This article is the final in a four-part series. The first installment, published in April, surveyed the structural, strategic and tactical ways that major corporate defendants may successfully manage their way through mass-tort liabilities. It also listed 17 best practices that every defendant should adopt, irrespective of the path chosen.
This article details the final set of steps:
In product defense cases, the norm is for the same local counsel networks to undertake settlements with plaintiffs’ counsel, with authority granted by the defendant and perhaps by a raft of unruly insurers in the mix. However, some defendants opt to have a single settlement principal. Part of the logic is that the role of counsel is to hammer the opposition in litigation versus the role of a settlement principal, which is to reach a consensual settlement agreement.
A single settlement principal may benefit from having the totality of settlement data across the country for all plaintiffs, hopefully going back several years. That enables them to calibrate settlement in the current case to all other cases. As a non-litigator, they may also have had the opportunity to form a non-adversarial relationship with plaintiffs' counsel, enabling more predictable settlement ranges and timing.
A further fruit of the comprehensive database of complaints and resolutions from best practice step 1 — and the use of technology throughout the litigation management process — is that real-time data is available for analysis and reporting. The importance of this fact may be lost on some. I can attest to how transformational this can be, having seen numerous defendant companies evolve from a place where their data was not well managed, either by themselves or by their insurers. Defendants can struggle for days to produce rudimentary status reporting. Once best practices have been introduced, they are able to do so at the click of a mouse. Simply put, it is impossible to manage that which is not measured. When the reporting is close to real time, it contains actionable intelligence — not just yesterday’s news.
Step 9 described some of the benefits of real-time reporting to identify and triage dangerous cases as they develop. In addition, defendants can report on all pending new cases:
These data are of interest to CFO, GC, NCC, auditors, actuaries, senior management, insurers, and risk managers, to name a few.
A defendant that is constantly being named and dismissed may benefit from a different defense strategy. One strategy that many defendants follow is to negotiate settlements for large numbers of cases with specific plaintiff firms. These agreements allow for settling numerous cases in a set time frame at amounts specified in administrative schedules that reflect differences in injury severity and other characteristics deemed to affect the value of a claim. Similarly, under certain types of administrative agreements, a plaintiff firm and defendant agree to resolution of all cases for a given timeframe up to a maximum settlement amount — sometimes, but not always, without even being named on the complaints (there may be insurance implications). While these arrangements may result in a defendant paying some claims that would have otherwise resulted in a dismissal without payment, there is often a corresponding reduction in legal costs for both the plaintiff and the defendant. Another potential benefit to a defendant is a lower profile in the tort system.
Alternative fixed fee arrangements have become increasingly common over the last ten years or so. The normal legal billing arrangement for defense counsel is by the hour. Inevitably, under such arrangements, law firms are incented to maximize their hours. In fixed fee billing arrangements, firms agree to a dollar sum certain for the provision of all legal services. Under these arrangements, the law firms are incented to provide a minimum legal service. The art is to limit legal fees by using fixed-fee arrangements but to ensure that the law firms are also incented to provide excellent service. This may be achieved by:
In a traditional defense network, there may be an NCC and a dozen or more local counsel. The fixed fee arrangement may be contracted with the NCC, which then becomes responsible for paying its local counsel network. In this arrangement, the local counsel may be paid by the hour, or under a fixed fee, but will be deducted from the fixed fee of the NCC.
The problem, in a nutshell, is that the results of the alternative fee arrangement may not manifest for a long time and short- and long-term incentives may be out of sync. In general, settlement strategies are relatively cheap and litigation strategies, expensive. A fixed fee arrangement will, therefore, incentivize the client's defense counsel to settle and not litigate. However, over the long run, a defendant that never tries their cases may create the incentive for plaintiffs to always name them, and for settlement ranges to trend higher. Over time, therefore, the fixed fee arrangement may not be advantageous to the defendant, even if very advantageous to its counsel.
In this simple example, a multi-year arrangement with a bonus tied to reducing the number of times, on average, the defendant is named on complaints may achieve the desired balance between settlement and litigation.
Having given notice in the prescribed form and likely received a Reservation of Rights Letter and many questions from the insurer — and having diligently answered those questions — the defendant may still be unsuccessful in bringing insurers to agreement to defend and indemnify. Primary carriers are generally easier to bring on to the risk, and the provisions of a defense may be easier to achieve than payment of settlements and judgements (indemnity). But there are many reasons why coverage litigation employs the best efforts of hundreds of coverage lawyers across the nation. Insurance policies contain multiple provisions, exclusions and definitions that control the amount and circumstances under which they make payments to the policyholder. Each may be drafted in a way that is unclear. There is a potential conflict of laws between the many states that have adopted statutes that govern the interpretation of such conflicts of laws and language. Finally, insurance disputes tend to be factually intense. In other words, there is plenty to argue about.
