic Abstention:

As recently as 1979, legal academics Virginia Nordin and Harry Edwards were able to say that “historically American courts have adhered fairly consistently to the doctrine of academic abstention in order to avoid excessive judicial oversight of academic institutions” (Higher Education and the Law). Academic abstention is the doctrine (never formally promulgated) that courts should defer to colleges and universities when it comes to matters like promotions, curricula, admission policies, grading, tenure, etc. The reasoning is that courts lack the competence to monitor academic behavior; they should get out of the way and let the professionals do the job. “Courts are particularly ill-equipped,” Chief Justice Rehnquist declared in 1978, “to evaluate academic performance.” (Board of Curators of the University of Missouri v. Horowitz)

In 2009, courts still pay lip service to this doctrine but in practice, Amy Gajda tells us in her terrific new book, “The Trials of Academe,” they now boldly go where their predecessors feared to tread. Once, “if a student or faculty member had the temerity to bring a grievance to court, is was likely to be bounced out in short order.” Now, however, “courts feel free to enter . . . from the ground up, parceling out the right and obligations of each disputant down to the last dollar.” Indeed, “litigation and ‘rights talk’ have permeated every crease and wrinkle of academic life.”

Fish concludes,

When I began teaching in 1962 at the University of California in Berkeley, I asked older colleagues about the decorums and rules of the classroom. In response, I was given the Myron Brightfield rule. Brightfield was then a very senior member of the department. His rule (and I paraphrase) was, When you close the door, there’s nothing they can do to you. Those were the days, and they had their injustices as well as their advantages. Now we have justice, or at least the demand for justice, all the time and it may, Gajda suggests, be killing us.

Rubbish.

Fish highlights several cases to make his argument-by-anecdote. Let's look at his "favorite:"

My favorite (and Gajda’s, too) involves a student in osteopathic medicine who, after failing an important rotation, was dismissed because “he didn’t have the basic understanding that he should have as a fourth-year medical student.” The student sued on the grounds that he had been promised a degree by a phrase in a student handbook that described the program he was enrolled in as “a four-year curriculum leading to the DO degree.”

Anyone with the slightest familiarity with the way universities work would know that ‘”leading to” included the qualification “provided that the requirements for graduating were met” — a medical degree is not equivalent to the certificate you get for having completed six weeks of a summer camp — but the courts were persuaded to a more literal (and perverse) reading and awarded the plaintiff a partial tuition reimbursement. But he wanted more and he got it by arguing that he should receive an amount commensurate with the earnings he would have accumulated had the “promised” degree been conferred. Jurors ordered the medical school to pay him $4.3 million.

The case is Sharick v. Southeastern Univ. of the Health Scis., 780 So. 2d 136, (Fla. Dist. Ct. App. 3d Dist. 2000).

Indeed, as Fish says, anyone with "the slightest familiarity" with academia knows that the award of a degree is predicated on meeting the school's requirements — except, of course, for the school in question, which argued the student "contracted with [the school] solely to provide an education in exchange for payment of tuition." Id., 139 (emphasis added).

Got that? The school's argument was that, regardless of whether the student met the requirements, all the school contracted to do was "provide an education" and not actually award the degree. That is to say, the school argued that it was free to destroy the student's career for any reason, a bad reason, or no reason, so long as it had "educated" him in a way the student couldn't possibly use without the actual degree. The court disagreed. So do I. So, too, apparently, does Fish.

Contrary to Fish and Gadja's description, the student didn't allege the school "promised" a degree but didn't give it because he failed, he alleged that "Southeastern's decision to dismiss him [two months before his graduation] was arbitrary, capricious, and/or lacking any discernable rational basis." Id., 138. It's the only way he could recover under Florida law, in light of the "academic abstention" doctrine that Fish claims has been "increasingly narrowed to the point that it is in danger of vanishing."

A jury agreed with the student. In fact, the evidence against the school was so overwhelming that Southeastern didn't even appeal the jury's findings. The school only appealed the trial judge's rejection of their ridiculous and insulting "solely to provide an education" argument.

