A Colossus in the room

Can you remember the first time you went into a McDonalds? Self service without plates, eat with your fingers and clear up after yourself. It’ll never catch on over here.

Now with the Golden Arches in every shopping mall, we contemplate a pandemic of diabetes and obesity and wonder if the development has been entirely benign.

The world of personal injury law has seen a new US import. Under the generic name “Decision Support Software”, the Colossus program now dominates the UK claims handling process. It has arrived unheralded and unhanselled, but make no mistake it is here to stay.

On 2 February 2007 the award winning UK insurer Groupama announced that they had signed a five-year deal for the use of the Colossus Personal Injury Claim Solution from Computer Sciences Corporation (CSC), a leading global information technology firm. The deal followed a nine-month trial which demonstrated how Colossus “could bring the business real value in personal injury claims”. They chose Colossus as “the market leader in Europe”, benefiting from “a large and active user group”.

Groupama are following the lead of Norwich Union, the largest UK insurer, who have already implemented the software. Perhaps the clearest evidence that Colossus is now at the centre of the claims process is its adoption by the Motor Insurers’ Bureau (MIB). The MIB is the fund of last resort for uninsured and untraced driver claims, and is directly financed by the whole UK road traffic insurance market. The tipping point for Colossus has already been reached. Huge sums have been spent. Now for the return on investment.

What is Colossus?

The Colossus program is software designed to manage and reduce the transactional costs when dealing with low to mid-value claims. The program is owned by Computer Sciences Corporation of California. CSC, which has 78,000 employees globally, specialises in providing “innovative solutions for customers around the world by applying leading technologies and CSC’s own advanced capabilities”. It reported 12-month revenues in September 2006 of $14.6 billion.

There is no need for the experienced and competent claims managers of distant memory. A data processor is taken through an interactive questionnaire, entering documented medical details of the claim injury. Colossus then produces a value for the injury based on its own database of information collected from previous user settlements.

The attractions are obvious. What if you could compile a database of all personal injury claims, factor in current claims values and produce the proper settlement figure with a couple of keystrokes? This would first of all give an internal discipline and consistency to the decision making process. What if you then refused to allow the data controller any discretionary override on the figure? By far the largest number of claims dealt with in the UK are in the range up to £5,000. That is the sweet spot for insurers’ transactional costs, both in damages payouts and expenses. If you could standardise and automate the injury claims in that range, huge savings could be made. It is not just a case of disciplined decision making; it is the shape of the whole industry.

Once the human element is effectively removed from the claims process, it is a short step for the industry to remove human beings altogether. At the same time as shareholders of the parent group Aviva plc were receiving dividends from a record £2.7 billion profit, 4,000 Norwich Union employees (including 450 based in Scotland) were receiving their redundancy notices. And there is no doubt that adoption of the Colossus system and strategy can achieve some remarkable results for shareholders. The biggest success story has been Allstate Corporation, USA. In 1992 Allstate was paying 87 cents for every premium dollar collected. By 2006 that figure was reduced to 43 cents in the dollar and Allstate had become one of the largest insurers in the US. And as whole back-office functions are outsourced overseas, insurance industry employees are not the only victims of progress.

What objection can anyone have? Everyone uses the Google autofill on the toolbar to click order that book from Amazon. On one view all the insurance industry has done is to replicate that process on a macro-economic scale and to increase massively shareholder value. Unfortunately the effects of Colossus for the bodily injured claimant are rather less beneficial.

The US experience

Allstate’s brand profile is based on their advertising mantra “You’re in good hands with Allstate”. Their remarkable transformation has been achieved not simply by buying the software, but also by implementing a management and claims handling strategy which has become known as “From good hands to boxing gloves”.

The strategy was formulated by the McKinsey Consulting Agency, who were called in to advise Allstate in 1992. Documents which Allstate have been forced to produce in various class actions involving bad faith insurance litigation have revealed a set of Powerpoint presentations delivered by the Agency. The various class actions have alleged that Allstate breached their fiduciary duty to their own policyholders and effectively conspired to defraud them of true value for their damages claims.

The McKinsey slides make plain that the insured who makes a claim should first of all be “thrown a bone” of a lowball first offer. If he accepts, he is treated with “good hands”, with the insurer moving quickly to tie up the settlement. If he refuses, he gets the “boxing gloves” treatment, being ushered into the “kill box” of the American civil justice system and years of delay and attrition. The Lexington court where the slides were produced was shown a picture of an alligator with the caption “Sit and Wait”.

Where legitimate claims emanate from third parties, the McKinsey advice is that energetic efforts should be made to contact the claimant direct and to settle the claim without involving an attorney, resulting in an average saving of 25% on each payout. That claimant too will get the “good hands” or “boxing gloves” treatment, depending on whether he settles.

In 2005 a class action was raised in Miller County Court in Texarkana, Arkansas citing CSC, Allstate and other defendants, and alleging civil conspiracy, breach of contract, breach of fiduciary duty and unjust enrichment and fraud. The particulars include the allegation that Colossus software has been employed as a cost containment tool designed to enhance the insurance companies’ profits at the expense of their first party insured. Allstate are currently in breach of a court discovery order to produce internal documentation, refusing on grounds of “respectful civil disobedience”. In February 2007 the county court approved a voluntary settlement by some defendants (not Allstate or CSC) amounting to a total of $293 million.