The single, biggest matter that may need to be resolved, and which may be addressed by filing a Declaratory Judgement (“DJ”), is which state’s law will control the adjudication of the matter. A number of factors will be evaluated in this determination. It is not unusual for competing DJs to be filed in different states. The choice of law is potentially very significant, in that state coverage law governing the interpretation of insurance contracts varies widely.
Other than establishing choice of law, the other most significant matter that is litigated is whether an excess policy has attached based on the exhaustion of underlying limits. Related to this are a plethora of exclusions, defense language and allocation principles that may legitimately be a source for dispute and therefore litigation.
Getting sensible, experienced coverage counsel, as described in step 8, to advise on strategic litigation is an important best practice for defendants.
The building block for settling pretty much every litigated dispute between insurer and insured is the expected future cash flow of payments from an insurer, year by year in the future, until policy exhaustion. Given the fact that the controlling choice of law may be uncertain, there may be alternative methods that produce materially different results. In addition, with the application of exclusions that may operate to limit the liability of some policies, and complicated language governing the responsibility for defense costs, there may potentially be dozens of scenarios needed to model every potential iteration. In my experience, what is most useful is a “reasonable best”, “reasonable worst”, and “expected” scenario from which to calibrate the exchange of settlement offers between insurer and insured.
Given that there are dozens of data points in every insurance policy that implicate the way it responds, given that there may be hundreds of individual insurance policies in a program, and given the potential for numerous scenarios to take account of competing choices of law, those analyses require experts who have deep familiarity with both the principles of coverage and database technology. Identifying an expert to assist in this process is something that coverage counsel can assist with.
This best practice is discussed as “Part 1: Restructuring and Sale to a Third Party” in the companion piece to this article: “Three Paths for Defendant Companies to Manage their Mass-Tort Liabilities”. In it, I outline and discuss the three alternatives, including an improved “Business as Usual” and “Bankruptcy Solutions”.
Whether or not a defendant is planning any further steps, I advise undertaking this best practice step for a couple of reasons. One is that it takes some time to execute properly, and it's too important for a rush job. Another is that restructuring lawyers with the necessary experience have limited availability. Another is that corporate boards can be suspicious and need some time and explanation to fully understand the concepts. Once achieved, there is no need to do anything further in terms of restructuring, but the option will have been created to go further.
This step ensures that current and future mass tort liabilities are separated from the company’s operating assets. A due diligence exercise must be undertaken with restructuring counsel to identify every subsidiary that has been, or could be, a defendant in mass tort litigation. This is an exercise that is best undertaken only once, so the due diligence needs to be sufficiently thorough to identify products that have the potential for lawsuits even if nothing has been filed to date.
Each potentially affected subsidiary is then split into two separate companies: the “old company”, which continues to have insurance rights and is the name under which complaints will be served, and a “new company”, under a new name into which operating assets and the ongoing business are transferred. This is all completely legitimate provided that the old companies are fully capitalized, usually by a combination of insurance assets and cash equivalents, and thus able to meet their obligations in the tort system.
Under this further step, all “old” companies are brought under the ownership of a common parent, typically at the periphery of the corporate structure. At this point, the ultimate parent can sell the common parent and its old company subsidiaries to an unrelated third party. This is referred to as “disaffiliation”, meaning that the common parent and its “old” company subsidiaries no longer need to be consolidated with the rest of the group. The independent auditors must conclude that the entities being sold are adequately funded, which may require opinions from other professionals as well. But with such assurances in hand, the shareholders will have achieved the finality of a clean state, in which legacy liabilities and related uncertainties are permanently removed from the company’s financials.
There are many considerations in taking this step; however, all that I am recommending here is the first part: structural optimization — bringing all the old companies under a common parent with the option of a further sale if demonstrably adequately capitalized.
That concludes my detailed explanation of the 17 best practices. I hope it’s been helpful as you consider preparing to manage through mass-tort liabilities.
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Jonathan Terrell is the Founder and President of KCIC. He has more than 30 years of international financial services experience with a multi-disciplinary background in accounting, finance and insurance. Prior to founding KCIC in 2002, he worked at Zurich Financial Services, JP Morgan, and PriceWaterhouseCoopers.
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