Let me tell you, as a plaintiff it's not easy to prove "arbitrary and capricious" behavior. It's one of the highest bars a plaintiff can ever face, and typically results in the plaintiff losing. Do you have any doubt that, if Southeastern had any credible defense at all, it would have appealed the jury's findings? All they had to show was some reason — any reason — justifying the student's dismissal and the verdict would have been overturned.

Yet, they didn't even try, presumably because they knew they couldn't. Rather than making things right, however, they forced him into over fifteen years of litigation, litigation which is still going on. See the most recent appeal, Nova Southeastern Univ. of the Health Scis., Inc. v. Sharick, 2009 Fla. App. LEXIS 12494 (Fla. Dist. Ct. App. 3d Dist. Aug. 26, 2009)

How are we to take Fish or Gadja seriously when their "favorite" example shows why academic institutions should not be above the law?

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Walter Olson at Point of Law refers us to a proposal by a Democratic legislator in Maryland:

Primary-care providers who practice at federally qualified health centers do not need to purchase medical malpractice insurance. Why? The government promises to cover any claims against them under the Federal Tort Claims Act. If a patient has a successful malpractice case against the health center provider, the government becomes the insurer and agrees to pay the claim.

The national health reform debate should include a proposal to expand Federal Tort Claims Act coverage to all primary care providers, regardless of where they practice, and to certain specialists (such as obstetricians) where access to care is threatened. Doing so would have multiple benefits: Doctors, nurse practitioners and other primary care providers would be freed from the burdens of finding and paying for costly malpractice insurance; future medical students would have an incentive to choose primary care, addressing a critical shortage; and we would finally begin to bend the "cost curve" in health care.

A number of states, including Pennsylvania, already have state-administered medical malpractice insurance. In Pennsylvania,

32. What is Mcare?

“Mcare” stands for the Medical Care Availability and Reduction of Error Fund. It was created under Act 13 of 2002 and is the successor to the Medical Professional Liability Catastrophe Loss Fund, better known as the “CAT Fund.”

33. How does Mcare work?

Currently, Pennsylvania law requires physicians to carry a minimum of $1 million of medical malpractice coverage per incident, and physicians must have this coverage in order to be licensed. The first $500,000 of medical professional liability coverage per incident, which is called the basic or primary insurance layer, is obtained through the private insurance market. The second $500,000 of coverage per incident is provided by the state-administered Mcare Fund. Hospitals must also maintain medical malpractice coverage and their required amounts are higher -- $1 million worth of coverage for each incident and $4 million total coverage per year.

The fund is paid for primarily by a $.25 tax on every pack of cigarettes sold in Pennsylvania. Right now, the fund has a whopping $414 million surplus. All though the fund says that the surplus was caused by "the improvement in the medical malpractice climate in Pennsylvania," that's not the whole story.

Government-administered casualty insurance programs run the gambit from fair and equitable, like the September 11 fund administered by Kenneth Feinberg, to hostile and vexatious, like the Pennsylvania Property and Casualty Insurance Guaranty Association (intended to cover insurance claims against insurers that have become insolvent), which has been reprimanded by the Pennsylvania Supreme Court for its "slash and burn approach to protecting PPCIGA’s assets."

Pennsylvania's MCARE fund sits somewhere in the middle, and is not without its faults. Let me give you an example.

Not too long ago, I attended a court-ordered settlement conference in a medical malpractice action brought against two physicians and a hospital. The case was quite serious, with seven-figure damages, the absence of any good explanation for why the defendants did what they did, and highly damaging testimony by another physician at the hospital who had recognized the problem in a timely manner and yet had their recommendations for emergency treatment overruled.

The federal judge hearing the case (we were in federal court because the plaintiffs did not live in Pennsylvania) ordered the parties come to the conference with authority from the insurance carriers to settle. Such naturally included MCARE, which often ends up matching the contributions of the physicians and/or hospitals in a suit.

At the settlement conference one physician showed up ready to tender policy limits. The other physician and the hospital showed up with substantial authority and a willingness to negotiate.

