Will Faith, Hope or Charity Audit You?
by Ron Sandgrund
Editor’s Note: This article is a rare glimpse behind the scenes of insurance defense practice, and the reality that in many ways these attorneys have an adversarial relationship with their own clients.
It was not a good sign that the auditor from the Very Sound Fidelity & Guaranty Insurance Company (VSF&G) [not its real name] sent to examine our last three years’ invoices was named "Charity." I still have no idea what criteria she used to find that our law firm had "overcharged" VSF&G $32,341 out of over $3.5 million in billings. I suspect it was akin to the coverage defense some insurance companies fall back on when their policy language fails them—the "sincere desire not to have to pay" exclusion. When combined with the, "We have more money than God" gambit and the, "We can litigate this for an eternity" maneuver, it takes a stubborn
Although Charity slaved away in our office for several weeks, she rarely was spotted emerging from behind the "dead files" heaped on her desk. Yet, Charity was like a modern-day medium, able to make those dead files speak. The Sphinx itself could not conjure up more confounding riddles.
"What was this $23.75 charge for?" she whispered. I strained to read the faded entry: "Nov. 4, 1992. $23.75. Receive, read and analyze letter from Plaintiff’s counsel." Seemed self-evident to me. "Well, Charity, it appears that on the fourth day of Nov. 1992, I got a letter from Plaintiff’s counsel, read it and analyzed whether any sort of response was required."
"Why did it take you fifteen minutes to read this letter, when it is only a paragraph long?" she said nudging the file toward me. The letter said, in its entirety: "Dear Mr. Sandgrund: I would like to schedule a Rule 30(b)(6) deposition of VSF&G. Please make the necessary corporate representatives available at my office on Nov. 20, 1992."
I had zero recollection of the five-year-old letter or the requested deposition, and just a vague memory of the case. I knew there was no way I would make any corporate representatives available or even identify likely deponents without first insisting on a full description of the subject matter of their testimony. Also, it would have been very difficult to have made anyone from VSF&G available to testify on such short notice, particularly around Thanksgiving, and particularly for a Rule 30(b)(6) deposition (just try to find any Colorado case authority explaining a deponent’s obligations under Rule 30(b)(6)). The advance wood shedding of the witnesses alone would take at least a week, plus at least another two weeks to find adequate substitutes once we realized that the head of underwriting, while probably an excellent underwriter, was the wrong person to explain in plain English (you know, the kind of English jurors won’t roll their eyes at) what anything having to do with insurance meant.
I explained this to an expressionless Charity, a lawyer who had never litigated a case. I couldn’t sleep for months after this exchange, my dreams charged with the spectre of a visit years down the road from an auditor named Faith or Hope, demanding that I justify spending a quarter-hour talking about a 1992 $23.75 charge.
There are few things as satisfying to insurance defense counsel as having to substantiate one’s bills from five years ago. Certainly nothing cements the bonds of trust between you and the corporate client responsible for 85 percent of your billings more than a pleasant letter explaining to whom your $32,341 refund check should be sent. Never mind that over $21,000 of the "rebate" was for money the firm actually paid (we had the receipts) out-of-pocket to a contract lawyer to summarize tens of thousands of records in a $25 million pollution coverage and bad faith dispute that we settled for less than $360,000, while another insurer got hit with more than a $10 million judgment. And, let’s ignore the fact that we obtained the oral approval of the local claims manager for this special hire, who willingly paid all our charges without comment or question. Our sin was that we had failed to "get the approval in writing," before the claims manager was down-sized to the Shady Home Retirement Center for Good Ol’ Boy Adjusters Who Did Everything on a Handshake Because Who Wants to Deal With All That Paperwork Anyway.
It was tough for our senior partner to write that $32,341 check to VSF&G—he’d sacrificed for that company for nearly 30 years.
Shortly after we dropped the money in the mail, VSF&G announced that it was consolidating much of its work with a single, "economy-size" Denver law firm. Within two short years, VSF&G was bought out by the Very Big Fidelity & Guaranty Insurance Company (VBF&G), which later merged with the Mother of All Fidelity & Occidental Insurance Companies (MOFO).
Sure we were fools not to see the legal services market shifting beneath our feet years before mailing the check, but we were not so dim as to fail to see the handwriting on the wall during the audit. The relationship that existed between many insurers and their loyal "panel" counsel was changing markedly, as some insurers began to ignore what was best for their insureds or fair to their lawyers. The 1990s was a decade of consolidation for the insurance industry—of mergers and buy-outs intended to drive up stock prices, increase executive bonuses, and release golden parachutes.
So, as VSF&G was auditing us, we were auditing it. It is hard to say whether we fired VSF&G or VSF&G fired us. Either way, an uneasy separation preceded the divorce, due to our duty to continue to serve VSF&G’s insureds, our clients, through the completion of their cases, even though we knew that we might never get paid in full.
Finally, we parted ways. My graying partners and I then undertook the grim task of developing a brand new practice from scratch, crossing either from the dark side of the force to the light or vice versa, depending on which end of the Bar one sits.