An intriguing law-review article on high-volume "settlement mills" has implications beyond the tawdry business of extracting cash for questionable car-accident injuries.
In the article, "Run of the Mill Justice" ($3.50 for a pdf download), Nora Freeman Engstrom of Stanford Law School actually interviewed lawyers and paralegals at settlement mills as well as studying their not-infrequent disciplinary files. What she found would look quite familiar to anybody involved in the securities class-action business: A small group of specialized players who engage in repeated rounds of the same game.
Her conclusion is surprising, but logical. Settlement mills work because insurance companies, which pay the bills, like them.
Insurance companies might be choosing to cooperate with settlement mills, in part because settlement mills appear willing to settle the largest claims -- which present the highest chance of a catastrophic verdict -- at an attractive discount. In addition, settlement mills and insurance companies share two sets of overlapping interests: speed and certainty. Insurers, it appears, cooperate with settlement mills, in even marginal cases, because cooperation is profitable.
The article (hat tip to Drug and Device Law for bringing it to my attention) offers a fascinating tour through a little-scrutinized arm of the legal industry in which lawyers with little or no courtroom experience use advertising to draw in unsophisticated clients and process their claims at industrial levels of efficiency. Many of the claims involve "soft-tissue" injuries like neck sprains, which insurance-company research has shown tend to multiply in value when a lawyer is involved. (Ethically challenged physicians and chiropractors help in that process.)
These lawyers have no intention of filing suit. (Engstrom cites one Louisiana firm that tried four cases in a year and lost all of them, before deciding that was no way to make money in the law.) What's more, she suggests, insurance adjusters know this. So they are more than willing to pay hundreds of questionable soft-tissue claims at $2,500 or $5,000 a pop to insure that the truly dangerous accident case, the kind the right jury might decide was worth millions of dollars, gets settled along with the rest.
Statistics show the trend. From 1992 to 2001 the number of accident suits filed in 17 states representing 53% of the U.S. population fell 14%, while the actual number of accidents rose. This doesn't reflect a decline in insurance-company payouts -- did your car insurance rates go down over that period? Mine didn't -- but a shift in law-firm practices toward the settlement-mill model.
There are winners and losers in this game, Engstrom writes. The winners are the settlement-mill lawyers, who make nice incomes despite having subpar legal skills, and the people with soft-tissue claims that probably wouldn't withstand close scrutiny but make a couple of grand just to go away.
The losers are people with serious injuries, who probably settle their claims for a fraction of what they are "worth," in terms of the risk-adjusted expected jury verdict. The mills coerce these people into settling by offering graduated contingency fees that rise from 20%-30% if they settle to 40% if they dig in their heels and demand a trial.
The other losers are drivers, who pay inflated insurance premiums to fund all those questionable settlements and the expensive ad campaigns that bring more hopeful accident victims in the door.
A similar process occurs at the high end of the business, where companies and their insurers settle securities class actions because it makes financial sense to do so. Why bet the company balance sheet on a jury verdict when you can settle out of insurance and spread the cost on everybody else? Nobody wants to really test these claims in court, anyway. Least of all the lawyers who bring them.