MCARE sent a representative with little knowledge of the case and no authority to even begin negotiations, much less offer money. Such was, of course, a blatant violation of the court's order requiring the insurance carriers appear with authorization.

The judge was not amused, and so requested the MCARE representative phone home until they reached someone who could authorize a settlement.

The representative's efforts failed; not only did the representative not have any authority, but they couldn't find anyone who did. Such would have been a typical example of settlement-conference rope-a-dope but for the authorization phrase in the court's order. After the representative couldn't find anyone, the judge started making the calls, until they found the highest-ranking officer who was available, who they calmly informed was in violation of a federal court order, and as such should prepare for a visit by U.S. Marshals.

After that, MCARE changed its tune, and we settled the case by the end of the day. Like I said: MCARE is somewhere in the middle. Had it been PP&CIGA, I wouldn't have been surprised if they just dared the judge to send the Marshals out.

All of which is to say, it's not crazy to think that the government can run a liability insurance company, but the devil is in the details (Feinberg wrote a book about the difficulties of evaluating damages in 9/11 Fund), because government-administered casualty insurance programs have the same institutional incentives to thwart claimants, but don't have the same disincentives (such as the potential for bad faith lawsuits) against dilatory and obdurate conduct.

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Business Week points us to the major cases.

As Litigation & Trial is a legal, rather than a business, blog, I'm going to take their list of cases but replace their description of each with the actual legal issue at stake, along with links to SCOTUSWiki, which hosts all of the relevant briefs for your reading pleasure:

Bilski v. Kappos: Whether a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (”machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101 and whether the “machine-or-transformation” test for patent eligibility, contradicts Congressional intent that patents protect “method[s] of doing business” in 35 U.S.C. § 273.

Free Enterprise Fund v. Public Company Accounting Oversight Board, et al.: Whether the Sarbanes-Oxley Act is consistent with separation-of-powers principles - as the Public Company Accounting Oversight Board is overseen by the Securities and Exchange Commission, which is in turn overseen by the President - or contrary to the Appointments Clause of the Constitution, as the PCAOB members are appointed by the SEC.

Black et al. v. United States: Whether the “honest services” clause of 18 U.S.C. § 1346 applies in cases where the jury did not find - nor did the district court instruct them that they had to find - that the defendants “reasonably contemplated identifiable economic harm,” and if the defendants’ reversal claim is preserved for review after they objected to the government’s request for a special verdict.

American Needle Inc. v. NFL, et al.: Whether NFLP, the NFL, and the teams functioned as a “single entity” when granting the company an exclusive headwear license and therefore could not violate Section 1 of the Sherman Act, 15 U.S.C. 1, which requires proof of collective action involving “separate entities.”

United Student Aid Funds, Inc. v. Espinosa: Where a debtor declares to discharge a student loan debt in his Chapter 13 bankruptcy plan, has the debtor satisfied the due process requirements of Mullane v. Cent. Hanover Bank & Trust Co, and does the fact that the debtor failed to initiate an adversary proceeding render the enforceability of the discharge order under 11 U.S.C. 1327(a)inapplicable?

Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company: Can a state legislature properly prohibit the federal courts from using the class action device for state law claims?

Hemi Group, LLC, et al v. City of New York: Whether city government meets the Racketeer Influenced and Corrupt Organizations Act standing requirement that a plaintiff be directly injured in its “business or property” by alleging non commercial injury resulting from non payment of taxes by non litigant third parties.

Graham County Soil and Water Conservation Dist v. ex rel. Wilson: Whether federal courts have jurisdiction over False Claims Act suits based on revelations in administrative reports or audits issued by state or local governments, as opposed to the federal government.

Stay tuned for more discussion of each in upcoming posts.

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Although some physicians continue to claim medical malpractice liability is the biggest problem affecting access to health care (despite the total cost of medical malpractice premiums being $0.50 for every $100 spent on health care, and despite premiums being the lowest they've been in over forty years), the real problem, as alluded to by this American College of Surgeons report, is "declining reimbursement."

