Clients regularly ask their counsel to propose alternative fee arrangements and they are growing in popularity. While these arrangements can be beneficial for clients, they should be carefully considered when an insurance company will be paying all or part of the defense fees. Insurers are typically averse to alternative fee arrangements; they are more comfortable with a straight hourly arrangement – after trying to impose rate caps and litigation guidelines of course. Carriers have ingrained methods of managing defense costs and negotiating bespoke alternative arrangements with individual insureds is not cost-effective or efficient for a claims adjuster dealing with dozens or even hundreds of cases. Accordingly, insureds may need to accept more traditional fee deals when retaining counsel that will ultimately be paid by the insurer.
This does not mean that there is no room for creativity. As our readers know, there is typically a gap between the hourly rates that an insurer will pay and the rates charged by an insured’s chosen counsel. Often, insureds are forced to choose between the insurer’s panel counsel — who will accept the insurer’s proposed hourly rates — and independent counsel – who will charge more. One solution is to ask independent counsel to agree to bill at the insurer’s proposed rates, but add an incentive structure. This would allow independent counsel to recover from the client the difference between the insurer’s proposed rates and counsel’s hourly rates if the case has a “successful outcome” – as that term is defined by the insured and its counsel. Insurer consent to the alternative fee arrangement should be unnecessary because any incentive payment would be solely borne by the client. This type of arrangement can be a win-win-win, where the insurer pays only its proposed rates, the insured enjoys independent counsel paid for by insurance during the pendency of the action, and defense counsel can earn additional compensation by bringing home a win for the client. While options may be more limited when a carrier is footing the bill, it does not mean that clients should give up on alternative fee arrangements entirely.