Battle Plans

To defend or to settle? That is the question a good many insurance claims managers and risk managers have asked in recent years when facing lawsuits. In the stubborn area of liability, where the cost of defending or settling court cases is the main reason behind increased claims costs, it is pressing and extremely relevant.

Canada’s tort costs have increased in recent years, moving upward from Cdn$7.3 billion in 1998 to an estimated Cdn$10 billion in 2003. Liability claims rose over the same five-year period from Cdn$1.3 billion to Cdn$2.6 billion. The trend for commercial liability shows few signs of improvement.

Some contend there is an unsettling, tilted playing field in favor of plaintiffs and legal findings that stretch the responsibility of policyholders – and insurers. In addition, there are many stories of defence lawyers crossing over to the plaintiff’s bar to capitalize on a lucrative trend. The result is a steady stream of payouts or settlements for all sorts of liability.

“A lot of insurers have decided to pay to settle these lawsuits instead of investing in fighting them,” Owen Smith, president of Strategic Risk Control, says. Smith is a founding partner of Smith, Wowk law firm. “Right now, the plaintiff lawyers have several weapons, but the weapons are not there for the defence bar or insurers,” Smith says. “It has not been a happy story.”

PLAINTIFF LAWYER’S MAGIC

April Savchuk, past president of the Ontario Risk Insurance Management Society (ORIMS), and a risk management professional with 16 years of experience, confirms Smith’s experience. “I think someone like Owen has witnessed first-hand situations in which judges have stated, ‘If you would have done this, then the judgment would have only been x dollars,'” she says. “By then, it is a case of too little, too late.”

Joe Hardy, a risk manager with 23 years of experience in the profession, has watched plaintiff’s lawyers work their courtroom magic many times. “Many organizations have gone to trial thinking they had everything, but unfortunately found out that the plaintiff’s lawyer had one up on them,” Hardy, the president of Integrated Risk Management Solutions, says. “The real question is whether companies are bringing a business case to show that they are trial ready.”

Smith’s 30-year background as a lawyer has given him ample ammunition with which to build effective litigation defence strategies. “I have seen people lose, and it got to me,” he says. “These are good organizations, they are doing what they think is right – and often it is right – and they still get nailed. We think it’s time they start putting something in place, so they can capture the good practices into a proper system and fight back with it.”

Just what exactly is the “proper system?” Smith spends a lot of time discussing how risk managers and insurers must “package” their risk management programs into a common language of due diligence that is useful and understandable to all – particularly the courts.

“Due diligence is a defence,” Smith says. “Simply put, it means doing what is reasonable to prevent a potential risk from going wrong. With well-conceived programs and effective systems in place, it should be a simple matter to prove due diligence in defence of a claim against an organization. Unfortunately, that is not the case.”

He cites a range of challenges facing the traditional structures of defending lawsuits from a risk management perspective. The first is that most loss control programs are designed with an internal audience in mind – what Smith calls the “risk management trap.” While these systems are often effective from an internal point of view, they don’t translate well into the courtroom. In some cases, the right information never makes it as far as the courtroom because it remains trapped within the company.

“Most risk management programs aren’t integrated across the organization,” Smith says. “Their ultimate use should be for accountability; right now, most systems I have seen are useful inside the operation. You need to have – and to show that you have – a system that is consistent and transparent.”

“Often, organizations have developed good policies and procedures to manage foreseeable operational risks,” David Beal, risk manager for the Ontario School Boards Insurance Exchange, adds. “However, in the school board sector most programs seem to show poorly in court in providing documentation to prove that the program was actually being followed.”

SPEAKING THE SAME LANGUAGE

There are other weaknesses, as well. A major gap often exists between two groups of people involved in any trial related to an insurance matter. In the first group, underwriters, brokers and risk managers tend to jointly create risk management protocols. In the second group, adjusters, claims personnel and trial lawyers are called upon to defend lawsuits. The disconnect between the two groups is because the various parties don’t speak the same language.

“Historically, the claims people and trial lawyers and adjusters don’t know what’s there in terms of risk management practices,” Smith says. “If they do get a hold of them, they aren’t necessarily persuasive to the judge.”

Another issue is the use of proper standards or benchmarks in the trial setting: there is no one right or universal standard applicable in all cases. Indeed, the wide variation of commonly accepted practices can leave a company thinking it was following proper procedures, only to be found negligent in a trial. What standards should an organization use: regulatory compliance, industry benchmarks or professional codes? Smith calls the courtroom “the world’s biggest microscope” that effectively determines which standards of care are “reasonable.”

“An organization that ‘just meets standards’ may not be exercising due diligence if foreseeable risks are not being addressed or if similar organizations are taking steps beyond the standard requirements,” Beal says.

To address these challenges, Smith’s firm, Strategic Risk Control, has created a system based on “The Trial Ready Concept.” Essentially, if a company’s risk management procedures and processes can withstand the scrutiny of a courtroom, they are deemed to be effective and acceptable for all purposes. After sifting through criteria the courts have accepted and rejected, Smith developed a guideline known as the three P’s – Policy, Procedure and Proof – and a more detailed, 14-point formula to create a risk system that will actually hold up in a trial.

“We have looked carefully at where risk management protocols have been bombed out because they didn’t fit the bill,” Smith says. “For example, there has to be appropriate reward and punishment in a system of any kind. If there is not, the judge will say: ‘Look, if you haven’t got rewards and sanctions, then the system is not a serious one. This is just a wish list.'”