That's a euphemism for one of the ugliest businesses in America.

We got a glimpse into that ugly business last week, when Bayonne Hospital Center sued Horizon Blue Cross Blue Shield of New Jersey (hat tip: Movin' Meat), the largest health insurer in New Jersey, with just under 4 million insureds. The press release is mind-boggling:

The complaint, filed late yesterday in the U.S. District Court in Newark, New Jersey, provides a detailed account of Horizon’s business practices which run counter to the insurer’s contractual duties to its customers, its obligations under state law and its stated commitment to the interest of public health. Some of the most offensive Horizon practices detailed in the complaint include:

• A systematic campaign discouraging patients from seeking emergency care at BHC despite it being the closest and safest option for urgent care for the residents of Bayonne
• Intimidation of patients by threatening denial of coverage if they seek treatment at BHC
• Interference with care by sending couriers to BHC to tell patients undergoing medically necessary treatments to leave BHC and seek care at a hospital that is “in network”
• Indefensible denial of claims, often while the patient is still undergoing care
• Unilateral determinations by Horizon bureaucrats that emergency room patients are medically stable enough to be discharged to home or transferred to other in-network facilities without consulting the patient's attending physician

The complaint not only details Horizon’s atrocious behavior and policies with BHC, but also exposes Horizon’s multi-billion dollar financial success at a time when New Jersey’s hospitals cannot afford to provide healthcare to the communities which they serve. The complaint also reveals Horizon’s gold-plated executive compensation packages and its publicly stated plans for conversion to a “for profit” entity and initial public offering.

Keep than in mind next time someone tells you health care reform might involve "rationing." We've already got rationing, but right now it's done for profit, and done without any regard for your health or safety.

The complaint (a poorly rendered version is available here) alleges thirteen counts, which I break into four main types of claims: antitrust, ERISA, consumer fraud (including Lanham Act), and business torts.

I find that approach a little odd. Most cases involving fraudulent claims denials by insurance companies -- like Grider v. Keystone Health -- primarily allege racketeering ("RICO") claims. Antitrust continues to be notoriously hard to prove, and recent efforts to reform it have already run into trouble. ERISA is a wicked beast of a claim, with dozens of loops and curveballs, and though it quite clearly covers how employers administer the health benefits plans they run, it's not clear how it applies to the health insurance company itself.

That said, these cases aren't easy or simple, and I give the lawyers credit for creativity. They may end up making good law here, and perhaps they'll amend to allege RICO later.

Of course, let's not forget why Grider v. Keystone Health became so prominent: because the defense lawyers for the health insurance company, taking their cues from the client, brought the obstructionism and deception that pervades the health insurance industry into the courtroom, prompting severe sanction from the court.

Like I said: one of the ugliest businesses in America.

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I've written before about Contingent Fee Business Lawyers As Venture Capitalists and Lawyers Who "Don't Take Possible Losers," so I was thrilled to read the NYTimes yesterday:

Richard W. Fields says he has come up with a win-win financial strategy for the downturn. He is investing in lawsuits.

Not in trip-and-fall cases, mind you, but in disputes that are far larger, more costly and potentially more lucrative, often pitting major corporations against each other.

Mr. Fields is chief executive of Juridica Capital Management. which runs a fund that invests in one side of a lawsuit in exchange for a share of any winnings.

Larry Ribstein has the most thorough commentary on it:

Litigation financing can be viewed as simply another way for the capital markets to help firms exploit productive assets. Of course there are special problems relating to outsiders stirring up claims by simply funding actions by others (maintenance), particularly where the investor gets some of the proceeds (champerty) or the claims are groundless (barratry).  Also, confidentiality and privilege rules may forbid disclosure of litigation information to outside funders, making these particularly difficult investments. The basic problem, as discussed in my earlier blog post, is that "it turns litigation into a business rather than the search for corrective justice."

With respect to the excessive litigation point, it's worth noting that the hedge funds aren't financing the most abusive types of strike suits. These aren’t consumer class actions, but b2b litigation. ...