In Washington, in the case of Jones v Allstate Insurance Company, the court found that the defendants’ mode of operation of contacting the accident victim directly and persuading Janet Jones that all she could expect from her accident claim was $25,000, amounted to the unauthorised and negligent practice of law, and released the plaintiff from the settlement terms.

Over here and under-settling

The critical component of the application of the software is that the database is populated only with information from its own settled cases. It should not really come as much of a surprise to learn that standardisation, automation and internal consistency are not the only goals, or even the main goal of the system. The system is primarily designed to cut the cost of claims to industry by reducing the value of settlements to the injured victim. There the real leverage lies.

All practitioners are familiar with the concept of settlement “in the shadow of the law”, if not by name, certainly by practice. It means that legal claims are solved by the mutual prediction of a full court outcome. The proximity of the judicial process gives coercive power to negotiations, and establishes settlement norms with reference to decided cases. This is the daily stuff of our practitioner lives. So a database which consists of recent court decisions, perhaps allied to the Judicial Studies Board, would be an invaluable aid to those discussions. Colossus disdains those figures, and instead relies on data from every settled case within its user group. These will never relate to the judicial book value of the injury.

Cases settle for many reasons. There are very few modest value claimants who are prepared to run the gauntlet of litigation to obtain the true value of their injury. This added to the delay and frustration endemic in the system means that many claimants simply give up and accept offers made in correspondence. Many lawyers adopt a litigation-averse strategy, dissuading clients from pursuing cases through the courts. So whilst the Colossus strategy may result in litigation from some clients, or indeed litigation from some particular firms, it is clearly a successful macro-economic strategy in driving down the costs of settlements overall. In the long run, the house always wins. And it keeps its own records, justifying further lowball strategies.

This article does not suggest that any UK insurer has adopted the “good hands to boxing gloves” strategy wholesale. But for practitioners in the field, some of the concepts are depressingly familiar. No longer the give and take of settlement discussions: defenders’ agents are given a figure with which they are stuck. The UK insurance industry has frequently said that lawyers add no real value to the claims process, and merely increase frictional costs. The policy of direct contact and direct dealing with the accident victim, known as “third party capture”, is specifically aimed at keeping lawyers out.

There have been examples of scandalous third party capture purported settlements. Wolverhampton MP Rob Marris presented evidence of two constituents, one of whom was offered a direct settlement of £5,000 and who received £150,000 after receipt of legal advice. The other case involved an initial offer of £4,000 which ended up as a settlement of £165,000. Few pursuers’ firms could come up with such extreme examples, but all have had some experience of the adverse effect of the practice. The basic conflict of interest is that the insurers are holding both sides of the ring, completely unregulated by the Financial Services Authority or any professional code of conduct.

Litigation is not a pathology

The insurance industry’s primary duty is towards its shareholders. It is perfectly proper and understandable that it should seek to drive transactional costs to the lowest level the market will bear. It has no fiduciary duty towards third party claimants, and can legitimately seek to reduce all legal costs and victim damages. It is the job of the claimant’s lawyer to ensure that proper value is given. There is nothing new in this. What is new however is that this goes on against background chatter by the ill informed and those who really should know better, that court action should always be a last resort, that reasonable people should be able to sort out all differences, and that law firms which exercise a litigation strategy for the benefit of their clients are simply looking to inflate costs.

The Colossus strategy seriously undermines the value of the Voluntary Pre-Action Protocol. The basic presumption of the Protocol is that both parties will act in good faith to achieve a reasonable settlement without resort to litigation. There is little point in the Protocol where Colossus is being used. In those cases the proposition appears to be that efforts must be directed to persuading the claimant to accept a discounted offer. In particular, Colossus offers for typical conditions such as whiplash are well below current book value. Any sheriff who happens to read this might now understand why there has been an upsurge in contested road traffic proofs. At a recent road traffic proof on quantum at Dunfermline sheriff court the defenders’ agent indicated that this was his 20th proof, and having lost the previous 19, he fully expected the same result. He was right. The sheriff (Dunbar) in his judgment stated: “No doubt the defenders have their reasons for taking this case to proof. It can rarely have been such a pointless exercise.”

Decision Support Software is the reason, just as it is the reason Greens Weekly Digest is suddenly awash with whiplash quantum decisions. So it cannot be repeated often enough: litigation is not a pathology. Where the settlement process has been subverted in this systematic way, resort to the courts is the only recourse for the claimant victim. There are checks and restraints enough in the judicial process to discourage the vexatious and frivolous.

Civil justice reform

In this regard it is somewhat unfortunate that the first act of Kenny MacAskill as Justice Minister was to make all sheriff court personal injury actions below £5,000 a summary cause, thus reducing the penalty on insurers for non-settlement, and providing even more encouragement to make low value settlement offers. Better advice to him might have been to adopt the Coulsfield rules for all sheriff court personal injury actions, with a suitable fees deduction for low value cases. It is not too late for a rethink on that particular aspect.  In the meantime practitioners in settlement discussions might be well advised to identify to whom they are talking. It is probably the Digital Hand.

Ronald E Conway is a partner in Bonnar & Co, Airdrie

Value proposition: why Colossus

The Colossus program is software designed to manage and reduce the transactional costs when dealing with low to mid-value claims. The critical component of the application of the software is that the database is populated only with information from its own settled cases.