The Three Pillars of a Successful
Flat Fee Agreement For Insurance
Defense Litigation Cases

By Kenneth W. Maxwell

Some insurance companies and their defense firms are experimenting with flat fee agreements – the stated objective being litigation efficiency.  Based on past failures, others have concluded that flat fee agreements will not work.  I believe many of the ongoing experiments will fail because they ignore the three pillars of a successful flat fee agreement: (1) partnering, (2) volume, and (3) uniformity.

How Flat Fee Agreements Realign Risks
A flat fee arrangement realigns the risks associated with the number of hours to be worked on a matter to the law firm.  These risks may manifest in three settings. 

First, is the risk of inefficiency, which is largely (but not entirely) within the control of the law firm.  A flat fee agreement provides financial incentive to law firms to increase efficiency.

Second, is the risk of unexpected litigation.  Defense litigation is reactive.  The defense lawyer cannot control the work necessitated by court rulings, unexpected events, or adverse party strategies.  Traditional logic requires the party who benefits from the defense to pay for the time spent reacting to unexpected events.  Flat fee agreements shift this risk to law firms.

The third risk is protracted litigation.  The threat of expensive litigation some times provides incentive to cut the process short through settlement.  Flat fee contracts significantly reduce this incentive to the defending carrier, whose fee obligation may not increase if the case does not settle.  Indeed, the carrier’s incentive may reverse.  Having already paid up front, the carrier may decide to maximize its investment in fees by pursuing prolonged litigation in an effort to reduce the indemnity payment.  The party with control of the indemnity purse strings also controls the duration of litigation.  Traditional logic requires the party with this power to assume the costs associated with exercising that power. 

Thus, while flat fees promote law firm inefficiency, they also allow carriers, adverse parties, judges and unforeseen events to cause lawyers to do extra work with no corresponding increase in fees.  This translates into the unilateral power to cause law firms to lose money on flat fee files.  Therefore, for a flat fee arrangement to appeal to law firms and to succeed, these risks must somehow be managed.

The Three Pillars of a Successful Flat Fee Agreement
I. Partnering

Because of ethical rules, insurance contract obligations, duties of good faith and fair dealing, fiduciary duties, and numerous other factors, a carrier cannot give the defending law firm the right to make decisions on how to spend defense and indemnity dollars.  And no matter how good their working affiliation, there will be inherent tension between an insurance company and its defense attorney who charges by the hour.  This tension exists because carriers fear the attorney will overbill the file.  Attorneys, on the other hand, may feel unfairly treated by reduced rates and inflexible billing rules or processes that carriers use to manage litigation expenses.

No matter how artfully drafted, contract terms or rules will not make a successful flat fee agreement for the simple reason that a flat fee contract makes the law firm financially responsible for the litigation decisions of the other parties, the court and the carrier.  If the flat fee arrangement is not beneficial to law firm and carrier both in design (the terms of the contract) and in application (the way the parties exercise their contractual discretion), the deal-loser will terminate the relationship.

For a flat fee contract to succeed, the carrier and the law firm should draw experience from other relationships where the carrier’s decisions may impact the profitability of the law firm’s work.  These are contingency fee relationships.  Many carriers pay their subrogation lawyers a contingency fee.  These successful contingency fee relationships succeed when the carrier and their subrogation lawyers approach key litigation decisions, including settlement, with a partnering attitude.  The benefits of a prolonged and mutually beneficial partnership must be more important to the carrier and the lawyer than exploiting contract loop holes or unfairly wielding contract power to further individual interests.   

II. Volume

A flat fee agreement can exist only if the carrier provides the law firm with a constant high-volume flow of cases.  The unique aspects of each case will create disparity in the time spent handling one file as compared to another.  A large inventory allows for averaging.  The more differences that exist in the inventory, the greater the volume of cases must be.  The converse also is true – the more uniform the cases, the fewer needed to achieve uniformity.

III. Uniformity

Uniformity is the third pillar of a successful flat fee agreement.  A flat fee agreement presupposes that the time to defend one case will be similar to the time spent on every other case.  The greater the differences, the harder it will be to predict the average time.  Lack of predictability increases the risk of loss to the law firm, who must request a larger flat fee to underwrite that risk.  At some point incongruity will drive the flat fee a law firm is willing to accept beyond the carrier’s price point.

Theoretically, the ideal inventory for a flat fee arrangement is one where reliable historical data demonstrates that the time spent defending each file will be similar.  This may exist only if the facts, number and location of witnesses, legal theories and defenses in each case are comparable.  Unfortunately, that rules out most litigation inventory.

However, case differences do not mean there is no uniformity from which a flat fee program may be designed.  The key is to find similarities that will allow the parties to predict the cost of defense for measurable units of litigation.  Finding similarities is a creative process. Below are a few examples.

The carrier and the law firm may establish flat fees for definable stages in litigation where uniformity exists, with the remaining stages to be handled on an hourly platform.  For example, a flat fee agreement may end before trial or appeal, at which time the matter converts to a standard hourly rate. 

Another possibility is to tie the flat fee to an element common to the inventory, as opposed to the cases.  For example, reliable statistics may reveal the law firm historically receives $20,000 a month to handle on average twenty files.  Those files may vary in complexity and case duration ranging from one month to one year.  Nevertheless, the inventory count may stay at a constant twenty cases per month.  With this data, the parties may tie the flat fee to the case count and average fees.  The carrier may pay the law firm a flat fee of $22,000 per month, with a provision in place for adjustment if the case count varies beyond set parameters.  Or the carrier might pay the law firm a flat fee of $1,100 per month for each active case.  Either way, the insurance carrier is not “penalized” for cases that settle quickly and the law firm is not “penalized” for cases that don’t.


There are three pillars to a successful flat fee agreement.  The participants must have a partnering relationship so that their decisions seek to promote the success of the partnership.  The inventory must have sufficient volume to moderate the discrepancies that may exist.  Finally, the flat fee must be tied to some aspect of predictable uniformity in the cases or inventory.

So long as the law firm and carrier utilize accurate data, they can be as creative as the inventory allows.  The flat fee arrangement should benefit the carrier and the law firm.  To the extent new risks shift to the law firm, it should be given the opportunity to make more money than it would in a traditional hourly setting.  Of course, if the parties cannot come to terms after appropriate disclosure and effort, that is good evidence an hourly platform may be the most efficient way to handle those cases.

Kenneth W. Maxwell is a co-owner of Bauman Loewe Witt & Maxwell PLLC (“BLWM”). Among other clients, BLWM represents insurance companies in large property subrogation, insurance defense litigation, insurance coverage and first party work in the western United States. Mr. Maxwell has worked with insurance companies handling subrogation cases under various contingency fee arrangements. He has also defended insured clients on flat and traditional fee arrangements. Mr. Maxwell combined his knowledge and experience into a series of articles on the topic of flat fee agreements. Future articles will explore in detail the ideas introduced in this article.