I asked Larry in comments for some support for that latter point, to no avail, and I stick by my point that "There's no shortage of patent, copyright, antitrust and securities regulation defense attorneys willing to opine that those 'b2b' areas are as ripe with abuse as any other legal field."

In any event, we already have an industry in which billions (potentially trillions) of dollars of investments are pooled to fund litigation directed towards a particular result. We call it "insurance."

There is a good reason that plaintiff's trial lawyers up against insurance companies (not just in personal injury cases like wrongful death or medical malpractice, but also a variety of "b2b" claims like director & officer liability) accept it as an article of faith that they will not get any reasonable settlement offers until the eve of trial. The economic relationship between insurance companies, defense lawyers, and policyholders creates a situation in which no one mentally accepts the legitimacy of the claim -- much less a reasonable value of it -- until they are staring down the barrel of a verdict.

Thanks to defense liability insurance, even the most obvious of cases will be met with denial and furious litigating of any and all liability, including a denial of basic common sense principles such as a truck driver being the "agent" of the trucking company or a hospital having a duty to its patients.

Why?

To roll the dice: spending a couple thousand dollars litigating the issue could save them the cost of the entire judgment, or at least cause the plaintiff and their lawyer to worry and accept a smaller settlement.

So count me as deeply unimpressed by fears that these hedge funds will spur frivolous plaintiff's litigation: we've already got plenty of frivolous defense litigation and no one raises a peep.

Moreover, as I've mentioned time and again, investing in lawsuits is a risky business. The potential downside is 100%. Look at Juridica's cautious business model:

The investing companies say that because they do not take control of the lawsuit from the company and lawyers waging it, their most important task is identifying cases likely to produce a substantial return. That means, for example, rejecting claims that raise novel legal questions or that will probably end up before a jury, Mr. Fields said.

“Juries are a coin toss,” and that is too much uncertainty, he said. The company also avoids cases where the outcomes are difficult to predict because they could draw political attention or could be reversed on appeal, and cases in which the other side lacks deep pockets.

Let me reiterate that: these litigation investment hedge funds only take non-jury cases with simple issues and low odds of appeal.

That's a small fraction of the litigation and trial market, one with no "frivolous" cases at all. The funds are investing solely in the cases they believe are very likely to win.

The "danger" of frivolous cases is thus non-existent: the real "danger" is when plaintiffs with meritorous cases can't afford to pursue them.

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A recent post at a prominent club / venue in San Francisco, DNA Lounge:

Several years ago, there was some kind of scuffle and one of our customers who was dancing on the stage fell off and hurt her ankle. She sued us. I'm not sure what exactly her reasoning was, but she did, because this is America, and you can sue anybody for anything. She claimed she had spent $4,000 on medical bills (chiropractors!) and asked for $500,000 in pain and suffering.

We learned in the discovery phase that this woman had also been in three automobile accidents in the previous two years, for which she had been going to chiropractors already. How about that.

We submitted this claim to our insurance company, like you do, and their lawyers handled it. They ended up settling the case by paying her around $11,000. And here's where it gets fun:

Our deductible was $10,000. So the lawyer, who was working for the insurance company, did right by the insurance company. It only cost them $1,000! But he didn't try to negotiate anything lower, because that would have been a waste of his time, since he wasn't working for us, and that was the part we would have to pay. Oh, but it gets better.

It turns out that the fine print on our insurance said, in longwinded, 4-point, incomprehensible legalese, that the rates we had been paying for years were merely "estimates". So after our claim, the insurance company "audited" us, and retroactively raised our rates for the last four years by $20,000 per year. So the fact that we filed a claim at all caused the insurance company to demand an additional $80,000 from us.

At that point, we hired our own lawyer who negotiated that $80,000 down to $40,000, paid out over a year instead of being due immediately. Plus several thousand more for the new lawyer, obviously.

Though the author heaps blame on the plaintiff for what happened here, the outcome would have been exactly the same if the claim had been legitimate: $10,000 out of pocket plus a retroactive bill raising the rates.

There were two causes of this expensive affair: an absurdly high deductible and an unethical, unregulated insurance company.