There are many parts to the 14-point formula – such as inspection procedures, records control, audits and management review – that Smith acknowledges many companies already have in place. His firm helps companies catalogue those practices and build them into a methodology for sound litigation defence.

Dave Leach, the senior vice president of Greyhound Canada Transportation Corp., is a client of Strategic Risk Control. “It seems that no matter how any organization tries to manage its risks, incidents will and do occur,” Leach says. “Sometimes lawsuits are launched as the result of incidents that we feel occurred through no fault of ours. It is absolutely critical to have a risk management system that will be useful in the courts, as well as internally, and as far as we can see SRC is the only organization providing such a system.”

Savchuk adds: “The missing piece of the puzzle focuses on filling in the gaps in your procedures. You need look no further for your putty than the lessons learned from less-than-favorable litigation. The end result is to ensure your procedures are airtight and you can l
ocate them when required. That sounds easy, but it really isn’t.”

Smith notes his clients have never had to bring the “14 points” into a courtroom. But by following each of the 14 points, his clients have secured favorable settlements. “We treat the process like they are going into court; that is why we call it trial ready,” Smith says.

Leach says the ability to prove due diligence has started to work in Greyhound’s favor. “Potential claimants have abandoned their claims in one case and we are in a position to resist what appear to be unwarranted and exorbitant claims in several ongoing actions,” he says.

DEFENSIVE MINDSET

Hardy says he supports the trial ready concept because it gives back to adjusters and insurers the tools on which they were educated many years ago, before they started just automatically settling claims. “That is an easy out,” Hardy says of the tendency to settle. “As a risk manager, I have always asked myself: ‘If this were my money, would I be willing to cut a cheque here?'”

“We have found that clients, especially the self-insured retention clients, are realizing: ‘Hey, this is our money,'” Smith adds. “When that deductible is a million bucks, you start to think about what you should do to minimize your indemnity payments. It might be a little better to pay some increased money up front to put a system in place and to make sure it will work in the courts.”

Some insurance companies are starting to pay attention to the trial ready concept. They are using it to provide value-added services to customers. Jim McDonald, manager of specialized services and products group for Royal & SunAlliance Canada, says his company has worked with Strategic Risk Control on behalf of large clients who operate franchises in retail and real estate operations.

“If you were in the shoes of a risk manager and you were trying to establish benchmarking parameters and procedures for your corporation, this type of activity is demonstrably important,” McDonald says. “It indicates not only to the board to which you are reporting but to the insurance companies and brokers with whom you are dealing that you understand the issues of best practices, documentation and testing.”

Ideally, McDonald notes, there should be a blending of risk management and litigation defence strategies. “Traditional loss control, which still has a place, approaches risk from the standpoint of the physical characteristics of the building or premises,” he says. “The difference here is that Strategic Risk Control approaches risk from a procedural standpoint. It ensures there are measures built in, so any claim can be defensible. They are both different sides of the same coin.”

Risk- and loss-control programs in commercial property are well-established, but less work has been done on the casualty side of the fence, according to Hardy. “The whole risk management philosophy has been built on property conservation,” he says. “There are some large insurance companies that have spent millions of dollars on property risk control, but I haven’t seen any research done on the liability side.”

That trend is slowly starting to change, as insurers and risk managers pay increasing attention to a major area of liability claims: slip and fall injuries. Slips and falls represent 41% of preventable injuries in this country, at a total cost of Cdn$3.6 billion each year, according to SmartRisk Canada. Citing another example, these incidents account for 23% of school board injury claims in Ontario. Noting these trends, Smith is focusing on preventing lawsuits and settlements in slip and fall cases. In fact, he strongly favours recasting the whole notion of slip and fall into “loss of balance.”

“A ‘slip and fall’ means some villain put something in the path of someone and he or she innocently slipped on it,” Smith says. “Loss of balance is the proper term because that person could have easily fell on his or her own.”

He notes these claims represent the “easiest way to make a buck” for plaintiff lawyers. Smith is therefore surprised that more insurance companies and risk managers fail to make use of proper defences or “litigation shields.” This could include bringing in qualified experts in the fields of premises and standards to demonstrate the due diligence of an organization, or calling on specialists in kinesiology or perception/reaction to show the fall could be the result of a person’s negligence.

D&O INSURANCE

Smith notes the distinct possibility of extending risk and litigation defence strategies to other areas as well, such as D&O insurance. “I think if you take what Strategic Risk Control has done with loss of balance claims and move that into the D&O arena, you would find fewer claims, no question,” Hardy says. “This is just the stepping stone to implement risk control measures in various areas.”

McDonald, who notes loss costs for liability at Royal and SunAlliance have shown no reductions over the past 10 years, agrees. “This approach could apply to anything,” he says. “With very little effort it could include other areas, such as D&O.”

Smith argues that the idea of lobbying for tort reform in areas like liability is misplaced. “You don’t need to reform something that isn’t broken,” he says. What is broken is not the system, but rather the way it’s played with. I compare it to playing a football game with bare feet and no pads. As part of an industry, we just have to get together and start fighting this stuff better. We intend to shut down the free feast.”

For Hardy, the only way to end the feeding frenzy is to go back to fundamentals: align risk management to an external audience and be prepared to adjudicate claims properly. “If you have a good defence, I know from experience that the plaintiffs’ lawyers quietly go away,” he says.