Every bricks and mortar business which invites customers onto its premises -- whether it's a nightclub, a coffee shop, a computer store, a hair salon, a gym, a jewelry store, a DVD shop, a law firm, whatever -- should expect paying its deductible from time to time to defend or to settle claims.

I know, you are perfectly safe, and flawless in your execution of all mundane asks like ensuring walkway cracks are repaired in a timely fashion.

Are your employees? Your customers? The building? The location? In the case above, a fight broke out; not necessarily the club's fault, but if they had inadequate security and did not react appropriately then indeed their responsibility, at least in part, which in many jurisdictions exposes them to potentially paying the whole judgment.

It's not like driving a car where you can take a handful of defensive driving steps and dramatically reduce your odds of being at fault. (Even there, you can still expect to cause an accident at some point.) Someone will get hurt, or at least claim they were hurt, at your premises. A nightclub that serves alcohol is continually exposed to liability from multiple sources, like slip and fall, premises security, and dram shop.

A $10,000 deductible sounds cheap when you pay the premium, and it is exactly that: cheap. You'll pay the deductible more than once. You might pay it every single year.

Moving on to the unethical insurance company, if the insurance company-appointed lawyer "didn't try to negotiate anything lower, because that would have been a waste of his time," call me. The policyholder's interests come first. Anything less is bad faith.

As for the "estimated" premium, perhaps this was during the Quackenbush era. That wouldn't fly in most jurisdictions these days and would form the basis of a fraud, deceptive trade practices, and consumer protection act class action lawsuit and an insurance commissioner investigation.

The post ends:

What's the lesson here, kids?

I think it's, "people are scum" and/or "never start a business."

No. A properly-insured business will find a slip and fall soft tissue case to be a minor annoyance for which they will be liable, if at all, a nominal sum.

The lesson is "don't skimp on your deductible" and/or "regulation of the insurance industry is important."

Did you choose a reasonable deductible? Have you called up your local, state and federal representatives lately to ask what they're doing to keep insurance companies honest?

And do you know who is trying to protect you right now? Trial lawyers. They're fighting every day to keep insurance companies from abusing policyholders the way DNA Lounge was abused.

You don't have to be a lawsuit horror story.

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On Christmas Eve, the Third Circuit issued its opinion in Jurinko v. The Medical Protective Company and The Medical Care Availability and Reduction of Error (MCARE) Fund, a fascinating insurance bad faith claim arising from the failure to tender policy limits in a medical malpractice case, prompting an article in yesterday’s Legal Intelligencer and a flurry of twitter and blog activity. Perhaps it’s a lesson to all of us in the limitations of twitter and blogs and other rapid-response social media. Bob Ambrogi’s tweet “3rd Circuit imposes 1-1 ratio for punitive to compensatory damages” was technically correct, as was this AmLawDaily blog post summarizing the holding:

The court, citing two U.S. Supreme Court rulings (including the Exxon case), ruled that the award was excessive under a test the high court devised in a 2003 case. The judges went further, though, in concluding that the Supreme Court's general path points toward a 1-1 ratio between compensatory and punitive damages becoming a general guidepost. Good news for corporate defense lawyers.

Both, however, miss the point: the Third Circuit didn’t create or recognize a brightline 1-to-1 ratio. It’s a little more complicated than that.

Taking the “precedential” and “non-precedential” designations at face value (in spite of Federal Rule of Appellate Procedure 32.1 making such designations irrelevant), the non-precedential Jurinko opinion must give way to the precedential CGB Occupational Therapy v. RAJ Health Services, et al. opinion of August 23, 2007, which reduced a verdict of 18-to-1 punitive-to-compensatory damages down to 7-to-1 in another case also involving purely economic damages (and thus falling squarely under State Farm and Gore).

On the face of the two opinions, the take-home message is that, in the wake of recent Supreme Court precedent, trial and appellate courts will give very little weight to jury’s punitive damages awards and will instead look anew at the facts to determine, in the court’s own judgment, the degree to which the plaintiff established the State Farm v. Campbell elements for exceeding the 1-to-1 ratio:

(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the [factfinder] and the civil penalties authorized or imposed in comparable cases.

State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 418 (2003). (I note here how courts frequently overturn jury verdicts awarding punitives but never overturn verdicts denying punitives.)

Viewed that way, the distinction between the cases is clear: the conduct of Medical Protective was not nearly as reprehensible as the conduct of Sunrise (the company responsible for the most wrongful conduct in CGB Occupational Therapy), because Medical Protective merely acted in an outrageous manner to protect its own financial interests, rather than intentionally setting out to harm the plaintiff, as Sunrise did. The size of the respective underlying compensatory awards was also critical: in Jurinko, the jury awarded $1,658,345 in compensatory damages, as compared to the $109,000 awarded in CGB.

In essence, as a defendant’s conduct becomes worse, punitives above 1-to-1 are allowed but will be discounted by the size of the compensatory damages. (Again, note how no opinion will conclude, for example, “because the jury did not recognize how truly reprehensible the defendant’s conduct was, we hereby triple the punitive damages awarded.”)

Which brings me to what I believe is the real meaning behind both of these cases: courts have begun to take an economic, as opposed to legal, view of punitive damages. In line with the Supreme Court’s criticism in Exxon v. Baker of “the stark unpredictability of punitive awards” – an economic, not legal, concern – courts are increasingly unwilling to uphold verdicts designed to financially punish defendants (one of the explicit goals of punitive damages), even where the defendant has acted in a manner the court itself has recognized as “outrageous” and “reprehensible.”

I think that’s a shame, particularly given the mechanism by which such civil immunity from bankruptcy is being enacted: constitutional interpretation, the second most powerful weapon in the legal arsenal after constitutional amendment. If the duly-elected legislature decides that unlimited punitive damages awards are outweighed by the need for “predictability” after outrageous and reprehensible conduct, that’s one matter, but to see the courts usurp an economic policy determination under the rubric of constitutional interpretation is quite another.

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A Pennsylvania insurance coverage / bad faith question:

I bought my home 5 years ago from estate.  Now, I'm selling my home, the buyer's title insurance company found 3 problems, including a tax lein of 55.00 plus penalties.  My title insurance company offered ademity letter to new title insurance company.  They don't want that, they want problems resolved.  My title insurance company says too bad.  Not worth the money to find my file.  They don't know whether claims are valid or not.  Will not resolve them or see if they need to be resolved.  Won't even look at file!  This seems wrong.  What should I do?  We had a closing date of Sept.29 that will probably have to be moved.  May lose sale.  Do I need a lawyer?

And my response:

You should speak with a plaintiff's attorney experienced in bringing bad faith claims against insurance company.

When an insurance company breaches the terms of the insurance policy the insured can bring a claim for breach of contract and recover the damages resulting from the insurance company's breach. A number of title insurance policies include a requirement that the title insurance company actively work to resolve title issues, and every one I've seen requires the title insurance company at least pay for all damages resulting from such title issues, up to the policy limits. It sure seems like your title insurance company is refusing to do that, which is a breach.

Moreover, in Pennsylvania, every insurance company has a legal duty to promptly and reasonably evaluate and adjust claims in good faith. If they don't, there is a specific legal claim available against them which can include the award of attorneys fees, interest and punitive damages. It does not seem like your claim has been evaluated fairly.
 

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1.  Allstate

2.  Unum

3.  AIG

4.  State Farm

5.  Conseco

6.  Wellpoint

7.  Farmers

8.  United Health

9.  Torchmark

10.  Liberty Mutual

Lines up with this intriguing website, which also lists Allstate the worst and Chubb the best.

I'm inclined to agree. I've been very impressed by Chubb's claims handling. I once had to interpret their "Masterpiece" policy to see if it covered a particular act which a jury could easily find was intentional (and, if proven, would have been criminal). Amazingly, it did, and without any weasely insurance-coverage language designed to tie up such a question in the courts for years.

I switched my own homeowner's to it promptly.

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